Evaluation of the Sector and Business Model
Ajinomoto seasoning was invented in Japan in 1907 and patented by the company in 1908. The combination of loss of patent around 1930 followed by WW II disrupted growth, but following WW II the company continued to grow in spite of gradually losing its market share. Currently the Ajinomoto group companies supply an estimated 25% of the world’s MSG and Ajinomoto remains the price leader, although it is not able to set the price. MSG prices have dropped significantly over the last 15 years as China has become the world’s largest producer and consumer (over 50% of global production and consumption comes from China and recently global consumption has dropped to 69% of production). Aside from Ajinomoto and a Taiwan based producer, the global MSG market has become highly fragmented.
Due to aggressive production increases of MSG by competing factories in China, the margin of supply over demand has increased significantly in spite of continued price cutting. In Malaysia the Company has diversified into condimented snack foods, soups and flavored food enhancers, however company accounts do not indicate the breakdown.
China leads the world in per-capita annual consumption of MSG (1.2 KG) and Malaysia’s consumption is probably far lower and continuing to grow (in 1987 Malaysia’s consumption was estimated at 137 grams).
MSG is often suggested to be unhealthy; however numerous independent studies have been conducted with none concluding that it is dangerous to health. Although high consumption of sodium is generally unhealthy, it is not likely that per capita consumption of MSG, at least in emerging markets, will stop growing in the medium term.
Although MSG was originally produced from seaweed, today it is primarily produced by fermentation of starch, sugar beets, sugar cane or molasses. Significant price fluctuations in these raw materials have been a challenge to all MSG manufacturers over the past several years.
Internal Evaluation of the Business and its Constituents
Ajinomoto Malaysia Bhd is a subsidiary of Ajinomoto Co. Inc. of Japan, with 50% of the Company’s shares held directly by the Japanese parent, active senior managers seconded by the parent company and most of the cost of goods being attributed to purchases from the parent company.
The financial and operating performance of Ajinomoto Malaysia has been superior to its parent. This is probably because the Malaysian market continues to have more growth potential than Japan and also because the parent company has diversified into a wider range of areas (such as pharmaceuticals) with mixed success.
The company appears to be well run in terms of operations, employee relations and its understanding of the market; however its capital structure is too conservative (it operates on zero debt in spite of reasonably predictable sales and costs) and senior management does not display ambition to aggressively grow the business organically or through acquisitions. Much of the retained earnings seem to be sitting in cash and increasing inventories.
However, management has succeeded in a 9% 5 year CAGR of net income in spite of strong price competition from China-made MSG, raw materials price volatility and a challenging local economy. However, this rate of growth was probably slightly under the growth rate of the market. In FY 2009, gross profit and EBIT were below the previous year’s results, although much of the industry also saw declines.
Although competitive pressure will probably continue, particularly as the perceived and actual quality of China-made MSG improves, pressure on the Company may alleviate due to rising labor costs in China and the possibility of a strengthening RMB.
However, it’s difficult to envision the company doing anything to significantly grow above the overall rate of growth in the market. The last 5 years of annual reports read like carbon copies describing the “difficult market environment” but there are otherwise not many signs of urgency coming from management as to how the company will tackle market challenges to seek greater market share and profitability.
Viability of the Business Model
The Company has demonstrated its ability to survive and adapt, although it remains to be seen whether management has what it takes to make the company prosper. The company should focus on seeking growth as opposed to merely maintaining market share. Profit margins, averaging under 9% over the last 5 years, could probably be better.
Fundamentally one has to ask what the rationale is for this subsidiary company to continue to exist as a listed entity, given the limited growth prospects and how small the company remains. In South East Asia the parent Japanese company retains no less than 14 large subsidiary companies. One could perhaps see strong rationale for consolidating these companies under a listed holding company headquartered in Singapore (consolidate expenses, attract regional professional managers, develop region-specific products, etc.), however the strategic rationale for retaining this listed company is difficult to see, particularly given the very limited mandate that seems to have been given to management.
This will probably remain a “muddle-through” stock in the years ahead. The defensive qualities of the product and the management could merit consideration at the right price, but probably not at a P/E approaching 10x, given the apparent lack of urgency by management to pursue growth and improve profit margins.
sources: company accounts, company websites, ft.com, sriconsulting.com, food-info.net, wikipedia.com
