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Pigeon / 7956

COVERAGE INITIATED ON: 2013.01.25


LAST UPDATE: 2018.06.07

Shared Research Inc. has produced this report by request from the company discussed in the report. The aim is to
provide an “owner’s manual” to investors. We at Shared Research Inc. make every effort to provide an accurate,
objective, and neutral analysis. In order to highlight any biases, we clearly attribute our data and findings. We will
always present opinions from company management as such. Our views are ours where stated. We do not try to
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Pigeon / 7956
LAST UPDATE: 2018.06.07 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

INDEX
How to read a Shared Research report: This report begins with the trends and outlook section, which discusses the company’s most recent
earnings. First-time readers should start at the business section later in the report.

Executive summary ----------------------------------------------------------------------------------------------------------------------------------- 3 


Key financial data ------------------------------------------------------------------------------------------------------------------------------------- 4 
Recent updates ---------------------------------------------------------------------------------------------------------------------------------------- 5 
Highlights ------------------------------------------------------------------------------------------------------------------------------------------------------------5 
Trends and outlook ----------------------------------------------------------------------------------------------------------------------------------- 6 
Full-year company forecasts --------------------------------------------------------------------------------------------------------------------------------- 10 
Outlook ------------------------------------------------------------------------------------------------------------------------------------------------------------- 11 
Business ------------------------------------------------------------------------------------------------------------------------------------------------ 17 
Business description -------------------------------------------------------------------------------------------------------------------------------------------- 17 
Profitability snapshot, financial ratios --------------------------------------------------------------------------------------------------------------------- 30 
Market and value chain ---------------------------------------------------------------------------------------------------------------------------------------- 31 
Strategy ------------------------------------------------------------------------------------------------------------------------------------------------------------- 36 
Strengths and weaknesses------------------------------------------------------------------------------------------------------------------------------------ 38 
Historical financial statements ------------------------------------------------------------------------------------------------------------------ 39 
Income statement ----------------------------------------------------------------------------------------------------------------------------------------------- 53 
Balance sheet ----------------------------------------------------------------------------------------------------------------------------------------------------- 54 
Statement of cash flows --------------------------------------------------------------------------------------------------------------------------------------- 56 
News and topics ------------------------------------------------------------------------------------------------------------------------------------- 57 
Other information ---------------------------------------------------------------------------------------------------------------------------------- 58 
History -------------------------------------------------------------------------------------------------------------------------------------------------------------- 58 
Major shareholders --------------------------------------------------------------------------------------------------------------------------------------------- 59 
Corporate governance and top management --------------------------------------------------------------------------------------------------------- 59 
Employees --------------------------------------------------------------------------------------------------------------------------------------------------------- 60 
Investor relations ------------------------------------------------------------------------------------------------------------------------------------------------ 60 
By the way --------------------------------------------------------------------------------------------------------------------------------------------------------- 60 
Company profile ------------------------------------------------------------------------------------------------------------------------------------------------- 61 

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LAST UPDATE: 2018.06.07 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

Executive summary

Business overview
◤ Pigeon operates the following business segments: Domestic Baby & Mother Care, Child Care Service, Health & Elder Care,
Overseas, China, and Other.

◤ Pigeon’s core products are nursing bottles and nipples and its main market is parents with babies 0–18 months old. These
two product types represent approximately 18% of domestic sales (Shared Research estimates 25% of total consolidated sales,
including overseas sales). Other key products include nursing pads, baby wipes, skincare goods, maternity products, strollers,
and breast pumps.

Trends and outlook


◤ For full-year FY01/18, Pigeon reported JPY102.6bn (+8.4% YoY) and operating profit of JPY19.4bn (+21.2%). Recurring profit
rose 22.3% to JPY20.1bn. Net income attributable to parent company shareholders was up 30.5% YoY to JPY14.5bn.

◤ In March 2017, Pigeon released a sixth medium-term management plan that covers the three years between FY01/18 and
FY01/20. For FY01/20, the final year of medium-term management plan, targets for results are as follows: Sales, JPY110bn
(+5.1% average growth rate over the three years of the plan); operating profit, JPY20bn (+7.7%); recurring profit, JPY20bn
(+6.7%); net income attributable to parent company shareholders, JPY13.8bn (+7.5%).

◤ The medium-term plan’s slogan: “Building our dreams into the future—by creating a bridge towards the Global Number One
manufacturer of baby products.” The company plans to strengthen its management and business foundation by making
strategic business investments and achieving its current targets in order to generate further growth after the seventh
medium-term plan. The company aims to increase the GPM from 47.2% in FY01/17 to 50.0% and the OPM from 16.9% in
FY01/17 to 18.2%. ROE and ROIC are important management benchmarks and the company is striving to further improve
profitability and capital efficiency.

◤ Full-year FY01/19 forecasts are as follows: Sales, JPY107.0bn (+4.3% YoY); operating profit, JPY20.4bn (+5.1%); recurring
profit, JPY20.4bn (+1.4%); net income attributable to parent company shareholders, JPY14.1bn (-2.9%).

Strengths and weaknesses


Shared Research thinks Pigeon’s strengths center on its strong brand and trustworthiness, overwhelming share in a niche market,
and growth potential overseas. Weaknesses center on its possible competition against giants in adjacent businesses, limited
domestic growth potential, and minor-player status in Europe and the US.

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LAST UPDATE: 2018.06.07 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

Key financial data


Income statement FY01/09 FY01/10 FY01/11 FY01/12 FY01/13 FY01/14 FY01/15 FY01/16 FY01/17 FY01/18 FY01/19
(JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Est.
Total sales 53,092 53,432 57,061 59,145 65,075 77,465 84,113 92,209 94,640 102,563 107,000
   YoY 7.8% 0.6% 6.8% 3.7% 10.0% 19.0% 8.6% 9.6% 2.6% 8.4% 4.3%
Gross profit 20,164 20,903 23,281 24,319 27,761 34,464 38,296 43,345 44,688 50,572
   YoY 8.2% 3.7% 11.4% 4.5% 14.2% 24.1% 11.1% 13.2% 3.1% 13.2%
GPM 38.0% 39.1% 40.8% 41.1% 42.7% 44.5% 45.5% 47.0% 47.2% 49.3%
Operating profit 4,269 4,604 4,546 5,042 7,086 10,365 12,780 14,521 16,015 19,412 20,400
   YoY 33.7% 7.8% -1.3% 10.9% 40.5% 46.3% 23.3% 13.6% 10.3% 21.2% 5.1%
OPM 8.0% 8.6% 8.0% 8.5% 10.9% 13.4% 15.2% 15.7% 16.9% 18.9% 19.1%
Recurring profit 4,294 4,609 4,435 4,917 7,389 11,002 13,299 15,080 16,462 20,129 20,400
   YoY 35.1% 7.3% -3.8% 10.9% 50.3% 48.9% 20.9% 13.4% 9.2% 22.3% 1.4%
RPM 8.1% 8.6% 7.8% 8.3% 11.4% 14.2% 15.8% 16.4% 17.4% 19.6% 19.1%
Net income 2,854 2,840 2,928 3,183 4,573 6,985 8,451 10,197 11,118 14,515 14,100
   YoY 94.0% -0.5% 3.1% 8.7% 43.7% 52.7% 21.0% 20.7% 9.0% 30.5% -2.9%
Net margin 5.4% 5.3% 5.1% 5.4% 7.0% 9.0% 10.0% 11.1% 11.8% 14.2% 13.2%
Per share data (JPY; adjusted for stock splits)
Shares issued (year end; '000) 121,653 121,653 121,653 121,653 121,653 121,653 121,653 121,653 121,653 121,653
EPS 23.8 23.6 24.4 26.5 38.1 58.2 70.6 85.2 92.8 121.2 117.7
EPS (fully diluted) - - - - - - - - - -
Dividend per share 9.2 10.7 14.7 14.7 19.2 29.3 35.0 42.0 53.0 66.0 68.0
Book value per share 199.2 214.7 221.0 228.4 263.8 325.8 385.5 413.9 437.4 506.8
Balance sheet (JPYmn)
Cash and cash equivalents 5,973 6,906 6,828 7,294 10,574 13,103 21,591 24,298 30,052 31,346
Total current assets 21,631 22,273 24,163 25,443 29,103 35,363 47,027 48,914 55,244 58,178
Tangible fixed assets 13,308 14,040 15,409 15,059 16,208 19,023 21,383 21,471 20,263 21,116
Investments and other assets 1,924 1,951 1,925 1,985 2,051 2,127 2,232 2,212 2,273 1,865
Intangible fixed assets 1,545 1,231 1,188 1,285 1,176 1,441 1,724 1,346 1,106 3,307
Total assets 38,408 39,494 42,685 43,773 48,539 57,955 72,367 73,943 78,889 84,467
Accounts payable 4,674 4,312 3,985 3,758 3,864 4,518 4,463 5,366 6,550 6,991
Short-term debt 1,820 1,470 3,258 3,256 1,416 1,400 2,090 1,309 5,699 0
Total current liabilities 11,244 10,694 12,227 12,383 11,616 12,819 15,273 14,223 21,381 17,673
Long-term debt 1,320 1,000 1,615 1,642 2,204 2,012 5,928 5,000 0 0
Total fixed liabilities 2,840 2,535 3,414 3,454 4,558 5,155 9,797 8,927 3,770 3,982
Total liabilities 14,083 13,229 15,641 15,837 16,173 17,974 25,070 23,150 25,152 21,655
Net assets 24,325 26,264 27,044 27,936 32,365 39,982 47,297 50,793 53,736 62,812
Total interest-bearing debt 3,139 2,470 4,873 4,898 3,620 3,412 8,018 6,309 5,699 0
Cash flow statement (JPYmn)
Cash flows from operating activities 4,206 4,964 3,206 4,212 7,656 7,930 10,135 13,480 14,810 17,094
Cash flows from investing activities -1,279 -2,105 -3,948 -1,871 -1,848 -3,794 -3,134 -3,332 -1,854 -3,586
Cash flows from financing activities -110 -2,018 886 -1,776 -3,149 -3,163 -150 -6,568 -6,223 -12,812
Financial ratios
ROA (RP-based) 11.3% 11.8% 10.8% 11.4% 16.0% 20.7% 20.4% 20.6% 21.5% 24.6%
ROE 12.1% 11.4% 11.2% 11.8% 15.5% 19.7% 19.8% 21.3% 21.8% 25.7%
Equity ratio 62.3% 65.3% 62.2% 62.7% 65.3% 67.5% 63.8% 67.0% 66.4% 71.9%
Source: Shared Research based on company data
Note: Figures may differ from company materials due to differences in rounding methods.
Note: Gross profit figures are after provisions for returned products.
Note: Per-share data are adjusted for the 2-for-1, and 3-for-1 stock splits in August 2013 and May 2015, respectively.
Note: Est. represents most recent company forecast.

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LAST UPDATE: 2018.06.07 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

Recent updates
Highlights
On June 7, 2018, Shared Research updated the report following interviews with Pigeon Corp.

On June 4, 2018, the company announced earnings results for Q1 FY01/19; see the results section for details.

On March 5, 2018, the company announced earnings results for full-year FY01/18; see the results section for details.

On the same day, the company announced the booking of extraordinary profit (gain on step acquisition).

As announced in April 2017, wholly-owned subsidiary Pigeon Singapore Pte. Ltd. acquired additional shares of PT Pigeon
Indonesia, making it a consolidated subsidiary. At the same time, the company revalued the holdings from before the additional
share acquisition based on market price at the time of this transaction. As a result, the company booked JPY848mn in valuation
gain (gain on step acquisition).

On the same day, the company made an announcement regarding a surplus dividend in the FY01/18.

At a board of directors meeting held on the same day, the company decided to raise the FY01/18 year-end ordinary dividend by
JPY4 per share from the most recent dividend forecast, resulting in a year-end dividend of JPY35 per share (ordinary dividend of
JPY35).

For previous releases and developments, please refer to the News and topics section.

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LAST UPDATE: 2018.06.07 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

Trends and outlook

Quarterly trends and results


Cumulative FY01/18 FY01/19 FY01/19
(JPYmn) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 % of FY FY Est.
Sales 23,977 49,048 75,350 102,563 25,798 24.1% 107,000
YoY 5.4% 5.9% 7.9% 8.4% 7.6% 13.1%
Gross profit 11,715 23,770 37,029 50,572 12,986
YoY 12.7% 10.3% 12.8% 13.2% 10.8%
GPM 48.9% 48.5% 49.1% 49.3% 50.3%
SG&A expenses 6,774 14,474 22,090 31,159 7,540
YoY 1.7% 5.0% 6.5% 8.7% 11.3%
SG&A ratio 28.3% 29.5% 29.3% 30.4% 29.2%
Operating profit 4,940 9,296 14,938 19,412 5,446 26.7% 20,400
YoY 32.4% 19.5% 23.8% 21.2% 10.2% 27.4%
OPM 20.6% 19.0% 19.8% 18.9% 21.1% 19.1%
Recurring profit 4,858 9,380 15,171 20,129 5,380 26.4% 20,400
YoY 35.1% 22.3% 24.7% 22.3% 10.7% 23.9%
RPM 20.3% 19.1% 20.1% 19.6% 20.9% 19.1%
Net income 3,473 6,493 10,434 14,515 3,852 27.3% 14,100
YoY 39.9% 17.1% 21.8% 30.5% 10.9% 26.8%
Net margin 14.5% 13.3% 13.8% 14.2% 14.9% 13.2%
Quarterly FY01/18 FY01/19
(JPYmn) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Sales 23,977 25,071 26,302 27,212 25,798
YoY 5.4% 6.4% 11.9% 9.6% 7.6%
Gross profit 11,715 12,056 13,258 13,543 12,986
YoY 12.7% 8.0% 17.7% 14.1% 10.8%
GPM 48.9% 48.1% 50.4% 49.8% 50.3%
SG&A expenses 6,774 7,700 7,616 9,069 7,540
YoY 1.7% 8.1% 9.3% 14.5% 11.3%
SG&A ratio 28.3% 30.7% 29.0% 33.3% 29.2%
Operating profit 4,940 4,356 5,642 4,474 5,446
YoY 32.4% 7.7% 31.4% 13.5% 10.2%
OPM 20.6% 17.4% 21.5% 16.4% 21.1%
Recurring profit 4,858 4,521 5,791 4,958 5,380
YoY 35.1% 11.0% 28.8% 15.4% 10.7%
RPM 20.3% 18.0% 22.0% 18.2% 20.9%
Net income 3,473 3,020 3,941 4,081 3,852
YoY 39.9% -1.4% 30.4% 59.9% 10.9%
Net margin 14.5% 12.0% 15.0% 15.0% 14.9%

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LAST UPDATE: 2018.06.07 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

Quarterly segment performance (new segments)


Cumulative FY01/18 FY01/19
(JPYmn) Q1 Q1
Sales 23,977 25,798
YoY 5.4% 7.6%
Domestic Baby & Mother Care 8,729 9,393
YoY - 7.6%
Child Care Service 1,931 1,664
YoY - -13.8%
Health & Elder Care 1,681 1,673
YoY - -0.5%
China 7,124 7,806
YoY - 9.6%
Singapore 2,311 2,928
YoY - 26.7%
Lansinoh 2,935 2,948
YoY - 0.4%
Eliminations -1,060 -931
Other 323 314
Operating profit 4,940 5,446
YoY 32.4% 10.2%
Domestic Baby & Mother Care 1,752 1,875
YoY - 7.0%
Child Care Service 53 44
YoY - -16.2%
Health & Elder Care 97 80
YoY - -17.3%
China 2,477 2,961
YoY - 19.5%
Singapore 664 731
YoY - 10.1%
Lansinoh 544 463
YoY - -14.9%
Eliminations -683 -737
Other 35 26
Source: Shared Research based on company data
Note: Figures may differ from company materials due to differences in rounding methods.
Note: From FY01/19, Pigeon breaks down the Overseas segment into Singapore and Lansinoh segments. The Singapore segment is involved with procurement and sales
of Pigeon-branded products mainly in ASEAN and Middle Eastern countries; the Lansinoh segment operates Lansinoh brand business centered in Europe and the US.

GPM by segment (half-year basis)


Gross profit margin FY01/17 FY01/18
1H 2H FY 1H 2H FY
Consolidated total 46.6% 47.8% 47.2% 48.5% 50.0% 49.3%
YoY change -0.3% 0.7% 0.2% 1.9% 2.3% 2.1%
Domestic Baby & Mother Care 46.3% 47.8% 47.0% 48.8% 49.0% 48.9%
YoY change 1.8% 3.5% 2.6% 2.5% 1.2% 1.9%
Child Care Service 10.4% 10.9% 10.6% 10.0% 10.8% 10.4%
YoY change -0.6% 0.5% -0.1% -0.4% -0.1% -0.2%
Health & Elder Care 31.7% 31.1% 31.4% 31.3% 31.3% 31.3%
YoY change 3.3% 2.9% 3.1% -0.4% 0.2% -0.1%
Overseas 56.3% 54.9% 55.6% 56.1% 58.0% 57.1%
YoY change 1.1% -0.7% 0.2% -0.2% 3.1% 1.5%
China 43.7% 45.3% 44.6% 46.5% 47.8% 47.2%
YoY change -0.8% 0.6% 0.0% 2.8% 2.4% 2.6%
Source: Shared Research based on company data

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LAST UPDATE: 2018.06.07 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

Sales by overseas region (half-year basis)


FY01/17 FY01/18
1H 2H FY 1H 2H FY
USD/JPY (average) 111.69 105.85 108.77 112.33 111.99 112.16
CNY/JPY (average) 17.05 15.65 16.35 16.38 16.86 16.62
China (JPYmn) 12,445 15,540 27,985 14,086 17,816 31,902
YoY -16.8% 16.6% -1.1% 13.2% 14.6% 14.0%
Other Asia (JPYmn) 3,215 3,354 6,569 3,258 3,957 7,215
YoY -7.8% -12.6% -10.3% 1.3% 18.0% 9.8%
North America (JPYmn) 3,478 3,583 7,061 3,913 4,196 8,109
YoY -5.7% -10.0% -8.0% 12.5% 17.1% 14.8%
Europe (JPYmn) 1,140 1,122 2,262 1,225 1,441 2,666
YoY 5.8% -15.2% -5.8% 7.5% 28.4% 17.9%
Near and Middle East (JPYmn) 1,356 1,026 2,382 1,034 985 2,019
YoY 23.4% -35.3% -11.3% -23.7% -4.0% -15.2%
Other (JPYmn) 460 516 976 365 552 917
YoY -6.9% -27.4% -19.0% -20.7% 7.0% -6.0%
Source: Shared Research based on company data
Note: Figures may differ from company materials due to differences in rounding methods.

Q1 FY01/19 results
▷ Sales: JPY25.8bn (+7.6% YoY)

▷ Operating profit: JPY5.4bn (+10.2% YoY)


▷ Recurring profit: JPY5.4bn (+10.7% YoY)
▷ Net income: JPY3.9bn (+10.9% YoY)
*Net income refers to net income attributable to parent company shareholders

FY01/19 marks the second year of the sixth medium-term management plan (FY01/18–FY01/20). In a push to achieve the plan's
objectives, consolidated sales increased 7.6% YoY to JPY25.8bn largely due to strong performance at the Domestic Baby &
Mother Care and China businesses.

Operating profit rose 10.2% to JPY5.4bn owing to a CoGS ratio that improved 1.5pp YoY. Recurring profit rose 10.7% to
JPY5.4bn. Net income attributable to parent company shareholders was up 10.9% YoY to JPY3.9bn.

Exchange rates applied to earnings of overseas consolidated subsidiaries (regarding sales and expenses) in Q1 FY01/19 were
JPY108.22/USD (vs. JPY113.60/USD in FY01/18) and JPY17.04/CNY (vs. JPY16.56/CNY).

From Q1 FY01/19, the Overseas segment was renamed to the Singapore segment, which is involved in procurement and sales of
Pigeon-branded products mainly in ASEAN and Middle Eastern countries. The Lansinoh brand business centered in Europe and
the US, which was part of the Overseas segment in FY01/18, became an independent segment and newly named as the Lansinoh
segment.

Domestic Baby & Mother Care

▷ Sales: JPY9.4bn (+7.6% YoY)


▷ Operating profit: JPY1.9bn (+7.0% YoY)
Following the success of Momo No Ha (peach leaves) medicated skin lotion with the annual number of shipments exceeding
2.7mn bottles in FY01/18, Pigeon launched a new product to the Momo No Ha series, Momo No Ha medicated foam body soap.
Further, the company released Runfee RA8, an upgraded line of Runfee strollers equipped with improvements to allow for easy
pushing when in rear-facing (pusher-facing) position. Thanks to such new product releases, the segment sales increased. To
improve direct customer communication, Pigeon held five events in Q1 FY01/19, including classes for expecting mothers,
Pre-mama Class, and seminars on the theme of breast feeding for medical professionals who work with nursing mothers (total of
about 280 attendees).

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Child Care Service

▷ Sales: JPY1.7bn (-13.8% YoY)


▷ Operating profit: JPY44mn (-17.0% YoY)
Sales fell as the company’s contract to operate on-site child-care facilities in National Hospital Organization hospitals ended in
March 2018, resulting in fewer facilities under management. An increase in personnel and other expenses in addition to lower
sales pushed down profit.

Health & Elder Care

▷ Sales: JPY1.7bn (-0.5% YoY)


▷ Operating profit: JPY80mn (-17.5% YoY)
The company will continue strengthening sales to retailers and nursing facilities as well as improving the quality of its nursing
services.

China

▷ Sales: JPY7.8bn (+9.6% YoY)


▷ Operating profit: JPY3.0bn (+19.5% YoY)
Sales and operating profit rose driven by sales of core products such as baby skincare products and nursing bottles.

Sales of nursing bottles continued to expand, and sales of baby skincare products with Disney character motifs launched in
December 2017 were also steady. In addition to strengthening initiatives geared toward e-commerce, the company plans to
bolster direct communications with customers through social networking services, and expand its offline activities, such as sales
promotions at retail stores and activities in maternity and general hospitals.

Singapore

▷ Sales: JPY2.9bn (+26.7% YoY)


▷ Operating profit: JPY731mn (+10.1% YoY)

In Indonesia, one of the company’s business areas, Pigeon made its equity-method affiliate PT Pigeon Indonesia (Pigeon
Indonesia) a consolidated subsidiary in October 2017, and strengthened production and sales with an aim of expanding its
business in the area. Further, in other ASEAN and Middle Eastern countries, the company intends to continue working toward
market penetration with its brand.

Lansinoh

▷ Sales: JPY2.9bn (+0.4% YoY)


▷ Operating profit: JPY463mn (-14.9% YoY)
Sales of breast pumps via the new sales channel (Durable Medical Equipment [DME] channel) steadily increased. To grow its
business in China through Lansinoh Laboratories Shanghai, the company plans to promote initiatives to strengthen e-commerce
and brand value of Lansinoh.

Other

▷ Sales: JPY314mn (-2.8% YoY)

▷ Operating profit: JPY26mn (-24.6% YoY)

For details on previous quarterly and annual results, please refer to the Historical financial statements section

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Full-year company forecasts


FY01/17 FY01/18 FY01/19
(JPYmn) FY FY FY Est.
Sales 94,640 102,563 107,000
YoY 2.6% 8.4% 4.3%
CoGS 49,952 51,991
Gross profit 44,688 50,572
YoY 3.1% 13.2%
GPM 47.2% 49.3%
SG&A expenses 28,673 31,159
SG&A ratio 30.3% 30.4%
Operating profit 16,015 19,412 20,400
YoY 10.3% 21.2% 5.1%
OPM 16.9% 18.9% 19.1%
Recurring profit 16,462 20,129 20,400
YoY 9.2% 22.3% 1.3%
RPM 17.4% 19.6% 19.1%
Net income 11,118 14,515 14,100
YoY 9.0% 30.6% -2.9%
Source: Shared Research based on company data
Note: Figures may differ from company materials due to differences in rounding methods.
Note: Estimates represent most recent company forecast.

The company’s full-year FY01/19 forecasts are as follows:

▷ Sales: JPY107.0bn (+4.3% YoY)


▷ Operating profit: JPY20.4bn (+5.1% YoY)
▷ Recurring profit: JPY20.4bn (+1.3% YoY)
▷ Net income*: JPY14.1bn (-2.9% YoY)
*Net income refers to net income attributable to parent company shareholders.

Historical forecast accuracy


Results vs Initial Est. FY01/09 FY01/10 FY01/11 FY01/12 FY01/13 FY01/14 FY01/15 FY01/16 FY01/17 FY01/18
(JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons.
Sales (Initial Est.) 52,900 56,000 60,700 61,100 64,300 73,500 84,500 92,000 95,000 99,800
Sales (Results) 53,092 53,432 57,061 59,145 65,075 77,465 84,113 92,209 94,640 102,563
Results vs Initial Est. 0.4% -4.6% -6.0% -3.2% 1.2% 5.4% -0.5% 0.2% -0.4% 2.8%
Operating profit (Initial Est.) 3,470 4,400 5,500 5,000 5,650 7,800 11,600 13,900 15,000 17,000
Operating profit (Results) 4,269 4,604 4,546 5,042 7,086 10,365 12,780 14,521 16,015 19,412
Results vs Initial Est. 23.0% 4.6% -17.3% 0.8% 25.4% 32.9% 10.2% 4.5% 6.8% 14.2%
Recurring profit (Initial Est.) 3,400 4,350 5,400 4,950 5,550 7,800 11,800 14,000 15,300 17,000
Recurring profit (Results) 4,294 4,609 4,435 4,917 7,389 11,002 13,299 15,080 16,462 20,129
Results vs Initial Est. 26.3% 6.0% -17.9% -0.7% 33.1% 41.1% 12.7% 7.7% 7.6% 18.4%
Net income (Initial Est.) 2,000 3,000 3,500 3,300 3,300 4,850 7,300 8,900 10,400 11,800
Net income (Results) 2,854 2,840 2,928 3,183 4,573 6,985 8,451 10,197 11,118 14,515
Results vs Initial Est. 42.7% -5.3% -16.3% -3.5% 38.6% 44.0% 15.8% 14.6% 6.9% 23.0%
Source: Shared Research based on company data
Note: Figures may differ from company materials due to differences in rounding methods.

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Outlook
Targets for the Medium-term Management Plan
In March 2017, Pigeon released a sixth medium-term management plan that covers the three years between FY01/18 and
FY01/20.

For FY01/20, the final year of medium-term management plan, targets for consolidated results are as follows:

▷ Sales: JPY110bn (+5.1% average growth rate over the three years of the medium-term plan)
▷ Operating profit: JPY20bn (+7.7%)
▷ Recurring profit: JPY20bn (+6.7%)
▷ Net income*: JPY13.8bn (+7.5%)
*Net income refers to net income attributable to parent company shareholders.

Regarding indicators of shareholder returns, the sixth medium-term management plan targets a YoY dividend increase in each
fiscal year and consolidated total returns ratio of around 55%. The company says that it will adopt a flexible approach to
increasing shareholder returns with share buybacks as one of the options.

Main points of Medium-term Management Plan


The sixth medium-term management plan, which is positioned to build foundations for further growth during the next
medium-term plan period, focuses on improving the GPM over expanding sales. The company aims to build a base for
double-digit growth starting four years after the start of the sixth plan by prioritizing the allocation of management resources,
and strategic investment in core product categories.

Rather than slashing SG&A expenses, the sixth medium-term plan aims to lift gross profit by increasing sales of profitable
products and improving production efficiency. In terms of SG&A expenses, the company plans to increase marketing costs to
expand its trade area, but also improve the OP margin by increasing gross profit.

The company’s FY01/19 forecasts are sales of JPY107bn, GPM of 51.1%, operating profit of JPY20.4bn, and OPM of 19.1%. If the
company were to attain these targets, it will reach the final-year targets of its current medium-term plan a year early in FY01/19.

Positioning of sixth medium-term management plan

Source: company data

Outline of Sixth Medium-Term Management Plan


In the medium-term plan, the company has decided on the following slogan: “Building our dreams into the future—by creating a
bridge towards the Global Number One manufacturer of baby products.” The company plans to strengthen its management and

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business foundation by making strategic investments and achieving its targets in order to generate further growth after the
seventh medium-term management plan.

In this new medium-term management plan, the company aims to expand the group’s businesses and improve management
quality with the following three key strategies.

◤ Based on the core principles of the “Pigeon Way,” the company will develop and implement policies to achieve its goal set in
the plan to become the most trusted company for babies and their families around the world and the top global manufacturer
of baby products.

◤ The company will aim to increase corporate value by maximizing its cash flow and improving profitability and efficiency. In
addition, the company will build and strengthen its organizational structure, management system, and governance structure
to sustain medium- to long-term growth.

◤ In the three years of the sixth medium-term plan, the company will make strategic investments and focus management
resources on key products in order to lay the foundation for double-digit future growth.

Based on these key strategies, the company plans to focus on improving efficiency and profitability (better profit and cash flow
management) and expanding its priority categories (leverage strengths of the robust nursing bottles and nipples businesses into
related categories).

Specifically, the company is focusing on three new core products in addition to its traditional three core products of nursing
bottles & nipples, cups, and pacifiers/teether toys to lift sales. The three new core products are breast milk-related products,
electrical appliances, and skincare, toiletries, & detergents (i.e., chemical products made in the same factory). Pigeon aims to
improve its product mix by increasing the sales share of these profitable new products.

In specific trade areas, the company is focusing on expanding sales of disposable diapers in China and strollers and infant car seats
in Japan. These measures are designed to increase the sales share of these products in each region so that higher sales lead to
improved production and sourcing.

By implementing these measures, the company aims to increase the GPM from 47.2% in FY01/17 to 50.0% and OPM from 16.9%
in FY01/17 to 18.2%. ROE and ROIC have been identified as important management benchmarks and the company is striving to
further improve profitability and capital efficiency.
Improving business efficiency and profitability

(JPYbn) Sales Gross profit GPM

120.0 110.0 51.0%


99.8 102.3
100.0 94.6 50.0%
50.0%
49.7%
80.0 49.0%
47.7% 55.0
60.0 50.8 48.0%
44.6 47.6
40.0 47.0%
47.2%
20.0 46.0%

0.0 45.0%
FY01/17 FY01/18 FY01/19 FY01/20

Source: Shared Research based on company data

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Key targets for medium-term management plan


FY01/17 Act. FY01/20 Target CAGR
(JPYbn) Act. % of sales Target % of sales
Sales 94.6 - 110.0 - +5.1%
Gross profit 44.6 47.2% 55.0 50.0% +7.2%
Operating profit 16.0 16.9% 20.0 18.2% +7.7%
Recurring profit 16.4 17.4% 20.0 18.2% +6.7%
Net income 11.1 11.8% 13.8 12.5% +7.5%
ROE 21.8% - Over 22.0% - -
ROIC* 19.2% - Over 20.0% - -
*NOPAT/invested capital, tax rates assumed at 30.0%
Source: Shared Research based on company data

Plan targets and business strategies by segment


Sales targets for final year of medium-term management plan by segment are as follows:

▷ Domestic Baby & Mother Care: JPY36.5bn (+4.7% average growth rate over the three years of the plan)
▷ Child Care Service: JPY3.0bn
▷ Health & Elder Care: JPY8.0bn (+5.0%)
▷ Overseas: JPY28.9bn (+7.9%)
▷ China: JPY39.0bn (+8.5%)
Sales forecasts by segment
FY01/17 Act. FY01/20 Target CAGR
(JPYbn) Act. GPM Target GPM
Domestic Baby & Mother Care 31.8 47.0% 36.5 47.6% +4.7%
Child Care Service 7.3 10.6% 3.0 16.8% -
Health & Elder Care 6.9 31.4% 8.0 34.6% +5.0%
Overseas 23 55.6% 28.9 56.1% +7.9%
China 30.5 44.6% 39.0 45.7% +8.5%
Elimination -6.3 - -6.9 - -
Others 1.2 15.6% 1.4 15.5% +4.6%
Consolidated sales 94.6 47.2% 110.0 50.0% +5.1%
Source: Shared Research based on company data

Business strategies and main measures by segment

Domestic Baby & Mother Care segment: Increase sales from JPY31.8bn in FY01/17 to JPY36.5bn in FY01/20

Expand existing businesses Increase market share in six core categories


Sales target (excluding large-size products): from JPY30.7bn in FY01/17 to JPY33.0bn in FY01/20

Business growth Growth in large-size products category


Growth in baby strollers, car seats, etc., by increasing market share
Sixth medium-term plan target of 25% market share in strollers
Category sales target: from JPY1.0bn in FY01/17 to JPY3.5bn in FY01/20

Further strengthen Restructure and reinforce hospital/maternity hospital relations


communication with Strengthen relationship with target hospitals/maternity hospitals and further expand healthcare seminars
consumers (regions, frequency)
Strengthen direct communication
Attract more Pigeon fans using Pigeon.info website

Child Care Service segment: Increase sales from JPY7.4bn in FY01/17 to JPY3.0bn in FY01/20

Improve business quality Practice professional child care suited to individual child’s personality
Further improve management structure for safety and security
Improve quality of child care by training child-care workers

Health and Elder Care segment: Increase sales from JPY6.9bn in FY01/17 to JPY8.0bn in FY01/20

Business growth and Strengthen internal sales and distribution structure


improving profitability Develop and sell new products aligned with consumer/care giver insights by collaborating with partners outside
the company
Strengthen promotion based on four themes aligned with benefiting consumers and care givers

China segment: Increase sales from JPY30.5bn in FY01/17 to JPY39.0bn in FY01/20

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Business growth Increase market share in six core categories


Nursing bottles & nipples: Increase sales by 39% between FY01/17 and FY01/20
Launch new products every year
Grow disposable diaper business
Increase sales from JPY900mn in FY01/17 to JPY3.5bn in FY01/20

Strengthen business base Sales and distribution structure


Further strengthen sales and distribution structure to adapt to growth of e-commerce channel

Further strengthen Restructure and reinforce hospital/maternity hospital relations


communication with Strengthen relationship with target hospitals/maternity hospitals (e.g., joint research with university hospitals)
consumers Strengthen direct communication
Attract more Pigeon fans using WeChat and Weibo

Overseas segment: Increase sales from JPY23.1bn in FY01/17 to JPY29.0bn in FY01/20

Business growth Increase market share in six core categories


Nursing bottles: Increase market share by 15pp in each country
Growth of Lansinoh Group
Increase sales from USD99mn in FY01/17 to USD135mn in FY01/20
Strengthen sales via DME route in US

Branding Working with NICU


Step up collaboration with NICU as well as other hospital/maternity hospital relations activities

New and growth markets Strengthen presence in growth markets


India, Indonesia, France (Benelux), Lansinoh Shanghai
Pioneer new markets
Africa (Nigeria, Kenya, and West Coast countries)
Source: Shared Research based on company data

Potential of target markets


The company estimates that 135mn babies are born per year worldwide, of which the 20 largest countries account for 68% of the
total (91.6mn). The company estimates that its target market as 17.82mn babies based on this figure and factoring in the
purchasing power of each country benchmarked by US GDP.
Top 20 countries representing Pigeon’s target market
Est. target
No. of births
GDP per capita no. of births
Country ('000 per US=100%
(USD) ('000 per
year)
year)
United States 4,010 56,300 100% 4,010
Mature market Russia 1,650 23,700 42% 700
(Over USD20,000 per capita)
Turkey 1,300 20,500 36% 470
Mexico 2,290 18,500 33% 750
Iran 1,470 17,800 32% 470
Growth market Brazil 2,950 15,800 28% 830
(USD10,000–20,000 per capita) China 17,080 14,300 25% 4,340
Egypt 2,030 11,500 20% 410
Indonesia 4,280 11,300 20% 860
Philippines 2,450 7,500 13% 330
Next wave Nigeria 6,830 6,400 11% 780
(USD5,000–10,000 per capita) India 24,470 6,300 11% 2,740
Vietnam 1,510 6,100 11% 160
Pakistan 4,500 4,900 9% 390
Bangladesh 3,570 3,600 6% 230
Tanzania 1,860 3,000 5% 100
Ten years later Uganda 1,620 2,100 4% 60
(Less than USD5,000 per capita)
Afghanistan 1,260 2,000 4% 40
Ethiopia 3,710 1,700 3% 110
Congo 2,770 800 1% 40
Source: Shared Research based on company data

Pigeon comments that there is no direct link between this estimate and the sixth medium-term plan targets, but notes that China
(its current growth market) and other regions offer substantial growth potential. Given the considerable scope for cultivating
these markets based on current GDP levels, the company expects target markets to expand further if these countries’ GDPs rise
going forward.

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Image of estimated market size

Source: company data

Targets by overseas region


In the overseas business, Pigeon plans to increase market share in the six core categories in China, North America, and Europe.
The company has two timelines for new/growth markets. The company intends to continue strengthening growth markets like
India, Indonesia, France, and China (Lansinoh Shanghai) as well as pioneering new, emerging markets such as Africa.

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Sales target by overseas region

FY01/17 Act. FY01/18 Act. FY01/19 Est. FY01/20 Target. CAGR


(JPYmn)
Sales % of total Sales % of total Sales % of total Sales % of total
Total overseas 47,238 49.9% 52,828 51.5% 55,716 54.5% 61,012 55.5% +8.9%
China (incl. Hong Kong) 27,985 29.6% 31,902 31.1% 32,727 32.0% 36,015 32.7% +8.8%
Other Asia 6,569 6.9% 7,215 7.0% 6,863 6.7% 7,534 6.8% +4.7%
North America 7,061 7.5% 8,109 7.9% 8,355 8.2% 8,713 7.9% +7.3%
Europe 2,262 2.4% 2,666 2.6% 3,605 3.5% 4,075 3.7% +21.7%
Near and Middle East 2,382 2.5% 2,019 2.0% 2,706 2.6% 2,994 2.7% +7.9%
Other regions 976 1.0% 917 0.9% 1,457 1.4% 1,678 1.5% +19.8%

(JP Ybn)
China (incl. Hong Kong) Other Asia North America Europe Near and Middle East Other regions
70

60

50

40

30

20

10

0
FY01/14 FY01/15 FY01/16 FY01/17 Act. FY01/18 Act. FY01/19 Est. FY01/20 Target

(JPYbn) FY01/14 FY01/15 FY01/16 FY01/17 FY01/18 FY01/19 FY01/20


Act. Act. Act. Act. Act. Est. Target
China (incl. Hong Kong) 22.4 26.3 28.2 27.9 31.9 32.7 36.0
Other Asia 6.1 6.8 7.3 6.5 7.2 6.8 7.5
North America 5.4 6.3 7.6 7.0 8.1 8.3 8.7
Europe - 2.0 2.4 2.2 2.6 3.6 4.0
Near and Middle East 2.1 2.2 2.6 2.3 2.0 2.7 2.9
Other regions 24.0 0.9 1.2 0.9 0.9 1.4 1.6
Source: Shared Research based on company data

ESG initiative
Pigeon is focusing ESG (Environment, Social, and Governance) as part of a program to improve corporate value (see below).
Main ESG measures
Topics Actions to take
Climate change - Reduce CO2 emission; save electric power
Natural resources - Ensure sustainable use of natural resources
Environment
Pollution and industrial waste - Reduce waste and trash; prevent pollution
Environmental opportunities - Engage in tree-planting activities
- Control overtime work: implement MBO and training; develop
Human capital
human resources for international operations
Product liability - Secure product safety and quality
Social - Promote tree-planting campaign for newborns; support
Social action developing children's creativity; donate buildings to elementary
schools
- Encourage use of Pigeon Partners' Line; respect property
Fair business practices
rights
Corporate governance - Enhance corporate governance
- Promote employee diversity; support female advancement to
Governance
Diversity and inclusion senior management; assist employees with child raising
- Enhance compliance; Encourage use of Speak Up
Source: Shared Research based on company data

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Business
Business description
Pigeon operates three business segments in Japan, Domestic Baby & Mother Care, Health & Elder Care, and Child Care Service,
and two overseas segments, Overseas and China. The Overseas and China segments handle baby and mother care products, and
this product group is overwhelmingly important for the company.
Earnings by segment
(JPYmn) FY01/12 FY01/13 FY01/14 FY01/15 FY01/16 FY01/17 FY01/18

Sales 59,145 65,075 77,465 84,113 92,210 94,640 102,563


YoY 3.7% 10.0% 19.0% 8.6% 9.6% 2.6% 8.4%
Domestic Baby & Mother Care 24,048 23,882 24,451 24,432 28,053 31,823 33,841
YoY -1.5% -0.7% 2.4% -0.1% 14.8% 13.4% 6.3%
% of sales 40.7% 36.7% 31.6% 29.0% 30.4% 33.6% 33.0%
Child Care Service 5,991 6,388 6,600 6,722 6,758 7,393 7,541
YoY 9.8% 6.6% 3.3% 1.9% 0.5% 9.4% 2.0%
% of sales 10.1% 9.8% 8.5% 8.0% 7.3% 7.8% 7.4%
Health & Elder Care 6,469 6,700 6,721 6,761 6,499 6,901 7,058
YoY -0.5% 3.6% 0.3% 0.6% -3.9% 6.2% 2.3%
% of sales 10.9% 10.3% 8.7% 8.0% 7.0% 7.3% 6.9%
Overseas (old segments, incl. China) 21,585 26,964 38,541 44,921 49,616 47,247 52,830
YoY 8.4% 24.9% 42.9% 16.6% 10.5% -4.8% 11.8%
% of sales 36.5% 41.4% 49.8% 53.4% 53.8% 49.9% 51.5%
Overseas (new segments, excl. China) - - 16,857 19,144 18,421 16,932 18,659
YoY - - - 13.6% -3.8% -8.1% 10.2%
% of sales - - 21.8% 22.8% 20.0% 17.9% 18.2%
China - - 21,684 25,776 31,195 30,315 34,171
YoY - - - 18.9% 21.0% -2.8% 12.7%
% of sales - - 28.0% 30.6% 33.8% 32.0% 33.3%
Other 1,052 1,141 1,152 1,276 1,284 1,273 1,289
Operating profit 5,043 7,086 10,366 12,781 14,522 16,015 19,412
YoY 10.9% 40.5% 46.3% 23.3% 13.6% 10.3% 21.2%
OPM 8.5% 10.9% 13.4% 15.2% 15.7% 16.9% 18.9%
Domestic Baby & Mother Care 3,678 3,380 3,412 3,752 4,384 4,818 5,928
YoY 1.9% -8.1% 1.0% 10.0% 16.8% 9.9% 23.0%
OPM 15.3% 14.2% 14.0% 15.4% 15.6% 15.1% 17.5%
% of operating profit 44.7% 32.8% 24.1% 22.2% 23.1% 25.6% 26.6%
Child Care Service 153 183 176 189 149 211 218
YoY 30.4% 19.7% -3.6% 7.4% -21.3% 41.8% 3.3%
OPM 2.5% 2.9% 2.7% 2.8% 2.2% 2.9% 2.9%
% of operating profit 1.9% 1.8% 1.2% 1.1% 0.8% 1.1% 1.0%
Health & Elder Care 350 213 212 260 141 445 468
YoY 215.6% -39.3% -0.4% 22.6% -45.9% 216.4% 5.2%
OPM 5.4% 3.2% 3.2% 3.8% 2.2% 6.4% 6.6%
% of operating profit 4.3% 2.1% 1.5% 1.5% 0.7% 2.4% 2.1%
Overseas (old segments, incl. China) 3,909 6,387 10,172 12,494 14,166 13,216 15,557
YoY 4.4% 63.4% 59.3% 22.8% 13.4% -6.7% 17.7%
OPM 18.1% 23.7% 26.4% 27.8% 28.6% 28.0% 29.4%
% of operating profit 47.5% 62.0% 71.8% 74.1% 74.6% 70.1% 69.8%
Overseas (new segments, excl. China) - - 4,152 4,969 5,579 4,861 5,841
YoY - - - 19.7% 12.3% -12.9% 20.2%
OPM - - 24.6% 26.0% 30.3% 28.7% 31.3%
% of operating profit - - 29.3% 29.5% 29.4% 25.8% 26.2%
China - - 6,041 7,525 8,587 8,355 9,716
YoY - - - 24.6% 14.1% -2.7% 16.3%
OPM - - 27.9% 29.2% 27.5% 27.6% 28.4%
% of operating profit - - 42.6% 44.6% 45.2% 44.3% 43.6%
Other 138 142 204 173 152 162 126
Eliminations -3,185 -3,218 -3,811 -4,091 -4,469 -2,840 -2,887
Source: Shared Research based on company data
Figures may differ from company materials due to differences in rounding methods.

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Domestic Baby & Mother Care segment (33.0% of total sales in FY01/18, 26.6% of OP before adjustments)
Domestic Baby & Mother Care segment earnings
(JPYmn) FY01/12 FY01/13 FY01/14 FY01/15 FY01/16 FY01/17 FY01/18

Sales 24,048 23,882 24,451 24,432 28,053 31,823 33,841


YoY -1.5% -0.7% 2.4% -0.1% 14.8% 13.4% 6.3%
Gross profit 11,180 11,180 11,200 11,240 12,460 14,960 16,550
YoY 1.3% 0.0% 0.2% 0.4% 10.9% 20.1% 10.6%
GPM 46.5% 46.8% 45.8% 46.0% 44.4% 47.0% 48.9%
SG&A expenses 7,500 7,800 7,790 7,490 8,080 10,140 10,620
YoY 0.9% 4.0% -0.1% -3.9% 7.9% 25.5% 4.7%
SG&A-to-sales ratio 31.2% 32.7% 31.9% 30.7% 28.8% 31.9% 31.4%
Operating profit 3,678 3,380 3,412 3,752 4,384 4,818 5,928
YoY 1.9% -8.1% 1.0% 10.0% 16.8% 9.9% 23.0%
OPM 15.3% 14.2% 14.0% 15.4% 15.6% 15.1% 17.5%
Source: Shared Research based on company data
Figures may differ from company materials due to differences in rounding methods.
GPM and SG&A expenses are calculated by Shared Research based on company data.

Pigeon’s core products are nursing bottles and nipples and its main market are parents of babies 0–24 months old. These two
product types represent approximately 18% of domestic sales (Shared Research understands the number to be about 25% of
total consolidated sales, including the Overseas segment), and their importance for both the brand and the bottom line cannot
be underestimated. Apart from bottles and nipples, the product lineup includes nursing pads, baby wipes, skincare goods,
maternity products, strollers, and breast pumps.

The product cycle is two to three years for baby food and about five years for other products. The product-renewal cycle offers a
chance to secure shelf space and negotiate with store owners. R&D expenses tend to be a little over 2% of consolidated sales—at
2.1% in FY01/08 and 2.6% in FY01/18.

Pigeon products enjoy exceptional support of its Japanese consumers as illustrated by the market share chart below. The strong
brand allows the company to maintain premium pricing and avoid discounting. This not only helps to perpetuate the brand
image but contributes to high profitability.
Domestic Baby & Mother Care products

Source: Shared Research based on company data

Pigeon core product market share and position (FY01/18)

100%

80% No.1
No.1
No.1
60%

40% No.1
73% No.1
70%
64%

20% 37% 32%

0%
Nursing bottles Manual breast Breast pads Baby skincare Baby wipes
pumps (cleaners)

Source: Shared Research based on company data

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Pigeon makes about 60% of its products in house. The company did not have its own manufacturing facilities till the mid-80s
when it established Pigeon Home Products Corp. in Shizuoka Prefecture. Pigeon opened its first overseas factory in Thailand in
1996. As of FY01/13, the in-house manufacturing is carried out by several domestic and overseas manufacturing subsidiaries. The
remaining 40% of the products are sourced from over 100 partner manufacturers.

In general, the company’s products sold wholesale to distributors are sold at drugstores and baby goods retailers. Main clients
are major drugstore chains like drugstores of Tsuruha Holdings, Inc. (TSE1: 3391), Matsumotokiyoshi Holdings Co., Ltd. (TSE1:
3088), Sundrug Co., Ltd. (TSE1: 9989), Sugi Holdings Co., Ltd. (TSE1: 7649), and Cosmos Pharmaceutical Corporation (TSE1:
3349), and baby goods retailers including Nishimatsuya Chain Co., Ltd. (TSE1: 7545) and Akachan Honpo. The company has
three-way sales negotiations with a retailer and distributor in attendance. As an exception to this practice, Pigeon deals directly
with Toys “R” Us and Akachan Honpo.

The company also sells online, at third-party e-commerce sites such as Amazon.co.jp.

Mag Mag
Mag Mag Nipple Cup Mag Mag Spout Cup Mag Mag Training Cup Mag Mag Straw Cup

Source: Shared Research based on company data

Child Care Service segment (7.4% of total sales in FY01/18, 1.0% of OP before adjustments)
Child Care Service segment earnings
(JPYmn) FY01/12 FY01/13 FY01/14 FY01/15 FY01/16 FY01/17 FY01/18

Sales 5,991 6,388 6,600 6,722 6,758 7,393 7,541


YoY 9.8% 6.6% 3.3% 1.9% 0.5% 9.4% 2.0%
Gross profit 690 730 760 750 720 780 780
YoY 3.0% 5.8% 4.1% -1.3% -4.0% 8.3% 0.0%
GPM 11.5% 11.4% 11.5% 11.2% 10.7% 10.6% 10.4%
SG&A expenses 540 550 580 560 570 570 560
YoY -1.8% 1.9% 5.5% -3.4% 1.8% 0.0% -1.8%
SG&A-to-sales ratio 9.0% 8.6% 8.8% 8.3% 8.4% 7.7% 7.4%
Operating profit 153 183 176 189 149 211 218
YoY 30.4% 19.7% -3.6% 7.4% -21.3% 41.8% 3.3%
OPM 2.5% 2.9% 2.7% 2.8% 2.2% 2.9% 2.9%
Source: Shared Research based on company data
Figures may differ from company materials due to differences in rounding methods.
GPM and SG&A expenses are calculated by Shared Research based on company data.

Child Care Services

Source: Shared Research based on company data

This division operates licensed and certified child-care centers, including onsite company child-care centers, contracted centers,
Kids World preschool, and other facilities. As of FY01/18, the division had 54 sites, excluding hospital centers under the National
Hospital Organization.

A “licensed child-care center” is one approved under the provisions of the Child Welfare Act, which cover standards (e.g., facility
size, number of caregivers, kitchen facilities, disaster management, and hygiene management) set by the national government

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and approved by the prefectural governor. In contrast, a “certified child-care center” is particular to Tokyo. The Tokyo
Metropolitan Government felt that the licensed centers were not likely to fill the needs of citizens of Tokyo, because many of the
requirements for “licensed” centers were not applicable to large cities (in densely populated Japanese cities, it is fairly difficult to
secure enough space meeting the national standard), and some centers do not accept babies under one year old. The local
government set its own standards that match the characteristics of Tokyo, and established its own centers and designed a system
to cope with diversified child-care needs, through promoting competition among service providers by soliciting a large number
of new entrants.

Pigeon hires its own child-care workers and cooking staff, providing training depending on the type of employment and services.
Child-care staff receives training at Pigeon Heartner College to ensure safe and reliable care. Pigeon Hearts Corporation, a group
company, offers licensed and certified child-care facilities, as well as in-house child-care services for companies. Kids World, a
child-care center, offers child care, English classes, and preschool activities and is primarily a franchise operation that generates
royalty revenues for Pigeon. This labor-intensive business is not a high-margin one, but it does offer synergies with the Domestic
Baby & Mother Care business, which targets babies 0–24 months (unlike other general child-care centers) to better support
working mothers.

Health & Elder Care segment (6.9% of total sales in FY01/18, 2.1% of OP before adjustments )
Health & Elder Care segment earnings
(JPYmn) FY01/12 FY01/13 FY01/14 FY01/15 FY01/16 FY01/17 FY01/18

Sales 6,469 6,700 6,721 6,761 6,499 6,901 7,058


YoY -0.5% 3.6% 0.3% 0.6% -3.9% 6.2% 2.3%
Gross profit 1,900 2,050 2,000 1,940 1,840 2,170 2,210
YoY 2.2% 7.9% -2.4% -3.0% -5.2% 17.9% 1.8%
GPM 29.3% 30.6% 29.8% 28.7% 28.3% 31.4% 31.3%
SG&A expenses 1,550 1,840 1,790 1,680 1,700 1,730 1,740
YoY -11.4% 18.7% -2.7% -6.1% 1.2% 1.8% 0.6%
SG&A-to-sales ratio 24.0% 27.5% 26.6% 24.8% 26.2% 25.1% 24.7%
Operating profit 350 213 212 260 141 445 468
YoY 215.6% -39.3% -0.4% 22.6% -45.9% 216.4% 5.2%
OPM 5.4% 3.2% 3.2% 3.8% 2.2% 6.4% 6.6%
Source: Shared Research based on company data
Figures may differ from company materials due to differences in rounding methods.
GPM and SG&A expenses are calculated by Shared Research based on company data.

This segment offers two brands: Habinurse (nursing products) and Recoup (for active seniors). These brands cover products and
services related to toilet use, bathing, hygiene, meals, sleeping, and mobility. Pigeon plans to use its expertise and quality control
cultivated though its development of baby products to fulfill unmet needs in the senior market.
Health & Elder Care segment products

Source: Shared Research based on company data

Pigeon Tahira Corporation sells products in this segment to retail shops and care facilities. In 1991, Pigeon Tahira moved away
from direct sales and introduced a distributor system (a first in the Japanese nursing industry). It has been a Pigeon subsidiary
since 2004. The company began to strengthen sales activities at care facilities in FY01/14. In FY01/15, the company combined the
Pigeon Tahira’s salesforce with its own in the Health & Elder Care segment, in a bid to enhance its marketing capacity and
efficiency.

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Pigeon Manaka Corporation sells in-home nursing support services and products in and around its home prefecture of Tochigi.
The group offers house call services, in-home bathing assistance, daycare, assisting devices, home renovation, and care
consultation. Pigeon Manaka hires care workers with level 1 and 2 helper qualifications and standard driver’s licenses. In August
2011, it opened centers in Ohira-machi, Tochigi City, and Kanuma City, offering home-visit nurses and in-home bathing services.
In December 2011, it also opened adult daycare center “San San” in Tochigi City (on the premises of Pigeon Manaka’s head
office) where clients needing nursing or assistance can go to receive help with bathing and meals (including associated nursing)
as well as advice, health checks, help with everyday living, and functional training.

Overseas segment (18.2% of total sales in FY01/18, 26.2% of OP before adjustments)


Overseas segment earnings
(JPYmn) FY01/14 FY01/15 FY01/16 FY01/17 FY01/18

Sales 20,306 23,374 25,234 23,051 25,427


YoY - 15.1% 8.0% -8.7% 10.3%
Sales (external customers) 16,857 19,144 18,421 16,932 18,659
YoY - 13.6% -3.8% -8.1% 10.2%
Interrnal transactions or transfer 3,449 4,230 6,813 6,119 6,768
Gross profit 10,780 12,550 13,980 12,820 14,520
YoY - 16.4% 11.4% -8.3% 13.3%
GPM 53.1% 53.7% 55.4% 55.6% 57.1%
SG&A expenses 6,630 7,580 8,400 7,960 8,680
YoY - 14.3% 10.8% -5.2% 9.0%
SG&A-to-sales ratio 39.3% 39.6% 45.6% 47.0% 46.5%
Operating profit 4,152 4,969 5,579 4,861 5,841
YoY - 19.7% 12.3% -12.9% 20.2%
OPM 24.6% 26.0% 30.3% 28.7% 31.3%
Source: Shared Research based on company data
Figures may differ from company materials due to differences in rounding methods.
GPM and SG&A expenses are calculated by Shared Research based on company data.
Operations in South Korea, Hong Kong, and Taiwan were transferred from the Overseas business to the China business from FY01/16.

The Overseas segment includes other overseas regions than those under the China segment (broken down into Singapore and
Lansinoh from FY01/19). The Overseas segment only handles baby goods. As a reference, in FY01/18 the Singapore business
posted sales of JPY10.3bn and operating profit of JPY2.4bn, and the Lansinoh business posted sales of JPY12.5bn and operating
profit of JPY1.4bn.

Sales of the Lansinoh business is close to total sales of the following regional segments: North America (JPY8.1bn in FY01/18),
Europe (JPY2.7bn), and Lansinoh Shanghai (approx. JPY900mn versus a little over JPY450mn in FY01/17).

China segment (33.6% of total sales in FY01/18, 43.6% of OP before adjustments)


China segment earnings
(JPYmn) FY01/14 FY01/15 FY01/16 FY01/17 FY01/18

Sales 21,980 26,302 31,688 30,533 34,494


YoY - 19.7% 20.5% -3.6% 13.0%
Sales (external customers) 21,684 25,776 31,195 30,315 34,171
YoY - 18.9% 21.0% -2.8% 12.7%
Interrnal transactions or transfer 296 525 493 218 323
Gross profit 9,430 11,490 14,130 13,620 19,730
YoY - 21.8% 23.0% -3.6% 44.9%
GPM 42.9% 43.7% 44.6% 44.6% 57.2%
SG&A expenses 3,390 3,970 5,540 5,270 10,010
YoY - 17.1% 39.5% -4.9% 89.9%
SG&A-to-sales ratio 15.6% 15.4% 17.8% 17.4% 29.3%
Operating profit 6,041 7,525 8,587 8,355 9,716
YoY - 24.6% 14.1% -2.7% 16.3%
OPM 27.9% 29.2% 27.5% 27.6% 28.4%
Source: Shared Research based on company data
Figures may differ from company materials due to differences in rounding methods.
GPM and SG&A expenses are calculated by Shared Research based on company data.
Operations in South Korea, Hong Kong, and Taiwan were transferred from the Overseas business to the China business from FY01/16.

The China segment only handles maternity and baby goods. In China, most of mainstay products are produced at local plants.
High capacity utilization rates at the local plants helped boost the profitability in China. The segment includes operations in China,
South Korea, Hong Kong, and Taiwan. From FY 01/16, the company included South Korea, Taiwan, Russia, the Philippines, and
some others under supervision of the segment and reclassified its disclosure segments correspondingly.

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Overseas sales trends by market


Pigeon classifies overseas operations into the China and Overseas segments, and also discloses sales trends by region.
Overseas sales breakdown
(JPYmn) FY01/12 FY01/13 FY01/14 FY01/15 FY01/16 FY01/17 FY01/18

Overseas sales 21,542 26,922 38,492 44,900 49,579 47,238 52,828


YoY 8.5% 25.0% 43.0% 16.6% 10.4% -4.7% 11.8%
China 10,167 14,112 22,417 26,384 28,291 27,985 31,902
YoY 11.8% 38.8% 58.9% 17.7% 7.2% -1.1% 14.0%
% of sales 47.2% 52.4% 58.2% 58.8% 57.1% 59.2% 60.4%
Other Asia 4,221 5,243 6,125 6,800 7,326 6,569 7,215
YoY 8.0% 24.2% 16.8% 11.0% 7.7% -10.3% 9.8%
% of sales 19.6% 19.5% 15.9% 15.1% 14.8% 13.9% 13.7%
North America 3,842 3,668 5,418 6,376 7,671 7,061 8,109
YoY -0.3% -4.5% 47.7% 17.7% 20.3% -8.0% 14.8%
% of sales 17.8% 13.6% 14.1% 14.2% 15.5% 14.9% 15.3%
Europe - - - 2,090 2,400 2,262 2,666
YoY - - - - 14.8% -5.8% 17.9%
% of sales - - - 4.7% 4.8% 4.8% 5.0%
Near and Middle East 1,532 1,878 2,118 2,262 2,684 2,382 2,019
YoY 8.6% 22.6% 12.8% 6.8% 18.7% -11.3% -15.2%
% of sales 7.1% 7.0% 5.5% 5.0% 5.4% 5.0% 3.8%
Other regions 1,776 2,020 2,412 986 1,205 979 917
YoY 11.8% 13.7% 19.4% - 22.2% -18.8% -6.3%
% of sales 8.2% 7.5% 6.3% 2.2% 2.4% 2.1% 1.7%
Source: Shared Research based on company data
Figures may differ from company materials due to differences in rounding methods.
In FY01/14 and before, European business was included in Others

Sales trends by market in FY01/18


China (including Hong Kong)
Sales were JPY32.0bn (+14.0% YoY, +12.1% on a local currency basis). The figures include Hong Kong, a minor contributor. The
number of births in China was 17.23mn in 2017 (-3.5% YoY); China is Pigeon’s largest overseas market.

Other Asia
Sales in this region were JPY7.2bn (+9.8% YoY). Major markets are South Korea, Singapore, Malaysia, Taiwan, and Thailand.

North America and Europe


North American sales were JPY8.1bn (+14.8% YoY, +11.4% on a local currency basis). Sales in Europe were JPY2.7bn (+17.8%
YoY). In these markets, the company depends on Lansinoh Laboratories, Inc., which sells Pigeon products under the Lansinoh
brand.

The Near and Middle East


Near and Middle East sales were JPY2.0bn (-15.2% YoY).

Other regions
Sales were JPY917mn (-6.3% YoY). Other Regions include Central and South America, South Africa, and others.

What are the factors that so far have been helping Pigeon to succeed overseas? Pigeon cites its superior products and a skillful use
of local partners. According to the company, the product superiority is what drives its success not only in China but in all foreign
markets where it sells under Pigeon brand. Pigeon’s R&D effort (described in detail in the R&D section) in baby products,
particularly in bottle and nipple design, is arguably second to none. The second pillar of Pigeon’s success overseas is its strong
relationships with local partners. It has relied on local distributors to grow the Pigeon brand recognition and penetrate the market.
That relatively early move has since won Pigeon brand recognition and deep market penetration thanks to its partners’ selling
power.

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Operations by region
China
As of November 2012, China accounted for the largest proportion of the company’s overseas business, and its growth rate is by
far the highest. Pigeon built strong relationships with local primary distributors since it began exporting to China in the 1990s.
The company established a local subsidiary, Pigeon (Shanghai) Co., Ltd. in China in 2002 when it saw the country as a final
market rather than a manufacturing base. Through the subsidiary, the company has enhanced the Pigeon brand recognition and
expanded its presence in this country. In the Chinese market, the company targets affluent families (with monthly income of
CNY10,000 per household).

At the end of FY01/16, approximately 13,000 stores in China stocked Pigeon products. Pigeon had had contracts with three
primary distributors for each channel: baby goods retailers, general merchandisers, and department stores. From 01/16, however,
the company changed the contracts with two of the three primary distributors to those for each product category from those for
each channel, in a bid to expand sales of disposable diapers and other products.

Pigeon aims to expand its business further by having each distributor specializing in a product category, in which they have
strengths.
Distribution system in China

Primary distributors A Primary distributors B


Primary distributors C
(Accessories) (Diapers, baby foods)

E-commerce Baby goods retailers General merchandisers Department stores

Source: Shared Research based on company data


Note: Lansinoh-branded products are marketed through distributors handling diapers and baby foods.

At department and baby goods stores in China, Pigeon set up “Pigeon Corner”—a space dedicated to Pigeon products—and
pursuing recognition as a high-end brand (the company had 3,482 stores that had Pigeon Corner retail spaces in FY01/17).
New “Pigeon Corner” at a Store in China

Source: Shared Research based on company data

From 2H FY01/14, Pigeon began to sell disposable diapers in the Chinese market. These are high-end products (selling for
CNY2.0–3.0 compared with regular products retailing for CNY1.5–2.0) targeting the affluent segment. The company also started
sales of baby food in China in FY01/14. In the Chinese market where food safety awareness is on the rise, we see strong potential
for the Pigeon brand to win market share.

The company began to operate a plant in Changzhou, Pigeon Industries (Changzhou) Co., Ltd., in March 2011 to manufacture
products for the Chinese market. In FY01/12, the company made some 50% of its products sold in China within the country. This
ratio rose to 60% in FY01/13, 70% in FY01/14, and most recently 75%. The capacity utilization rate of the plant was more than
80–90% as of FY01/18.

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According to the company, despite a large percentage of products being made locally, pricing is in line with Japan (or slightly
higher), as is product quality.

North America
In April 2004, Pigeon brought Virginia-based Lansinoh Laboratories, Inc. under the group umbrella as a launching pad for
expansion into the US and Europe. Lansinoh makes nursing products, including nipple cream, nursing pads, and breast pumps,
which are stocked at over 40,000 stores in the US. General merchandisers (e.g., Walmart, Target) are the main sales channels for
Lansinoh products. Sales of electric breast pumps covered by medical insurance at hospitals have been rising since 2017.
Lansinoh products

Source: Shared Research based on company data

Lansinoh was founded in 1984 and was initially selling Pigeon products on an OEM basis. Lansinoh has historically focused on
breastfeeding-related products, with nipple cream, nursing pads, and breast pumps at the core of its product lineup. However,
after an overhaul of local staff in FY01/13, Lansinoh is putting in place a structure to more aggressively expand sales of nursing
bottles and nipples as well.

In December 2010, Lansinoh acquired the mOmma brand (children’s products in Europe) from Baby Solution SA and Baby
Solution Italia Srl to expand its product categories. The mOmma brand is well-known for nursing bottles and nipples, sippy cups,
baby utensils, etc.

Lansinoh’s electric breast pumps were certified as durable medical equipment (DME) by the FDA in 2017, which led to an
increase in their sales at hospitals as items covered by medical insurance. According to the company, there are approximately
4mn births per year in North America, and 80% of mothers of these newborns choose to breastfeed. Around 50% of the
breastfeeding mothers obtain electric breast pumps under the DME program. With a market share of only 2%, the company sees
substantial growth potential for Lansinoh electric breast pumps in the longer term.

Shares of Lansinoh products in U.S. (FY01/18) Shares of Lansinoh products in Germany (FY01/17)

79.7%
80.0%
80.0%
64.3% 70.9%
60.0% No.1
No.1 60.0%
47.0%
No.2 42.8%
40.0% No.1 39.6%
32.0% 40.0%
No.1
No.2 No.2 20.8%
20.0%
20.0%
No.2
0.0%
0.0%
Nipple care Breast pads Breast milk Manual breast
Nipple care Breast pads Breast milk Manual breast
cream storage bags pumps
cream storage bags pumps

Source: Shared Research based on company data

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Europe
The company sells Lansinoh-branded products mainly in the UK and Germany through distributors. Main sales channels in
Germany are drugstores, while in the UK main channels are general merchandisers, baby goods stores, and drugstores. In Turkey,
Lansinoh operates a breast-pump, nursing bottle and nipple factory, which began production in January 2017, and accordingly
sells the product under its namesake brand. In Russia, the company began selling Pigeon-brand products through distributors in
2010.

Other Asian regions


The company incorporated a Mumbai representative office of Pigeon Singapore Pte. Ltd. as Pigeon India Pvt. Ltd. in November
2009. The India subsidiary sets up “Pigeon shelves” mainly in pharmacies and conducts sales and marketing efforts. The number
of pharmacies stocking Pigeon products exceeded 30,000 as of end-FY01/18. Meanwhile, not all of the country’s affluent
consumers live in major cities such as New Delhi and Mumbai. Additionally, since many of these affluent consumers in regional
areas tend to send housekeepers to do the shopping, the company must adapt its marketing accordingly. The company expects
sales to continue trending upward as it continues expanding the store network, mainly focusing on drugstores. A factory
producing nursing bottles and nipples also came online in India in March 2015. Import tariffs are high, so the company is
improving profitability by shipping mainstay products from this local factory. The business turned profitable in FY01/18.

In South Korea, the company operates under the Double Heart brand in cooperation with distributors. In Singapore and Malaysia,
Pigeon has eventually bought out its local distributors making them subsidiaries Pigeon Singapore Pte. Ltd. and Pigeon Malaysia
(Trading) Sdn. Bhd. A large number of births in the Near and Middle East have created an attractive market, and Pigeon is mainly
selling nursing bottles and nipples in these markets. Historically, Pigeon has heavily relied on local distributors in Other Asia,
causing its growth in this geographical segment to lag behind that in China. However, from 2012, Pigeon’s distributors in other
Asian regions began visiting Chinese distributors to learn from them.
“DoubleHeart” Brand in South Korea

Source: Shared Research based on company data

For more information about the competitors in each market, see Competition.

Group companies
◤ Pigeon Home Products Corp.: Manufactures toiletries for Domestic Baby & Mother Care and Health & Elder Care. 100%
owned.

◤ Pigeon Hearts Corp.: Provides contracted child-care and education services. 100% owned.

◤ PHP Hyogo Co., Ltd.: Makes baby wipes for Domestic Baby & Mother Care and Health and Elder Care. 100% owned.

◤ PHP Ibaraki Co., Ltd.: Makes baby wipes for Domestic Baby & Mother Care and Health and Elder Care. 100% owned.

◤ Pigeon Tahira Co., Ltd.: Sells nursing products for Health & Elder Care. 100% owned.

◤ Pigeon Manaka Co., Ltd.: Residential and at-home nursing care services. 67.0% owned.

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◤ Pigeon Singapore Pte. Ltd.: Local subsidiary in Singapore. Procures and sells Pigeon-branded products for expecting and
nursing mothers, as well as baby goods. 100% owned.

◤ Pigeon Malaysia (Trading) Sdn. Bhd.: Local subsidiary in Malaysia. As above. 100% owned.

◤ PT Pigeon Indonesia (Pigeon Indonesia): Local subsidiary in Indonesia. Makes baby goods. 65.0% owned.

◤ Pigeon (Shanghai) Co., Ltd.: Chinese subsidiary. Procures and sells Pigeon-branded products for expecting and nursing
mothers, as well as baby goods. 100% owned.

◤ Pigeon Manufacturing (Shanghai) Co., Ltd.: Chinese subsidiary. Makes Pigeon-branded products for expecting and
nursing mothers, as well as baby goods. 100% owned.

◤ Pigeon Industries (Changzhou) Co., Ltd.: As above. 100% owned.

◤ Lansinoh Laboratories, Inc.: US subsidiary. Sells baby products. 100% owned.

◤ Lansinoh Laboratories Medical Devices Design Industry and Commerce Co., Ltd.: Turkish subsidiary. Makes branded
products for expecting and nursing mothers, as well as baby goods. 100% owned.

◤ Lansinoh Laboratorios do Brasil Ltda.: Brazilian subsidiary. Sells products for expecting and nursing mothers, as well as
baby goods. 100% owned.

◤ Lansinoh Laboratories Benelux: Belgian subsidiary. Sells products for expecting and nursing mothers, as well as baby
goods. 100% owned.

◤ Lansinoh Laboratories Shanghai: Chinese subsidiary. Sells products for expecting and nursing mothers, as well as baby
goods. 100% owned.

◤ Doubleheart Co., Ltd.: South Korean subsidiary. Sells products for expecting and nursing mothers, as well as baby goods.
100% owned.

◤ Pigeon India Pvt. Ltd.: Indian subsidiary. Sells Pigeon-branded products for expecting and nursing mothers, as well as baby
goods. 100% owned.

◤ Pigeon Produtos Infantis Ltda. (Pigeon Brazil): Brazilian subsidiary. 100% owned.

◤ Pigeon Industries (Thailand) Co., Ltd.: Thai subsidiary. Makes Pigeon-branded products for expecting and nursing
mothers, as well as baby goods. 97.5% owned.

◤ Thai Pigeon Co., Ltd.: Thai subsidiary. Makes Pigeon-branded products for infants. 53.0% owned.

R&D
Since its founding, Pigeon has been conducting significant amounts of R&D in nipple technology. The company says that long
years of research have resulted in a product that functions more like the real thing than anything competitors offer.

Source: Shared Research based on company data

Through half a century of research into breastfeeding and children’s development, Pigeon has delved deep into childhood
growth processes and milk-drinking action.

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As an example of the thorough research, the company has used ultrasonic tomography to observe how babies’ tongues move
during breastfeeding to squeeze out the mother’s milk. Pigeon’s researchers also developed methods to observe wave motion
using motion analysis. By comparing actual breastfeeding with artificial-nipple breastfeeding, they were able to demonstrate how
a soft silicone-based nipple material provided an experience similar to suckling on the human mother (2002).

Pigeon’s nursing bottle development


◤ 1949: Introduced Japan’s first wide-neck bottle with cap. Much more hygienic than bottles with connected nipples, which
prevailed until then.

◤ 1954: First polyethylene bottle in Japan (S-type). Hexagonal shape easy for babies to grip. Shape and material represented a
revolutionary advance.

◤ 1956: First glass bottle with pictures (F-type) in Japan. Spread the idea that childrearing could be fun, as compared to purely
functional baby products.

◤ 1962: Introduced polycarbonate bottles. Full of features desirable in a bottle: light yet strong, transparent, and able to
withstand boiling. R-8 type won 1962 Tokyo Invention Prize and is recommended by Japanese Red Cross Central and Main
hospitals.

◤ 1965: Improved neck design to eliminate threads inside bottleneck (W-8 type). As the bottleneck was flat inside, no milk
dregs remained, making it more hygienic.

◤ 1977: P-type bottle introduced. Specially designed for children with reduced sucking power due to problems with lips or
upper jaws or low birth weight.

◤ 1982: New concept introduced: Mag Mag cup with interchangeable caps. With four different caps tailored to different stages
of a baby’s growth, it was a big hit. Became a standard fixture in the company’s product line.

◤ 1988: Company research showed that babies have a unique drinking method—peristaltic movement of the tongue. Pigeon’s
researchers explained that this particular tongue movement, not available to adults, is used when babies drink mother’s milk.

◤ 2000: Japan’s first polyethersulphone (PES) bottle released.

◤ 2002: “Bonyu-jikkan”—loosely translated as “Just like Mom”—nipples and bottles introduced, based on extensive research of
babies’ sucking action. Flexible and fitting the mouth perfectly, the nipples enabled a smooth, natural, sucking action.

◤ 2003: “Just like Mom” line extended with PES bottles suitable for use when going out and about.

◤ 2007: “Just like Mom” line refreshed to reflect a new standard in childrearing. Four nipple sizes and plastic
polyphenylsulphone (PPSU) bottles introduced.

◤ 2010: “Just like Mom” line again refreshed to serve the three key stages of feeding: attachment, sucking, and swallowing.

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Source: Shared Research based on company data

In 1993, the company established a Central Research Center in Tsukubamirai City, Ibaraki Prefecture.
The Fundamental Research Group of the Center studies nursing infants, sucking action, and the loss of function in the elderly.
Since 2006, the Quality Control Group has tested the quality, safety, and security of company products developed worldwide.
The Intellectual Property Group is responsible for patents and design trademarks.
Central Research Center (Tsukubamirai-shi, Ibaragi Prefecture)

Source: Shared Research based on company data

Overseas R&D
Pigeon conducts research in China and Singapore as well as in Japan in order to meet the needs of overseas markets. The key
criteria for its overseas research activities are tailoring development in line with market needs and constructing highly reliable
quality-control systems. The local development divisions ensure that products sold in each region suit local consumers.

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Factory in Changzhou, Jiangsu Province, China

Source: Shared Research based on company data

PMFG China

Source: Shared Research based on company data

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Profitability snapshot, financial ratios


Profit margins FY01/09 FY01/10 FY01/11 FY01/12 FY01/13 FY01/14 FY01/15 FY01/16 FY01/17 FY01/18
(JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons.
Gross profit 20,164 20,903 23,281 24,319 27,761 34,464 38,296 43,345 44,688 50,572
GPM 38.0% 39.1% 40.8% 41.1% 42.7% 44.5% 45.5% 47.0% 47.2% 49.3%
Operating profit 4,269 4,604 4,546 5,042 7,086 10,365 12,780 14,521 16,015 19,412
OPM 8.0% 8.6% 8.0% 8.5% 10.9% 13.4% 15.2% 15.7% 16.9% 18.9%
EBITDA 6,167 6,414 6,486 6,875 8,903 12,436 14,875 17,071 18,371 21,862
EBITDA margin 11.6% 12.0% 11.4% 11.6% 13.7% 16.1% 17.7% 18.5% 19.4% 21.3%
Net margin 5.4% 5.3% 5.1% 5.4% 7.0% 9.0% 10.0% 11.1% 11.7% 14.2%
Financial ratios
ROA (RP-based) 11.3% 11.8% 10.8% 11.4% 16.0% 20.7% 20.4% 20.6% 21.5% 24.6%
ROE 12.1% 11.4% 11.2% 11.8% 15.5% 19.7% 19.8% 21.3% 21.8% 25.7%
Total asset turnover 140.0% 137.2% 138.9% 136.8% 141.0% 145.5% 129.1% 126.0% 123.8% 125.6%
Inventory turnover 710.1% 737.4% 597.6% 547.4% 544.6% 580.0% 553.6% 563.0% 606.9% 637.4%
Days of inventory 51.4 49.5 61.1 66.7 67.0 62.9 65.9 64.8 60.1 57.3
Working capital 10,086 9,954 11,688 13,161 13,453 16,103 19,315 17,364 17,155 18,160
Current ratio 192.4% 208.3% 197.6% 205.5% 250.5% 275.9% 307.9% 343.9% 258.4% 329.2%
Quick ratio 149.1% 154.0% 145.3% 146.8% 189.8% 209.3% 248.9% 276.4% 220.0% 274.9%
OCF / Current liabilities 36.1% 45.3% 28.0% 34.2% 63.8% 64.9% 72.2% 91.4% 83.2% 87.5%
Net debt / Equity -11.6% -16.9% -7.2% -8.6% -21.5% -24.2% -28.7% -35.4% -45.3% -49.9%
OCF / Total liabilities 29.9% 37.5% 20.5% 26.6% 47.3% 44.1% 40.4% 58.2% 58.9% 78.9%
Cash cycle (days) 69.2 60.9 75.8 87.4 87.3 81.8 90.6 85.8 74.4 67.6
Changes in working capital 1,167 -132 1,734 1,473 292 2,650 3,211 -1,951 -209 1,005
Source: Shared Research based on company data

The main drivers of SG&A expenses for Pigeon are sales promotion, salaries and allowances. Sales promotion costs grew from
2.9% of sales in FY01/09 to 6.0% in FY01/17 due to an aggressive overseas push. Salaries and allowances rose from 6.5% of sales
in FY01/09 to 7.0% in FY01/12. However, since then they have been on a declining trend, falling to 5.6% of sales in FY01/17.
Pigeon raised its operating profit margin from 8.0% to 18.9% from FY01/09 through FY01/18. This is partly due to the start-up of
the Shanghai and Changzhou factories in China and the Turkish plant, which helped boost gross profit margins from 38.0% to
49.3%.
SG&A expenses
SG&A expenses FY01/08 FY01/09 FY01/10 FY01/11 FY01/12 FY01/13 FY01/14 FY01/15 FY01/16 FY01/17
(JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons.
SG&A expenses 15,448 15,895 16,299 18,734 19,276 20,675 24,099 25,515 28,823 28,673
YoY 7.5% 2.9% 2.5% 14.9% 2.9% 7.3% 16.6% 5.9% 13.0% -0.5%
SG&A-to-sales ratio 31.4% 29.9% 30.5% 32.8% 32.6% 31.8% 31.1% 30.3% 31.3% 30.3%
Delivery expenses 1,614 1,616 1,604 1,748 1,782 1,969 2,158 2,476 2,567 2,517
Promotion expenses 1,566 1,539 1,725 3,328 3,336 4,042 4,608 5,120 5,516 5,684
Salaries and allowances 3,359 3,434 3,736 3,904 4,116 4,205 4,716 5,128 5,504 5,274
Provision for bonuses 350 297 316 289 311 335 492 560 649 636
Provision for doubtful accounts 36 4 66 10 10 -100 -8 -8 -2 -12
Retirement benefit expenses 262 257 260 274 271 285 321 292 299 338
Provision for directors' retirement benefits 29 24 39 26 33 38 53 43 66 58
R&D expenses 1,045 1,129 1,211 1,359 1,497 1,621 1,730 1,932 2,263 2,263
Others 7,186 7,596 7,343 7,796 7,919 8,280 10,029 9,972 11,960 11,915

Source: Shared Research based on company data


Note: Figures may differ from company materials due to differences in rounding methods

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Market and value chain


Market overview
Domestic Baby & Mother Care segment
According to the Ministry of Health, Labour and Welfare (MHLW)’s Trends in Japan’s Population, in 2016 the total fertility rate
(estimated number of children a woman will give birth to in her lifetime) was 1.44, down 0.01pp YoY. The number of births was
down 29,000 YoY, at 977,000. Although the birth rate is recovering slowly from the 2005 trough of 1.26, the number of births
continued to decline, because the number of women (denominator) shrank.
3,000,000 5.00
Number of births Total fertility rate (right axis)
4.50
2,500,000
4.00

3.50
2,000,000
3.00

1,500,000 2.50

2.00
1,000,000
1.50

1.00
500,000
0.50

0 0.00
1947
1949
1951
1953
1955
1957
1959
1961
1963
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
('000) 1950 1960 1970 1980 1990 2000 2005 2010 2015 2016
Number of births 2,338 1,606 1,934 1,577 1,222 1,191 1,063 1,071 1,006 977
Total fertility rate 3.65 2.00 2.13 1.75 1.54 1.36 1.26 1.39 1.45 1.44
Source: Shared Research based on Ministry of Health, Labour and Welfare’s Trends in Japan’s Population

Meanwhile, the drugstore market—Pigeon’s main sales channel—is growing. According to a survey by the Japan Association of
Chain Drug Stores, total sales in the Japanese drugstore market for FY2015 were JPY6.1tn (+1.1% YoY). The market has been
expanding for 15 years in a row since the survey began in FY2000, although the pace of growth is slow. There were 18,479
drugstores in Japan (+526 YoY).

Child Care Service segment


According to MHLW statistics on child-care facilities (out April 1, 2017), the number of children awaiting entrance to child-care
facilities as of April 2017 rose by 2,528 YoY to 26,081. Capacity of child-care facilities was 2.74mn, up 100,000 YoY. The number
of children attending nurseries was 2.55mn, up 88,000 YoY. The rise in capacity was bigger than the increase in children
attending nurseries, but there were uneven distributions regionally. As a result, the number of cities, wards, towns, and villages
where there were children on waiting lists for licensed facilities totaled 420, up 34 YoY.

As of April 2017, 72.1% of the children on waiting lists were in the Greater Tokyo Area, the seven prefectures in the Kinki region,
and other core cities. By age, 88.6% were 0–24 months old (as of April 2017).

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Children on waiting lists for child-care facilities

30,000

25,000 26,383 26,275


25,447 25,384 25,556
24,825
24,245
23,338
22,741 23,167 23,553 23,114
20,00021,031 21,371
19,794 19,550
17,926
15,000

10,000

5,000

0
Apr. 2001

Apr. 2002

Apr. 2003

Apr. 2004

Apr. 2005

Apr. 2006

Apr. 2007

Apr. 2008

Apr. 2009

Apr. 2010

Apr. 2011

Apr. 2012

Apr. 2013

Apr. 2014

Apr. 2015

Apr. 2016

Apr. 2017
Source: Shared Research based on Ministry of Health, Labour and Welfare data

According to a 2016 MHLW survey on working women, the number of working women totaled 28.83mn in 2016, up 410,000
YoY, and the share of working women increased for the 14th year in a row. The number of women wanting to bear children and
continue working, or those wishing to return to the workforce while raising children is increasing, supporting a strong need for
child-care services despite the trend toward smaller families. Further, the extended economic malaise means that one-income
households cannot make ends meet, which is also spurring child-care needs.

Health & Elder Care segment


As of October 2016, Japan’s population aged 65 or older was 34.6mn (March 2017 estimate by the Statistics Bureau of the
Ministry of Internal Affairs and Communications), up 723,000 YoY. The share in the total population was 27.2% (against 26.6% a
year before). While Japan’s overall population is shrinking, its graying continues. According to Japan’s Cabinet Office’s Policy on
Cohesive Society (2013) data, the share of elderly aged 65 or older will break 30% in 2025, and as baby boomers’ children turn
65 around 2040, the number will reach 35%.
Japan’s aging population (65 and older, % of total)
45%

40%
39.4% 39.9%
38.8%
37.7%
35% 36.1%

33.4%
30% 31.6%
30.3%
29.1%

25% 26.8%

20%
2015 2020 2025 2030 2035 2040 2045 2050 2055 2060

Source: Shared Research based on Cabinet Office data

China
There were 17.23mn births in China in 2016, up by 630,000 from the previous year. According to the company, the annual
number of births in China is estimated at 15–17mn, 14–17x that of Japan. Pigeon targets affluent consumers in China, suggesting
a potential market of about 2.3–3.4mn babies. According to the company, by extrapolating Japan’s 1.0mn births and Pigeon’s
Domestic Baby and Mother Care segment sales of JPY33.8bn in FY01/18, this suggests potential sales of at least JPY40.0bn in
China. In 2012, the company marked 10 years since its entry into the Chinese market. Initially, the company’s presence was
centered on coastal areas such as Shanghai and Beijing, but it now has a presence throughout China, including further inland.

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China’s GDP growth

15.0%

14.0%
14.2%
13.0%

12.0% 12.7%

11.0%
11.3%
10.0% 10.6%
10.0%10.1%
9.0% 9.6% 9.5%
9.1% 9.2%
8.0%
8.3%
7.9% 7.8%
7.0%
7.3%
6.9% 6.7% 6.9%
6.0%

5.0%
2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017
Source: Shared Research based on Company data

In China, Pigeon targets the new middle class with products such as nursing bottles and toiletries, aiming to offer consumers a
new lifestyle. It sells over 500 products in China, and is increasing its range of high-end products to match growing demand for
quality from the rising middle class in cities such as Beijing and Shanghai on China’s east coast.

According to the company, demand for products for infants aged 0–24 months is similar in Japan and China. It expects the
Chinese market to grow—particularly for supplies—in line with economic growth. The outlook in China is also more promising
than Japan in terms of birth figures, and government policy is settled. The Chinese government is also quick to stimulate
consumer demand and make public investments. Pigeon’ s sales in China have increased as it has expanded there, with sales
inland already outstripping those in major coastal cities such as Shanghai, Beijing, and Guangzhou. The company plans to
continue expanding and growing sales in this region.

As a measure of its policy to promote providing babies with breast milk, the Chinese Ministry of Health launched a joint project
with Pigeon in 2009 to open counseling rooms for breastfeeding at 34 major hospitals and maternity homes nationwide (the
number rose to 62 in FY01/17). The company joined hands with over 281 hospitals and maternity homes in FY01/17 to hold a
campaign for breastfeeding. As the company’s nursing bottles are used in the instructions in the counseling rooms, they provide
an opportunity to let expecting and nursing mothers recognize its brand.

Pigeon started selling disposable diapers in the Chinese market in July 2013, also targeting affluent families (accounting for 7-8%
of all households). The company aims to take a share of around 30% of the affluent families (2-3% of all households).

India
Along with the Chinese market, the company positions India as a growth market. The Indian population continues to grow,
reaching 1.32bn in 2016, up 15mn from the previous year (source: World Bank). The fertility rate in 2015 was 2.4 (flat YoY),
higher than China’s 1.6. The rate stays high though it is gradually falling. The population is also young, with over half under 25
years old, and despite the wide gap between rich and poor, the notable growth in the rich demographic means births are
increasing. The company estimates the number of births in India at 27mn annually.

The US
Based on World Bank statistics, the population of the US was 323mn in 2016, up 2.0mn from the previous year. The total fertility
rate in the US was 1.84 in 2015, down 0.02. According to Pigeon, the number of births is around 4.0mn per annum, and the
population is rising.

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Population rankings and fertility rates

Source: Shared Research based on the World Bank’s Data Indicators

Customers
The company’s end users are babies 0-24 months old and their mothers. The customers are overwhelmingly mothers. In Health &
Elder Care segment, the customers are seniors over 65. Pigeon sells mainly through drugstores, baby good retailers, and
e-commerce.

Barriers to entry
Barriers to entry in the domestic baby goods market—particularly for the company’s core bottles and nipples—are exceptionally
high as demonstrated by the company’s dominant market share. Mothers buy Pigeon products to feed their babies, choosing the
brand they know and trust (and likely used themselves as babies). Both the reputation and technology have been developed
over many years and represent a formidable barrier to entry.

In other baby products, the barriers may vary—in certain niches having enough capital may be enough to become a competitor
overnight—and the company emphasizes its niche status and has so far been staying away from the markets where price
competition may start easily (and spread into other product groups), such as disposable diapers.

Barriers to entry are also arguably lower in the developing countries. There, the impenetrable brand equity is yet to be built and
price often plays more important role, allowing new entrants to try their hand.

Competition
Pigeon has about 80% of the Japanese market for bottles and nipples. Combi Corp. (unlisted), Aprica Children’s Products Inc.
(unlisted), and Wakodo Co., Ltd. (Asahi Group Holdings, Ltd.; TSE1: 2502) carry a similar wide range of baby goods. These
companies, though, focus on different product categories.

In China, competitors include AVENT (UK), NUK (Germany), and chicco (Italy). Pigeon has the top market share within the
wealthier demographic.

There are a number of competitors in the United States, including local player Evenflo Company, Inc. (unlisted), UK-based Philips
AVENT, and Swiss-based Medela Inc.

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Market share of Pigeon products in US, Europe

US market (January 2018) German market (January 2017)


100% 100%
No.1
80% 80% No.1
No.1
60% 60%
No.2
No.1 No.2
40% 79.7% No.2 40%
64.3% 70.9%
47.0% No.2
20% 20% 42.8% 39.6%
32.0%
20.8%
0% 0%
Nipple care Breast pads Breast milk Manual breast Nipple care Breast pads Breast milk Manual breast
cream storage bags pumps cream storage bags pumps

Source: Shared Research based on company data

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Strategy
Domestic strategy
In Domestic Baby & Mother Care segment, the strategy centers on going into new product categories. The company focuses on
0-24 months old babies. However, as of late 2012, even for that market the Pigeon’s offering does not cover the entire possible
product range. Examples of areas to explore include babywear. Pigeon has already started selling strollers and child safety seats in
FY01/11. The company had been struggling to increase its share of the baby stroller market (as measured by monthly sales), but
the launch of the new Runfee line of baby strollers in January 2015 led to its monthly share of the baby stroller market exceeding
20% at one stage. As of early FY01/18, its market share was at 15–16%.

Pigeon describes itself as a "comprehensive manufacturer" of baby and child-care products, but to complete its product lineup
the company probably also needs to offer disposable diapers. Pigeon had this expertise and did manufacture adult diapers in the
past. Judging from remarks by management that they receive many calls from customers asking why they cannot find Pigeon
diapers, and the progress of the rollout of the company's disposal diaper line in China that began in 2H FY01/14. Shared Research
believes there is room for Pigeon to enter the disposable diaper market in Japan. Although the company would have to keep a
close eye on existing manufacturers to gauge their response, Shared Research believes Pigeon may be able to successfully roll out
a disposal diaper line in Japan if it sticks to a premium product that effectively leverage its existing brand strength in infant and
baby products.

Going forward, Pigeon plans to expand the lineup of goods at its mainstay Domestic Baby & Mother Care segment for babies
ages 0–24 months in areas where it can take full advantage of its existing brand strength. Management is hesitant about
expanding its target market beyond the age of 24 months, fearing that a move into a market outside of its core competence
would siphon off R&D, marketing, and other resources from the 0–24 month market where it has a strong competitive edge.

In Health & Elder Care, Pigeon aims to strengthen sales activities for elder care products targeting drugstores and care facilities—a
promising market—by its salesforce with that of subsidiary Pigeon Tahira Corp.

The company’s Child Care Service is expected to accelerate consigned operations of child-care facilities on the back of strong
demand for such services. Despite the not-so-outstanding profitability that the segment offers, Pigeon appears to want to
generate synergy of Child Care Service and Domestic Baby & Mother Care.

Overseas strategy
Pigeon’s overseas strategy calls for capturing market share of over 50% in each country in bottles and nipples. Market shares over
50% increase brand power and boost sales of bottles and accessories. The company appointed Shigeru Yamashita, who had
headed the overseas operations, as president. The founder’s grandson, Yusuke Nakata, became president of Pigeon Singapore
Pte Ltd in January 2014, to oversee the company’s Asia operations.

China
In China, Pigeon notes that large socioeconomics gaps between rich and poor create difficulties in developing products for the
mass market. The company thus aims to continue developing high-quality, safe products aimed at the affluent, rather than
products for the mass market. Pigeon has leveraged its strengths as all-round child-care brand that provides all-round parenting
support such as setting up counseling rooms for breastfeeding at hospitals and maternity hospitals and providing parenting
information to nurses and parents in the form of antenatal classes, which sets the company apart from competitors and helps to
strengthen its brand. China has abolished its one child policy and is expected to maintain a large number of births for some years.
Chinese consumers are also becoming more aware of product safety as disposable income rises. Shared Research believes that
the combination of these external factors will continue to underpin growth of Pigeon’s China business.

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North America
In North America, Shared Research believes that brand strategy will be very important, given the high maturity of the market.
Pigeon plans to grow in North America by expanding product categories, such as nursing pads and nipple-care goods under the
Lansinoh brand, skincare goods under the “earth friendly” brand, and nursing bottles and nipples under the mOmma brand. The
Lansinoh brand is also putting in place a structure to more aggressively expand sales of nursing bottles and nipples. Going
forward, the company has such options as using acquired brands such as mOmma and Lansinoh or developing a new brand as it
moves toward other product categories.

In North America, Pigeon began to sell nursing bottles and nipples in January 2014. The company has also started a sales
campaign, “Smile Promotion,” in an effort to change the notion that nursing bottles are used only for baby formula. Pigeon will
promote the use of breast pumps, storage bags, and nursing bottles to provide breast milk to infants.

Lansinoh’s electric breast pumps were certified as durable medical equipment (DME) by the FDA in 2017, which led to an
increase in their sales at hospitals as items covered by medical insurance. According to the company, there are approximately
4mn births per year in North America, with 80% of mothers of these newborns electing to breastfeed, of which around 50%
acquire electric breast pumps under the DME program. With a market share of only 2%, the company sees substantial growth
potential for Lansinoh electric breast pumps in the longer term.

Central and South America


Central and South America are high on Pigeon’s priority list. Brazil and Mexico provide growing markets in particular. The
company plans to operate the business in the region in cooperation with Lansinoh of the US.

Europe
The company intends to operate through Lansinoh in Europe (including any M&A activity). The company plans to extend its
product lines in this market and increase the network of retailers and other stores selling mOmma products.

India
India should be an attractive market for Pigeon given the growing number of births and lack of dominant baby-product brands.
As in China and Japan, Pigeon aims to boost its recognition as a company that offers high-quality, high-value-added products to
affluent consumers. Because the affluent are dispersed around regional areas and business infrastructure is weak, the company
adopted a policy of shifting the weight of distribution channels from department stores to pharmacies. As of FY01/18, the
number of pharmacies stocking Pigeon products exceeded 30,000. In the longer term, the company targets 100,000 such
pharmacies. It expects to increase production in the region, having brought a new local factory online in March 2015 The
company plans to increase the number of “Pigeon corner” retail space to 100 stores from 40 stores at an early stage.

Other Asia
In Other Asia, the company reorganized its branch in South Korea and upgraded it to a subsidiary in August 2012. This subsidiary
will enhance the company’s brand image, and increase its product line up, which had been limited to its mainline products such
as bottles and nipples.

M&A
Although M&A is one potential growth strategy, it is not a major growth vehicle for the company. The company notes that it
needs distribution channels, but Shared Research notes that Pigeon has a cautious stance toward M&A due to difficulties
identifying adequate acquisition targets.

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Strengths and weaknesses


Strengths
◤ Super-brand in Japan: The Pigeon brand is the most well-known and one of the most trusted in Japanese children’s goods.
Shared Research thinks Pigeon’s strong brand and trustworthiness are powerful weapons, not just in existing product
categories but in new ones as well.

◤ Overwhelming share in a niche market: The company has a roughly 80% share of the domestic nursing bottle and nipples
market. As its nursing bottle history suggests, the company created many “industry firsts.” Its ability to develop innovative
products in niche markets is obviously second to none. Such ability will likely remain one of the company’s strengths going
forward, underpinned by its extensive know-how accumulated through vigorous customer hearings and R&D. Also, increased
in-house production will not only drive up the company’s profitability, but also lower the risk of knowledge outflows.

◤ Growth potential overseas: Pigeon can effectively use its business model (premium products, R&D operations) in Domestic
Baby & Mother Care when seeking growth outside Japan. In fact, the company generates about 50% of operating profit from
overseas activities and has attained the leading share in the market of the affluent in China. We think the company can
replicate similar successes in other foreign markets.

Weaknesses
◤ Possible competition against giants in adjacent businesses: Here, giants refer to certain cash-rich toiletry goods
companies. Fortunately, so far, the company has not faced direct competition against such companies. Any of these potential
competitors could in the future penetrate the lucrative niches where the company currently has high shares and subsequently
snatch some shares from the company, particularly for non-core products that the company has yet to develop unbeatable
presence. On the other hand, we wonder if the presence of these potential competitors is preventing the company from
reaching out to new business fields.

◤ Limited domestic growth potential: Given its shrinking population and limited economic growth prospects, Japan may
take some blame for the company’s narrow domestic growth. Behind declining birth rates are such socioeconomic factors as
an increase of dual-income, no-kids (DINK) households and people getting married later in life, and there are no signs of the
rates making a positive turnaround. Thus, the company’ potential for further domestic growth should depend on its ability to
penetrate the senior care products market and strengthen product categories and market shares for these categories in
Domestic Baby & Mother Care.

◤ Minor-player status in Europe and the US: The company essentially does not operate in developed countries other than
Japan. In North America, the company depends on the Lansinoh brand. Shared Research wonders if such somewhat indirect
control may be preventing the company from expanding in the region.

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Historical financial statements


Full-year FY01/18 results
▷ Sales: JPY102.6bn (+8.4% YoY)
▷ Operating profit: JPY19.4bn (+21.2% YoY)
▷ Recurring profit: JPY20.1bn (+22.3% YoY)
▷ Net income: JPY14.5bn (+30.6% YoY)
*Net income refers to net income attributable to parent company shareholders

FY01/18 marks the first year of the sixth medium-term management plan (FY01/18–FY01/20). In a push to achieve the plan's
objectives, consolidated sales increased 8.4% YoY to JPY102.6bn due to strong sales performance, especially in markets such as
Japan and China. Operating profit rose 21.2% to JPY19.4bn owing to a CoGS-to-sales ratio that improved 2.1pp YoY. Recurring
profit rose 22.3% to JPY20.1bn. Net income attributable to parent company shareholders was up 30.6% YoY to JPY14.5bn.

Exchange rates applied to earnings of consolidated subsidiaries (regarding sales and expenses) in Q3 FY01/18 were
JPY112.16/USD (vs. JPY108.77/USD during the same period in the previous year) and JPY16.62/CNY (vs. JPY16.35/CNY).

Versus the company forecast, FY01/18 sales were 101.3%, operating profit was 103.8%, recurring profit was 108.2%, and net
income was 111.7%. Sales and operating profit were in line with the company’s forecast. Recurring profit and net income came
in ahead of forecast because of a JPY100mn tax rebate in the China business and a JPY848mn extraordinary gain from making its
Indonesian equity-method subsidiary PT Pigeon Indonesia a consolidated subsidiary.

At the individual segment level, the company reported higher sales and higher earnings for all segments. Growth was especially
strong at its Domestic Baby & Mother Care business, Overseas business, and China business that account for the bulk of overall
sales and earnings, with earnings rising at a double-digit pace in all of these key areas.

Domestic Baby & Mother Care

▷ Sales: JPY33.8bn (+6.3% YoY)


▷ Operating profit: JPY5.9bn (+23.0% YoY)

Inbound demand from overseas visitors increased, driving segment sales growth. In addition, in February the company launched
sales of a new product, “Baby's Ice Cream Minis,” the first homemade ice cream for babies. In June, the company launched a
renewal of the Runfee, a baby stroller which uses single tires. In August, the company launched “Breast Pads Fit Up® Super
Absorptive” with enhanced absorption. In December the company launched “Bonyu Jikkan® Nursing bottle my Precious,” which
won the 2017 Good Design Award. As a result, the company increased sales and market share. Baby strollers, a key category,
continued to be robust. The company’s medium-term management plan targets baby stroller market share (value basis) of 16%
in FY01/18 and 25% in FY01/20. The company attained market share of over 20% in September 2017. However, its market share
declined after a fault was discovered in the rotation of the front caster wheels of some products, to which the company
responded by free recall and replacement. The company commented that the fault had been rectified at the start of FY01/19.

To improve direct customer communication, Pigeon held 32 events in FY01/18, including a class for expecting mothers, and
seminars on the theme of breast feeding for medical professionals who work with nursing mothers (total of 3,000 attendees).

The company attributed much of the sales growth in this area to the increased demand from overseas tourists visiting Japan. By
product category, sales of nursing bottles and nipples were up 12.3% YoY (17.6% of segment sales), sales of baby skincare
products including shampoo and lotion were up 21.3% (16.1% of sales), sales of baby wipes were up 5.1% (9.6% of sales), sales
of baby drinks were up 5.8% (6.3% of sales), and sales of masks, cotton swabs, and other baby healthcare products were down
2.0% (6.0% of sales). One particular product that was a strong seller was Momo No Ha (peach leaves) medicated skin lotion.

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On the profit front, the double-digit growth was driven by a combination of strong top-line growth and margin improvement.
The rise in operating profit margin reflected increased sales of high margin nursing bottles and nipples. The gross profit margin
rose due to an improvement in sales volumes and the resulting rise in the capacity utilization rates at the company’s production
plants.

Child Care Service

▷ Sales: JPY7.5bn (+2.0% YoY)


▷ Operating profit: JPY218mn (+3.6% YoY)

The company began operating four new contracted onsite company child-care centers.

Health & Elder Care

▷ Sales: JPY7.1bn (+2.3% YoY)


▷ Operating profit: JPY468mn (+5.2% YoY)

The company will continue strengthening sales to retailers and nursing facilities as well as improving the quality of its nursing
services.

Overseas

▷ Sales: JPY25.4bn (+10.3% YoY)


▷ Operating profit: JPY5.8bn (+20.1% YoY)

This segment comprises overseas businesses other than China and Asia. The company’s consolidated subsidiary, Lansinoh
Laboratories Inc. (hereinafter, “Lansinoh”), accounts for around 50% of segment sales.

Sales growth was underpinned by improved sales of Lansinoh’s core breastfeeding-related products, such as nipple cream,
electric breast pumps, and breast milk bags. Sales of electric breast pumps were also strong in North America, which account for
around 70% of Lansinoh's sales. Electric breast pumps were mainly sold at large general merchandise stores, but sales channels
have expanded to include maternity and general hospitals and Durable Medical Equipment (DME) route in which the costs of
electric breast pumps are covered by medical insurance.

According to the company, around four million new babies are born in North America each year, and about 80% of mothers of
these newborns choose to breastfeed, of which half purchase electric breast pumps under the DME program. With only about
2% share of the electric breast pump market at present, Lansinoh has plenty of headroom for sales growth over the medium to
long term. One of the key features of Lansinoh’s electric breast pumps is that by linking them with a smartphone, users can
record data such as pumping times and volumes.

In addition, capacity utilization at the Turkish plant, which began operation in January 2017, also improved, contributing to
profits growth. Sales of Lansinoh Laboratories Shanghai in China, which started in 2017, reached JPY900mn in FY01/18 (versus
JPY450mn in FY01/17). Further, in India, the company’s key market, both sales and profits rose as the company took efforts to
expand distribution locations.

By product category (local currency basis), sales of nipple cream increased by 15.6% YoY (28.6% of sales at Lansinoh), sales of
milk pads rose 7.5% (26.4% of sales), sales of milk bags increased by 25.2% (22.3% of sales), and sales of breast pumps rose
4.5% (14.0% of sales).

Profits rose due to higher sales, an improved GPM, and more efficient usage of SG&A expenses. Gross profit increased due to
improved capacity utilization rates at the production plants. High capacity utilization at the new plant in Turkey, which started
operations in January 2017, also contributed to profits growth.

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China

▷ Sales: JPY34.5bn (+13.0% YoY)


▷ Operating profit: JPY9.7bn (+16.3% YoY)

Sales and operating profit rose driven by sales of core products such as skincare products, nursing bottles and nipples. A new
range of nursing bottles, cups, and nipples with Disney motifs launched in May 2017 saw growth for both e-commerce and
physical retail stores, boosting sales. Sales growth was also underpinned by shipments to Chinese e-commerce businesses for big
sales events in Q3. The company plans to bolster direct communications with customers through social networking services, and
expand its offline activities, such as retail sales promotions and activities in maternity and general hospitals.

In terms of profits, segment profits were up by a double-digit amount, driven by sales growth and an improvement in margins.
Product mix improved due to an increase in higher margin breast pumps and nipples.

Other

▷ Sales: JPY1.3bn (+1.3% YoY)


▷ Operating profit: JPY126mn (-22.2% YoY)

Q3 FY01/18 results
▷ Sales: JPY75.3bn (+7.9% YoY)

▷ Operating profit: JPY14.9bn (+23.8% YoY)


▷ Recurring profit: JPY15.2bn (+24.7% YoY)
▷ Net income: JPY10.4bn (+21.8% YoY)
*Net income refers to net income attributable to parent company shareholders

FY01/18 marks the first year of the sixth medium-term management plan (FY01/18–FY01/20). In a push to achieve the plan's
objectives, Pigeon reported a 7.9% YoY rise in consolidated sales to JPY75.3bn due to strong sales performance, especially in
markets such as Japan and China. Operating profit rose 23.8% to JPY14.9bn owing to a CoGS-to-sales ratio that improved 2.1pp
YoY. Recurring profit rose 24.7% to JPY15.2bn. Net income attributable to parent company shareholders was up 21.8% YoY to
JPY10.4bn.

Exchange rates applied to earnings of consolidated subsidiaries (regarding sales and expenses) in Q3 FY01/18 were
JPY111.88/USD (vs. JPY108.56/USD during the same period in the previous year) and JPY16.46/CNY (vs. JPY16.47/CNY).

At the individual segment level, the company reported higher sales and higher earnings for all segments except Health & Elder
Care and Child Care Service. Growth was especially strong at its Domestic Baby & Mother Care business, Overseas business, and
China business (which account for the bulk of overall sales and earnings), with earnings rising at a double-digit pace in all of
these key areas.

Domestic Baby & Mother Care

▷ Sales: JPY25.8bn (+6.9% YoY)


▷ Segment operating profit: JPY4.6bn (+22.7% YoY)

Improved utilization rates at production plants due to increased sales yielded an increase in operating profit.

Inbound demand from overseas visitors increased. In addition, in August the company launched sales of a new product, “Baby
Milk Lotion Plus” with shea butter for extra moisture care, as well as “Baby Veggie Tea,” the first blended tea for babies using
vegetables. Baby strollers, a key category, continued to be robust. In the medium-term management plan which runs through

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FY01/20, the company has set itself a target of achieving a 25% market share in the stroller market. Its share of this market in
September 2017 has exceeded 20%, a record high.

To improve direct customer communication, Pigeon held 28 events in cumulative Q3, including a breast-feeding course for
expecting mothers, and seminars on the theme of breast feeding for medical professionals who work with nursing mothers (total
of 2,500 attendees).

The company attributed much of the sales growth in this area to buying by overseas tourists visiting Japan. By product category,
sales of nursing bottles/nipples (17.2% of segment sales) were up 9.7% YoY, sales of baby skincare products including shampoo
and lotion (16.0% of sales) were up 19.5%, sales of baby wipes (9.3% of sales) were up 7.9%, sales of masks, cotton swabs, and
other baby healthcare products (6.4% of sales) were up 1.2%, and sales of baby drinks (6.4% of sales) were up 6.5%. One
particular product that was a strong seller was Momo No Ha (peach leaves) medicated skin lotion.

On the profit front, the double-digit growth was driven by a combination of strong top-line growth and margin improvement.
The rise in operating profit margin reflected increased sales of high margin nursing bottles/nipples. The gross profit margin rose
due to an improvement in sales volumes and the resulting rise in the capacity utilization rates at the company’s production
plants.

Child Care Service

▷ Sales: JPY5.6bn (+1.8% YoY)

▷ Segment operating profit: JPY141mn (-7.2% YoY)

The company began operating three new contracted onsite company child-care centers.

Health & Elder Care

▷ Sales: JPY5.1bn (-2.6% YoY)


▷ Segment operating profit: JPY315mn (-14.2% YoY)

Sales and operating profit were down due to fiercer competition at the retail level over the company’s core products such as wet
wipes and skincare products. The company will continue increasing marketing to retailers and nursing facilities as well as
improving the quality of its nursing services.

Overseas

▷ Sales: JPY18.5bn (+10.6% YoY)


▷ Segment operating profit: JPY4.5bn (+26.3% YoY)

This segment comprises overseas businesses other than China and Asia. The consolidated subsidiary, Lansinoh Laboratories Inc.,
(hereinafter, “Lansinoh”) accounts for around 50% of segment sales.

Sales growth was underpinned by improved sales of Lansinoh’s core breastfeeding-related products, such as nipple cream, breast
pumps and milk bags. Sales of breast pumps were also strong in North America, which accounts for around 70% of Lansinoh's
sales, helped by the development of new sales channels.

Previously, Lansinoh has primarily distributed its products in North America via large, high-volume retail chains. With its breast
pumps certified as Durable Medical Equipment (DME) by the FDA in 2017, breast pump sales in hospitals have increased since
they are now included in health insurance plans. According to the company, around four million new babies are born in North
America each year, and about 80% of these are breastfed. The company says that half of all breast pump sales in North America
are made under the DME program. With only about 2% share of the market at present, Lansinoh has plenty of headroom for sales
growth over the medium to long term. One of the key features of Lansinoh’s breast pumps is that by linking them with a
smartphone, users can record data such as pumping times and volumes.

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In addition, capacity utilization at the Turkish plant, which began operation in January 2017, also improved, contributing to
profits growth.

By product category (local currency basis), nipple cream sales increased by 7.2% YoY (28.3% of segment sales), sales of milk pads
rose 5.0% (27.1% of sales), sales of milk bags increased by 27.7% (22.5% of sales), and breast pump sales rose 8.3% (14.3% of
sales).

Operating profit benefited from effective spending on SG&A, as well the improvement in sales, with gross profit boosted by
enhanced plant capacity utilization as a result of the growth in sales. A strong performance from the new plant in Turkey, which
started operations in January 2017, also contributed to profits growth.

China

▷ Sales: JPY24.5bn (+13.9% YoY)


▷ Segment profit: JPY7.4bn (+19.9%)

Sales and operating profit rose driven by sales of core products such as nursing bottles and nipples. A new range of nursing
bottles, cups, and nipples with Disney motifs launched in May 2017 saw growth for both e-commerce and physical retail stores,
boosting sales. Sales growth was also underpinned by shipments to Chinese e-commerce businesses which saw strong
performance in November. The company plans to bolster direct communications with customers through social networking
services, and expand its offline activities, such as retail sales promotions and activities in maternity and general hospitals.

In terms of sales by product category, sales of breast pumps increased by 25.9% YoY (44.6% of segment sales) and baby skin care
sales increased by 10.9% (14.5% of sales). Baby sanitary products rose 6.4% (5.5% of sales), while baby wipes declined -5.7%
(5.1% of sales). Breast milk pad sales were up 21.4% (4.2% of sales). According to the company, competition has intensified as
the quality of disposable baby care products in China improves. This has led to a decline in sales of baby wipes compared with
last year.

In terms of profits, segment profits were up by a double digit amount, driven by sales growth and an improvement in margins.
Product mix improved due to an increase in higher margin breast pumps and nipples. In addition, margins benefited from higher
shipments for large-scale sales by Chinese e-commerce companies in November, with sales expenses related to this, such as sales
promotion expenditure, not accounted for until Q4. China e-commerce companies achieve significant sales via their websites
during “shopping festivals” held in June and November. According to the company, there is a difference in timing in the
accounting for the sales and expenses related to these events. Revenues are booked when the company ships for the June and
November events in Q1 and Q3, respectively. In terms of costs, sales promotion expenses are accounted for in Q2 (June event)
and Q4 (November event).

Other

▷ Sales: JPY962mn (+0.5% YoY)


▷ Segment profit: JPY92mn (-29.8% YoY)

1H FY01/18 results
▷ Sales: JPY49.0bn (+5.9% YoY)
▷ Operating profit: JPY9.3bn (+19.5% YoY)

▷ Recurring profit: JPY9.4bn (+22.3% YoY)


▷ Net income: JPY6.5bn (+17.1% YoY)
*Net income refers to net income attributable to parent company shareholders

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FY01/18 marks the first year of the sixth medium-term management plan (FY01/18 – FY01/20). In a push to achieve the plan's
objectives, Pigeon reported a 5.9% YoY rise in consolidated sales to JPY49.0bn due to strong sales performance, especially in
markets such as Japan, China and North America. Operating profit rose 19.5% to JPY9.3bn owing to GPM that improved 1.9pp
YoY to 48.5%. Recurring profit rose 22.3% to JPY9.4bn. Net income attributable to parent company shareholders was up 17.1%
YoY to JPY6.5bn.

Along with the release of 1H FY01/18 results, the company announced an upward revision to its forecast for the full-year FY01/18.
Compared with its previous forecast, the company raised its full-year forecast for sales by JPY1.4bn, operating profit by JPY1.7bn,
recurring profit by JPY1.6bn, and net income attributable to parent company shareholders by JPY1.2bn. The company indicated
that it had raised its full-year forecast by the amount that 1H results had exceeded expectations.

Compared with its upwardly revised forecast for the full year, 1H results give the company 48.5% of its full-year target for sales
(versus 51.8% at this time last year), 49.7% of its full-year target for operating profit (versus 58.0%), 50.4% of its full-year target
for recurring profit (versus 56.9%), and 49.9% of its full-year target for net income attributable to parent company shareholders
(versus 58.4%).
Exchange rates applied to earnings of consolidated subsidiaries (regarding sales and expenses) in 1H FY01/18 were
JPY112.33/USD (vs. JPY111.69/USD during the same period in the previous year) and JPY16.38/CNY (vs. JPY17.05/CNY).

At the individual segment level, the company reported higher sales and higher earnings for all segments except Health & Elder
Care. Growth was especially strong at its Domestic Baby & Mother Care business, Overseas business, and China business (which
account for the bulk of overall sales and earnings), with earnings rising at a double-digit pace in all of these key areas.

Domestic Baby & Mother Care

▷ Sales: JPY17.3bn (+5.7% YoY)


▷ Segment profit: JPY3.1bn (+22.2% YoY)

Inbound demand from overseas visitors increased, and in June 2017, the company revamped the Runfee single-wheel baby
stroller product and launched the Bingle single-wheel B-type baby stroller product, spurring further sales growth and pushing up
Pigeon’s share of the baby stroller market in July 2017 to a record-high of 17.4%.

To improve direct customer communication, Pigeon held 19 events in 1H, including a breast-feeding course for expecting
mothers, and seminars on the theme of breast feeding for medical professionals who work with nursing mothers (total of 1,600
attendees).

The company attributed much of the sales growth in this area to buying by overseas tourists visiting Japan. By product category,
sales of nursing bottles/nipples (16.7% of segment sales) were up 4.9% YoY, sales of baby skincare products (15.8% of sales)
were up 16.1%, sales of baby wipes (9.4% of sales) were up 10.3%, sales of masks, cotton swabs, and other baby healthcare
products (7.3% of sales) were up 3.0%, and sales of baby drinks (6.8% of sales) were up 6.5%. One particular product that was a
strong seller was Momo No Ha (peach leaves) medicated skin lotion.

On the profit front, the double-digit growth was driven by a combination of strong top-line growth and margin improvement.
The rise in the operating profit margin reflected a 2.5pp increase to the gross profit margin (48.8%), the improvement here
being attributed to the increase in sales volumes and the resulting rise in the capacity utilization rates at the company’s
production plants.

Child Care Service

▷ Sales: JPY3.8bn (+2.9% YoY)


▷ Segment profit: JPY81mn (+1.5% YoY)

The company began operating three new contracted onsite company child-care centers.

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Health & Elder Care

▷ Sales: JPY3.4bn (-2.6% YoY)


▷ Segment profit: JPY244mn (-12.2% YoY)

Sales and operating profit were down due to fiercer competition at the retail level over the company’s core products such as wet
wipes and skincare products. The company will continue increasing marketing to retailers and nursing facilities as well as
improving the quality of its nursing services.

Overseas

▷ Sales: JPY12.0bn (+8.7% YoY)


▷ Segment profit: JPY2.9bn (+24.7% YoY)

The Overseas segment encompasses all overseas businesses except those in China and the rest of Asia. Roughly 50% of segment
sales are generated by consolidated subsidiary Lansinoh Laboratories, Inc.

In 1H, sales at the Overseas segment were driven in large part by the products for nursing mothers (including nipple cream,
breast pumps, and breast milk storage bags) that are the mainstay of Lansinoh Laboratories. Sales in North America account for
roughly 70% of Lansinoh’s total sales. Aided by rapid growth in sales of breast pumps through a new channel, the company
reported 1H sales in North America of JPY3.9bn, up 12.5% YoY in yen terms and up 11.9% in local currency terms.

In the past, Lansinoh Laboratories primarily distributed its products in North America through large, high-volume retail chains.
However, since its breast pumps were certified as Durable Medical Equipment (DME) by the United States Food and Drug
Administration in 2016, Lansinoh has also been able to expand sales through other channels from 2017 because the DME
certification allowed its breast pumps to be sold through hospitals and be eligible for coverage by healthcare insurance plans.
According to the company, there are about four million newborn babies in North America each year and roughly 80% of these
are breast-fed. The company says about half of all breast pump sales in North America are made under the auspices of the DME
program. As Lansinoh has only about 2% share of this market, there is still plenty of room for sales to grow over the medium to
longer term. One feature that distinguishes Lansinoh breast pumps from those made by competitors is their connectability to
smartphone apps that allow users to download data such as feeding times and volumes.

Further, the company noted that capacity utilization rates are improving at its new plant in Turkey, which began operation in
January 2017. Mainly e-commerce sales in China at Lansinoh Laboratories Shanghai have been solid since starting operation in
FY01/17.

By product category, in 1H Lansinoh Laboratories saw sales of nipple cream (28.8% of sales) rise 8.8% YoY, sales of breast pads
(27.0% of sales) rise 5.3%, sales of breast milk storage bags (22.4% of sales) rise 30.3%, and sales of breast pumps (14.7% of
sales) rise 10.0%.

On the earnings front, in additional to the top-line growth, earnings growth was added margin improvement stemming from
more efficient SG&A spending, including promotion and general administrative expenses. The gross profit margin declined
0.2pp to 56.1%. The improvement in the segment’s operating profit margin was also aided by the rise in North American sales of
Lansinoh breast pumps, which carry higher-than-average margins because the company does not have to spend on promotional.

China

▷ Sales: JPY15.2bn (+10.6% YoY)

▷ Segment profit: JPY4.4bn (+16.8% YoY)

Sales and operating profit rose due to e-commerce driving sales of core products such as nursing bottles and nipples. In May
2017, the company began selling a new range of nursing bottles, cups, and nipples with Disney motifs, which boosted sales. The

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company plans to bolster direct communications with customers through social networking services, and expand its offline
activities, such as retail sales promotions and activities in maternity and general hospitals.

By product category, in 1H the China business saw sales of breast pumps (42.4% of sales) rise 17.6% YoY, sales of baby skincare
products (14.8% of sales) rise 24.7%, sales of baby sanitary products (5.8% of sales) rise 6.5%, sales of baby wipes (5.1% of sales)
decline 6.8%, and sales of breast pads (4.5% of sales) rise 40.3%. According to the company, competition has gotten tougher as
the quality of disposable baby care products in China has improved, leading to a decline in sales of its baby wipes product line. In
contrast, successful promotions helped the company realize a sharp increase in sales of breast pads.

On the earnings front, in addition to the top-line growth, margin improvement was also a factor behind the double-digit growth
in segment operating profit. The gross profit margin rose 2.8ppt to 46.5%, driven in large part by a more profitable sales mix that
included more sales of high-margin nursing bottles and nipples for nursing bottles.

Other

▷ Sales: JPY653mn (+0.9% YoY)


▷ Segment profit: JPY65mn (-22.6% YoY)

FY01/17 results
▷Sales: JPY94.6bn (+2.6% YoY)

▷Operating profit: JPY16.0bn (+10.3% YoY)


▷Recurring profit: JPY16.5bn (+9.2% YoY)

▷Net income*: JPY11.1bn (+9.0% YoY)

*Net income refers to net income attributable to parent company shareholders.

For full-year FY01/17, Pigeon reported a 2.6% YoY rise in consolidated sales as the rise in sales at the company's Domestic Baby &
Mother Care segment, which continued to benefit from spending by overseas tourists, offset the impact of the yen's appreciation
against the dollar. Operating profit rose 10.3% thanks to effective SG&A spending and an improved cost ratio. Recurring profit
rose 9.2%. Net income attributable to parent company shareholders was up 9.0% YoY.

Progress toward the full-year target was 99.6% for sales, 106.8% for operating profit, 107.6% for recurring profit, and 106.9% for
net income attributable to parent company shareholders. Although yen appreciation had a negative impact on earnings,
excluding this factor, all segments performed well, with profits exceeding the initial company target at all levels. Looking at
segment results, the China segment resolved a longstanding inventory problem and made progress with its focus business of
diaper sales. In Japan, the mainstay Domestic Baby & Mother Care segment benefited from continued brisk inbound demand,
while earnings improved in the Child Care Service and Health & Elder Care segments, which had presented challenges for the
company. In the Overseas segment, core business Lansinoh Laboratories performed well.

Major exchange rates applied to earnings of consolidated subsidiaries (regarding sales and expenses) in Q4 FY01/17 were
JPY108.77/USD (vs. JPY121.10/USD during the same period in the previous year) and JPY16.35/CNY (vs. JPY19.22/CNY). The
company commented that the negative forex impact was approximately JPY7.0bn on sales, JPY3.7bn on gross profit, JPY1.8bn on
recurring profit, and JPY1.5bn on net income. Consolidated results for FY01/17 excluding this effect would come to increases of
10.1% YoY in sales, 11.6% in gross profit, 22.5% in operating profit, and 23.4% in net income.

Domestic Baby & Mother Care

▷Sales: JPY31.8bn (+13.4%YoY)


▷Operating profit: JPY6.2bn (+42.4% YoY)

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In this segment, operating profit saw significant YoY upside thanks to increased sales in mainstay products such as nursing bottles.
The company launched a revamped version of the baby clothes laundry detergent series Pure in February 2016 and rereleased its
light weight Runfee ef baby stroller redesigned for better comfort and a smoother ride. In March 2016, the company launched a
revamped version of its Bonyu-jikkan (“Just like Mom”) bottles with four new designs. The company expanded market share and
increased sales thanks to these initiatives as well as launching a redesigned Mimi chibi on in August, an ear thermometer making
it easier to measure and read temperature.

To improve direct customer communication, Pigeon held 32 events in Q4, including the Pre-Mama Class for expecting women
and seminars with the theme of breast feeding while cuddling. The events targeted people working in the medical field (total of
2,700 attendees). The company also added product information on Pigeon Info, an informational website aimed at pregnant
women and those with young children, and further enhanced its online presence with the addition of Bonyu Iku in February 2016,
a portal website offering ready access to topics of interest to nursing mothers.

According to the company, inbound demand in this segment remains robust, although per-customer spending of the segment as
a whole is trending down, due in part to a rising share of repeat customers. Demand has been stable due to annual turnover of
target customers, typically parents of infants aged 0–18 months, as well as the expanding scope of products purchased. Pigeon
notes that demand is especially high for products that make direct contact with infants’ skin. We surmise that there is persistent
demand associated with consumers’ confidence in the quality of Japanese products and products offered by a company
considered the top brand in the business.

Pigeon commented that baby stroller sales were flat YoY at JPY1.0bn, reflecting a weak market, although market share was up
slightly to almost 12% from 10% in 2015. The company plans to expand the scope of baby strollers sold by introducing products
exclusive to Akachan Honpo, which has around 70% sales share in baby strollers in Japan.

Child Care Service

▷Sales: JPY7.4bn (+9.4% YoY)

▷Operating profit: JPY211mn (+41.9% YoY)

The operating profit growth is attributable to effective spending on SG&A and higher sales pushing up gross profit. The company
began operating two new contracted onsite company child-care centers.

Sales and profits grew in FY01/17 due to this increase in the number of contracted onsite company child-care centers, but a
shortage of workers remains a challenge for the segment. Thus Pigeon is focusing on improving the quality of child care to
improve profit margins as opposed to seeking scale.

Health & Elder Care

▷Sales: JPY6.9bn (+6.2% YoY)


▷Operating profit: JPY504mn (+258.6% YoY)

Segment sales increased due to solid sales of wet towels, skincare and meal/oral care products. On the earnings front, the rise in
sales coupled with cuts in SG&A spending following the streamlining of the division's operating structure led to a sharp jump in
operating profit.

The company improved segment profits by SG&A expense savings made by transferring personnel seconded from the parent
company to the flourishing Domestic Baby & Mother Care segment as part of the operating structure streamlining program. A
customer-specific sales structure starting in January 2016 also proved effective, helping sales turn positive. Pigeon plans to
progress these measures further.

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In February 2016, the company launched Nursing Oral Care, a series of oral care products. The company continued increasing
marketing to retailers and nursing facilities as well as improving the quality of its nursing services.

Overseas

▷Sales: JPY23.1bn (-8.6% YoY)


▷Operating profit: JPY5.4bn (-4.1% YoY)

This segment includes countries other than China and other Asian regions. The ongoing appreciation of the yen versus the US
dollar put pressure on segment sales and profit.

Pigeon’s operations in North America and Europe are primarily focused on its consolidated subsidiary Lansinoh Laboratories, Inc.
(Lansinoh). In North America, Lansinoh business saw increased sales for mainstay products such as nipple cream, nursing pads,
breast pumps, and other nursing products. Lansinoh has also been operating in China as a new venture and generated robust
sales there. In Turkey, it built a new factory (operations began in January 2017) to strengthen its production network and has
been working on expanding its operations in Europe by improving sales structure.

The company notes that Lansinoh Laboratories Shanghai (Lansinoh’s Chinese operation founded in April 2016) has posted sales
of over JPY450mn in FY01/17, 50% up on target. Lansinoh Shanghai uses its own hospital network for marketing, which proved
successful in raising the brand’s profile and gaining customers’ trust. As a result, e-commerce sales of products like breast pumps
in which Lansinoh excels are growing fast. Lansinoh’s earnings remain brisk and are likely to continue expanding in 2017 and
beyond. Further, earnings have been especially strong in Germany, which overtook the UK as the top market in Europe in terms
of sales.

China

▷Sales: JPY30.5bn (-3.6% YoY)

▷Operating profit: JPY8.4bn (-2.7%YoY)

From previous year (FY01/16), this segment includes Asia and other regions (South Korea, Taiwan, the Philippines, Russia and
other countries) in addition to China (excluding Japan). While sales and profits grew on a local currency base, the segment saw
sales and profit decline year-one-year on a yen base, impacted by the further appreciation of the yen against the renminbi, and
parallel imports of products sold in Japan.

In China and other Asian countries (excluding Japan), Pigeon is looking to strengthen its handling of online orders, and is also
looking to simulate more direct communications with consumers utilizing social networking services. It also continues to expand
off-line activities, such as retail sales promotions, measures aimed at increasing sales of disposable diapers, and activities in
maternity and general hospitals to increase market share.

Although inventory problems occurred in China in 2016, inventory levels normalized in FY01/17, resulting in solid sales growth
on a local currency basis. The e-commerce sales share (percentage of sales coming from e-commerce site) in China at
end-FY01/17 was approximately 41% versus 30% a year earlier. Although physical store sales were affected by the shift to
e-commerce site, the rate of in-store sales decline has slowed after closing unprofitable stores. Instore campaigns have also been
effective in boosting sales of disposable diapers (a focus product for the company) by 2.16x YoY on a local currency basis to
approximately JPY900mn.

Other

▷Sales: JPY1.3bn (-0.8% YoY)


▷Operating profit: JPY162mn (+7.1% YoY)

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FY01/16 results
▷ Sales: JPY92.2bn (+9.6% YoY)
▷ Operating profit: JPY14.5bn (+13.6% YoY)
▷ Recurring profit: JPY15.1bn (+13.4% YoY)
▷ Net income: JPY10.2bn (+20.7% YoY)

Sales were higher due to increased earnings in the Overseas segment, growth in strollers, and expansion in the Domestic Baby &
Mother Care segment owing to heightened demand from overseas tourists. In addition to higher sales, the company also
improved utilization at its production centers (Pigeon Manufacturing (Shanghai) Co., Ltd. and Thai Pigeon Co., Ltd.) in line with
business growth, leading to a 1.5pp YoY improvement in the CoGS-to-sales ratio.

The company announced upward revisions to its full-year and dividend forecasts on September 7, 2015. For the full year, sales
reached 96.6% of the revised forecast (compared to 100.2% versus initial forecasts), operating profit reached 96.8% (compared
to 104.5%), recurring profit reached 99.9% (compared to 107.7%), and net income reached 106.2% (compared to 114.6%).
Although sales slightly fell below its revised estimate, profits indicators were in line with revised forecasts.

Alongside its earnings announcement, Pigeon announced an increase in its year-end dividend for FY01/16. Taking into account
the 3-for-1 stock split that took place on May 1, 2015, annual dividends for FY01/16 are effectively JPY7 higher year-on-year, at
JPY42 per share (JPY40 in the initial forecast). Dividends for FY01/17 are planned to be JPY44 per share, an increase of JPY2.

Outline of business results by segment


Though the Child Care Service incurred a profit decline with a rise in sales and the Health & Elder Care business saw falls in both
sales and profits, other segments showed rises in sales and profits. The Overseas and China segments showed YoY growth of
8.0% and 20.5%, respectively. From FY01/16, the China segment included sales in nearby regions due to a change in commercial
distribution. Based on the previous format, the Overseas and China segments grew 16.8% and 6.3% (reduced by 5% on a local
currency basis), respectively.

The yen’s depreciation contributed to the business growth in FY01/16; the average exchange rates were JPY121.10/USD (from
JPY105.78/USD in FY01/15) and JPY19.22/CNY (from JPY17.17/CNY). By overseas region, sales in the Chinese region declined
4.2% YoY on a local currency basis, but increased 7.2% in terms of yen. In North America, sales rose 5.1% on a local currency
basis and a sharper 20.3% on a yen basis.

Inventory problems in China


In China, final demand remained strong in FY01/16, but growth of sales was lackluster due to temporary factors. Problems related
to inventories affected the performance in China, for which Pigeon cited two reasons.

The first problem is the effect of a change in the network of distributors. With the aim of expanding sales of disposable diapers,
Pigeon reclassified part of its distribution network to a product-by-product basis from the previous classification based on sales
channels (baby goods retailers, department stores, and general merchandisers). The changeover took more time than expected,
leading to a temporary rise in inventories at distributors.

The second problem was a change in the weight of e-commerce stores. While final demand stayed active in China, sales at
e-commerce stores particularly increased, affecting sales at actual retail stores. Of the sales amount at Pigeon’s primary
distributors, sales to secondary distributors (for retail stores) declined 11% but those to e-commerce stores increased 36%. While
retail stores had kept inventories in expectation of expansion of the market, e-commerce stores had not accumulated inventories.
For Pigeon, sales at both retailers and e-commerce shops were favorable. However, the company’s sales were indirectly affected
by retail stores that temporarily diminished their inventories in accordance with a slowdown of sales growth in China.

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According to the company, the first problem was largely resolved in Q3 FY01/16. The second one, the adjustment of inventories
at retailers due to a rise in the ratio of e-commerce sales, is likely to be settled in Q1 FY01/17.

Pigeon wins Grand Prix of TSE’s Corporate Value Improvement Award


Pigeon won the Grand Prix of the Tokyo Stock Exchange’s Corporate Value Improvement Award for 2015.

From some 3,500 companies listed on the TSE, the award selects and praises companies engaging in management initiatives
toward improving corporate value by deeply incorporating investors’ standpoints, such as capital cost. The Listed Company
Award Selection Committee chooses three finalist companies, of which one is awarded the Grand Prix. Pigeon was also among
the three finalists in FY2014.

According to the company, the reason for the Grand Prix is its outstanding management initiatives for improving corporate value.
In particular, the company achieved excellent results by positioning and pursuing, in a concerted effort, a number of
performance indicators, including its unique “PVA” (Pigeon Value Added = Operating profit after estimated taxes – Capital cost),
as important management benchmarks.

Pigeon has evaluated its business divisions based on PVA since 2014. Not positioning PVA as a simple numerical target, each
business division holds seminars to learn the structure of PVA and capital cost, with employees setting their own numerical
targets on how they are able to contribute to improvement of PVA. This steady effort appears to have changed each employee’s
way of thinking and led to enhancement of corporate value.
Tree of PVA: Company plans and results in FY02/16 (JPYmn)
OP FY01/16 Est. 13,900 Sales FY01/16 Est. 92,000
FY01/16 Act. 14,522 FY01/16 Act. 92,210
FY01/15 Act. 12,780 FY01/15 Act. 84,113
NOPAT FY01/16 Est. 8,242
FY01/16 Act. 8,611 Tax FY01/16 Est. 5,657 CoGS FY01/16 Est. 49,900
FY01/15 Act. 7,578 FY01/16 Act. 5,910 FY01/16 Act. 48,865
FY01/15 Act. 5,201 FY01/15 Act. 45,817
PVA
FY01/16 Est. 5,584 Invested FY01/16 Est. 53,135 Working FY01/16 Est. 16,500 Accounts FY01/16 Est. 14,700 SG&A FY01/16 Est. 28,200
FY01/16 Act. 5,756 capital FY01/16 Act. 57,102 capital FY01/16 Act. 17,364 receivable FY01/16 Act. 13,781 FY01/16 Act. 28,823
FY01/15 Act. 4,812 FY01/15 Act. 55,315 FY01/15 Act. 18,097 FY01/15 Act. 15,278 FY01/15 Act. 25,515

Fixed FY01/16 Est. 27,569 Inventory FY01/16 Est. 9,000


WACC FY01/16 Est. 5.0% assets FY01/16 Act. 25,029 FY01/16 Act. 8,859
FY01/16 Act. (Common) FY01/15 Act. 25,339 FY01/15 Act. 8,498
FY01/15 Act.
Other FY01/16 Est. 9,084 Accounts FY01/16 Est. 7,200
assets FY01/16 Act. 14,708 payable FY01/16 Act. 5,366
FY01/15 Act. 11,877 FY01/15 Act. 5,679
Source: Shared Research based on company data

Business trends by segment


FY01/15 Act. FY01/16 Act.
(JPYmn) Sales YoY GPM OP YoY OPM Sales YoY GPM OP YoY OPM
Group Total 84,113 8.6% 45.5% 12,781 23.3% 15.2% 92,210 9.6% 47.0% 14,522 13.6% 15.7%
Domestic Baby & Mother Care 24,432 -0.1% 46.0% 3,752 10.0% 15.4% 28,053 14.8% 44.4% 4,384 16.8% 15.6%
Child Care Service 6,722 1.9% 11.2% 189 7.4% 2.8% 6,758 0.5% 10.7% 149 -21.3% 2.2%
Health & Elder Care 6,761 0.6% 28.7% 260 22.6% 3.8% 6,499 -3.9% 28.3% 141 -45.9% 2.2%
Overseas 23,373 15.1% 53.7% 4,969 19.7% 21.3% 25,234 8.0% 55.4% 5,579 12.3% 22.1%
China 26,301 19.7% 43.7% 7,525 24.6% 28.6% 31,688 20.5% 44.6% 8,587 14.1% 27.1%
Others 1,276 10.9% 16.6% 173 13.6% 13.6% 1,284 0.6% 15.4% 152 -12.1% 11.8%
Average exchange rate
USD/JPY 105.78 121.10
CNY/JPY 17.17 19.22
Source: Shared Research based on company data
Figures of each segment are those before eliminating intercompany transactions

Domestic Baby & Mother Care

▷ Sales: JPY28.1bn (+14.8% YoY)


▷ Operating profit: JPY4.4bn (+16.8% YoY)

In February 2015, the company began sales of nutritional supplements for nursing mothers. Two new colors of the Runfee baby
stroller—a product launched in January 2015—were also added in July. The Premige premium stroller also went on sale in
December, a product with enhanced ride comfort for babies. As a result of these initiatives, segment sales were robust and

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Pigeon was able to expand its market share. The CoGS-to-sales ratio also rose due to higher import costs resulting from a weaker
yen, but this was absorbed by increased revenue, resulting in an increase in profits.

As part of efforts to improve direct customer communication, Pigeon held several events targeting future and expecting mothers
in FY01/16 (38 events in total, with a total of 2,800 attendees). The company also updated product information on Pigeon Info,
an informational website aimed at pregnant women and those with young children.

The rise of nearly 15% in sales in the segment was partly due to contribution of the new promising product, the Runfee baby
stroller. Sales of the Premige premium stroller, launched in December 2015, also performed well. Other products also fared well.
In the domestic market, Pigeon took the top position in baby skincare goods, nursing bottles, baby wipes, baby drinks, and
nursing pads.

By product, sales of nursing bottles and nipples increased 132% YoY (accounting for 14% of segment sales). The company sees
all of the increases in nursing bottles and nipples worth more than JPY2bn were due to demand from foreign tourists, the
so-called inbound effect. Pigeon said if the increased portions had been sold in China, sales in the country would have increased
around 3% YoY. Sales of strollers and other products, which are used when parents go out, were up 78%. Though baby food
products have been exposed to intense competition, the company’s sales were up 35% due to efforts to launch new attractive
products.

Child Care Service

▷ Sales: JPY6.8bn (+0.5% YoY)


▷ Operating profit: JPY148mn (-21.7% YoY)

Sales were flat year-on-year, but an increase primarily in personnel expenses resulted in lower profits. The company began
operating four new contracted onsite company child-care centers.

Health & Elder Care

▷ Sales: JPY6.5bn (-3.9% YoY)


▷ Operating profit: JPY140mn (-46.1% YoY)

Fierce competition in the daily necessities market and revisions to nursing fees led to a fall in sales and profit. Profit was
particularly affected by a fall in sales to nursing facilities. The segment was affected by conservative buying and trends toward
purchasing consumables at lower prices because compensation under the nursing care insurance system was revised down for
the first time in nine years. In February 2015, the company launched a new wheelchair for the elderly, followed by a new
spray-type odor eliminator in April. The company continues to launch new products that add to its competitive edge, and focus
on sales to facilities.

Overseas

▷ Sales: JPY25.2bn (+8.0% YoY)


▷ Operating profit: JPY5.6bn (+12.3% YoY)

This segment includes countries other than China and other Asian regions. From this fiscal year, operations in South Korea, Hong
Kong, Taiwan, Russia, etc. were moved to under the China segment HQ (instead of Japan), but the company was still able to
attain an increase in sales and profits in this segment due to the solid performance of Lansinoh (European and North America)

In India, Pigeon began operations at a new local factory in May 2015, as part of efforts to put in place a supply framework to
procure mainstay nursing bottles, nipples, and other products, as well as improving sales and logistics. In North America and

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Europe, sales of nursing-related products such as mainstay nursing pads, breast pumps, and milk storage products were robust.
In Europe, the company also has plans to construct a new manufacturing plant in Turkey to begin operations in January 2017 with
the intent of enhancing its production structure. The company also aims to expand by strengthening its organizational structures
in the United Kingdom and Germany.

China

▷ Sales: JPY31.7bn (+20.5% YoY)


▷ Operating profit: JPY8.6bn (+14.1% YoY)

From this year (FY01/16), this segment includes other Asian regions in addition to China (excluding Japan). On the new segment
basis, SG&A expenses increased as the company continued to focus on marketing. Nevertheless, sales and profits increased
because management of areas of South Korea, Hong Kong, Taiwan, and Russia were moved, and nursing bottle nipples saw
robust growth from continued marketing and promotional activities.

From May, the company introduced a new baby skincare series and aimed for further business expansion, particularly in
categories other than its core nursing bottles and nipples products. In China, Pigeon worked to restructure its logistics framework
to cope with the rapid rise of internet-based orders, and is targeting further growth through sales promotions in partnership with
local retailers.

In China, sales growth temporarily turned sluggish on a local currency basis due to the change in the distribution network and
the expansion of e-commerce. By product, sales of nursing bottles and nipples fared well. Sales of skincare products in China
struggled, sandwiched between local low-priced products and high-end US and European products, but sales stopped falling
after launching a high-priced type with added value.

Sales of disposable diapers, which had been sluggish, began to turn better in 2H FY01/16 as the adjustment of the distribution
network saw progress. In Q4, the company decreased dependence on distributors and launched a comprehensive support
operation for its sales and promotion staff in four Chinese provinces, where sales shot up 3.7x. Sales were up 40% in other
provinces where the operation was not conducted, indicating a trend toward gradual recovery. The company manufactures
disposable diapers at Chinese plants. In November and December 2015, the situation turned better to generate gross profit at
the manufacturing stage. The company plans to continue the total support operation to expand sales in FY01/17.

Other

▷ Sales: JPY1.3bn (+0.6% YoY)


▷ Operating profit: JPY152mn (-12.3% YoY)

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Income statement
Income statement FY01/09 FY01/10 FY01/11 FY01/12 FY01/13 FY01/14 FY01/15 FY01/16 FY01/17 FY01/18
(JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons.
Sales 53,092 53,432 57,061 59,145 65,075 77,465 84,113 92,209 94,640 102,563
YoY 7.8% 0.6% 6.8% 3.7% 10.0% 19.0% 8.6% 9.6% 2.6% 8.4%
CoGS 32,896 32,541 33,796 34,812 37,331 42,992 45,831 48,863 49,941 52,010
Gross profit 20,196 20,891 23,266 24,333 27,744 34,473 38,283 43,347 44,698 50,552
YoY 8.2% 3.4% 11.4% 4.6% 14.0% 24.3% 11.1% 13.2% 3.1% 13.2%
GPM 38.0% 39.1% 40.8% 41.1% 42.6% 44.5% 45.5% 47.0% 47.2% 49.3%
Reversal of allowance for sales returns 48 76 61 46 60 47 57 46 45 70
Provision for sales returns 80 64 47 60 43 55 44 48 55 50
Adjusted gross profit 20,164 20,903 23,281 24,319 27,761 34,464 38,296 43,345 44,688 50,572
SG&A expenses 15,895 16,299 18,734 19,276 20,675 24,099 25,515 28,823 28,673 31,159
SG&A ratio 29.9% 30.5% 32.8% 32.6% 31.8% 31.1% 30.3% 31.3% 30.3% 30.4%
Operating profit 4,269 4,604 4,546 5,042 7,086 10,365 12,780 14,521 16,015 19,412
YoY 33.7% 7.8% -1.3% 10.9% 40.5% 46.3% 23.3% 13.6% 10.3% 21.2%
OPM 8.0% 8.6% 8.0% 8.5% 10.9% 13.4% 15.2% 15.7% 16.9% 18.9%
Non-operating income 407 410 373 373 656 974 923 1,113 945 1,263
Non-operating expenses 382 405 484 499 353 338 405 554 498 547
Recurring profit 4,294 4,609 4,435 4,917 7,389 11,002 13,299 15,080 16,462 20,129
YoY 35.1% 7.3% -3.8% 10.9% 50.3% 48.9% 20.9% 13.4% 9.2% 22.3%
RPM 8.1% 8.6% 7.8% 8.3% 11.4% 14.2% 15.8% 16.4% 17.4% 19.6%
Extraordinary gains 16 5 20 20 7 9 8 11 122 1,058
Extraordinary losses 290 449 86 213 27 24 167 205 350 271
Tax charges 1,015 1,210 1,352 1,452 2,655 3,784 4,503 4,424 4,891 6,157
Implied tax rate 25.3% 29.0% 31.0% 30.7% 36.0% 34.4% 34.3% 29.7% 30.1% 29.4%
Net income 2,854 2,840 2,928 3,183 4,573 6,985 8,451 10,197 11,118 14,515
YoY 94.0% -0.5% 3.1% 8.7% 43.7% 52.7% 21.0% 20.7% 9.0% 30.5%
Net margin 5.4% 5.3% 5.1% 5.4% 7.0% 9.0% 10.0% 11.1% 11.7% 14.2%
Source: Shared Research based on company data
Note: Figures may differ from company materials due to differences in rounding methods.
The company changed its reportable segments from FY01/15, splitting the previous Overseas segment into the Overseas and China segments. The Overseas segment for
FY01/14 and before includes the China business.

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Balance sheet
Balance sheet FY01/09 FY01/10 FY01/11 FY01/12 FY01/13 FY01/14 FY01/15 FY01/16 FY01/17 FY01/18
(JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons.
ASSETS
Cash and deposits 5,973 6,906 6,828 7,294 10,574 13,103 21,591 24,298 30,052 31,346
Accounts receivable 10,119 8,758 9,874 9,993 10,541 12,569 15,278 13,871 16,103 16,440
Inventories 4,641 5,508 5,798 6,926 6,776 8,052 8,499 8,859 7,602 8,711
Deferred tax assets 491 624 801 729 703 826 773 686 665 739
Accounts receivable–other 233 292 375 279 248 369 397 500 253 278
Other current assets 228 298 601 334 278 475 520 736 595 885
Allowance for doubtful accounts -55 -112 -114 -112 -17 -31 -31 -35 -26 -221
Total current assets 21,631 22,273 24,163 25,443 29,103 35,363 47,027 48,914 55,244 58,178
Buildings 4,542 4,639 5,351 5,157 5,221 6,239 6,802 7,372 6,989 7,105
Equipment 2,670 2,970 3,461 3,726 4,025 6,227 7,851 7,886 7,363 7,435
Land 5,880 5,897 6,013 5,979 6,015 6,080 6,139 6,018 5,683 5,878
Construction in progress 217 533 585 196 947 478 591 194 226 695
Total tangible fixed assets 13,308 14,040 15,409 15,059 16,208 19,023 21,383 21,471 20,263 21,116
Goodwill 816 521 600 660 552 441 302 163 51 1,271
Software 646 512 426 351 336 416 486 554 502 456
Others 83 198 163 275 288 585 936 629 552 578
Total intagible fixed assets 1,545 1,231 1,188 1,285 1,176 1,441 1,724 1,346 1,106 3,307
Total fixed assets 16,777 17,221 18,522 18,329 19,435 22,592 25,340 25,029 23,644 26,289
Total assets 38,408 39,494 42,685 43,773 48,539 57,955 72,367 73,943 78,889 84,467

LIABILITIES
Accounts payable 4,674 4,312 3,985 3,758 3,864 4,518 4,463 5,366 6,550 6,991
Short-term debt 1,820 1,470 3,258 3,256 1,416 1,400 2,090 1,309 5,699 0
Others 4,750 4,912 4,984 5,368 6,336 6,901 8,720 7,548 9,132 10,682
Total current liabilities 11,244 10,694 12,227 12,383 11,616 12,819 15,273 14,223 21,381 17,673
Long-term debt 1,320 1,000 1,615 1,642 2,204 2,012 5,928 5,000 0 0
Other fixed liabilities 1,520 1,535 1,799 1,812 2,353 3,143 3,869 3,927 3,770 3,982
Total long-term liabilities 2,840 2,535 3,414 3,454 4,558 5,155 9,797 8,927 3,770 3,982
Total liabilities 14,083 13,229 15,641 15,837 16,173 17,974 25,070 23,150 25,152 21,655
Net assets
Capital stock 5,200 5,200 5,200 5,200 5,200 5,200 5,200 5,200 5,199 5,199
Capital surplus 5,180 5,180 5,180 5,180 5,180 5,180 5,180 5,180 5,179 5,179
Retained earnings 15,485 17,044 18,451 19,874 22,686 26,930 31,384 36,791 42,280 49,729
Treasury stock -443 -447 -448 -449 -450 -456 -942 -947 -948 -949
Valuation and translation differences -1,494 -1,196 -1,850 -2,376 -944 2,271 5,343 3,344 676 1,534
Minority interests 397 483 511 507 694 857 1,133 1,226 1,349 2,119
Total net assets 24,325 26,264 27,044 27,936 32,365 39,982 47,297 50,793 53,736 62,812
Working capital 10,086 9,954 11,688 13,161 13,453 16,103 19,315 17,364 17,155 18,160
Total interest-bearing debt 3,139 2,470 4,873 4,898 3,620 3,412 8,018 6,309 5,699 0
Net debt -2,833 -4,436 -1,955 -2,395 -6,954 -9,691 -13,572 -17,989 -24,353 -31,346
Source: Shared Research based on company data
Note: Figures may differ from company materials due to differences in rounding methods.

Inventory management
Excess product returns from secondary distributors and stagnant Pigeon (Shanghai) subsidiary sales to primary distributors
created a dead inventory problem in China in FY01/11. Some secondary distributors were making more orders than they could
actually sell to primary distributors, and some distributors sold to retailers in regions outside provinces that they were responsible
for. Subsequently, the company strengthened primary distributors’ inventory monitoring. By FY01/12, these distributors’
inventory turnover (days in inventory) fell from a peak of five months to a more normal two months. From FY01/13, Pigeon has
started strictly enforcing rules on its distributors to prevent similar problems from reappearing. Though inventor levels stabilized
thereafter, the problem at primary distributors in China reappeared in FY01/16 However, as it had learned the lessons of the past,
the company adjusted the inventories immediately and the problem was basically resolved during the year.

Issued shares
The number of issued shares has been stable. The company generally invests within its operating cash flow and hasn’t used
equity financing over the past decade. The company split its stock 2 for 1 in August 2013, and conducted another 3-for-1 stock
split in April 2015 (record date April 30).
Per share data FY01/09 FY01/10 FY01/11 FY01/12 FY01/13 FY01/14 FY01/15 FY01/16 FY01/17 FY01/18
(JPY) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons.
Shares issued (year end; '000) 20,276 20,276 20,276 20,276 20,276 40,551 40,551 121,653 121,653 121,653
EPS 142.8 141.9 146.3 159.1 228.5 174.5 211.7 85.2 92.8 121.2
Dividend per share 55.0 64.0 88.0 88.0 115.0 88.0 105.0 42.0 53.0 66.0
Book value per share 1,195.5 1,288.1 1,325.7 1,370.5 1,582.5 977.5 1,156.4 413.9 437.4 506.8
Source: Shared Research based on company data
Figures may differ from company materials due to differences in rounding methods.

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Shareholder returns
Pigeon’s sixth medium-term management plan calls for overall returns to shareholders, including share buybacks, of around 55%.
Shared Research believes that high ROEs (at 25.7% in FY01/18) allow Pigeon to adopt a flexible attitude toward its shareholder
return policy.

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Statement of cash flows


Cash flow statement FY01/09 FY01/10 FY01/11 FY01/12 FY01/13 FY01/14 FY01/15 FY01/16 FY01/17 FY01/18
(JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons.
Cash flows from operating activities (1) 4,206 4,964 3,206 4,212 7,656 7,930 10,135 13,480 14,810 17,094
Cash flows from investing activities (2) -1,279 -2,105 -3,948 -1,871 -1,848 -3,794 -3,134 -3,332 -1,854 -3,586
Free cash flow (1+2) 2,927 2,859 -742 2,341 5,808 4,136 7,001 10,148 12,956 13,508
Cash flows from financing activities -110 -2,018 886 -1,776 -3,149 -3,163 -150 -6,568 -6,223 -12,812
Depreciation and amortization (A) 1,898 1,810 1,940 1,833 1,817 2,071 2,095 2,550 2,356 2,450
Capital expenditures (B) -1,769 -2,109 -2,903 -1,540 -1,858 -3,677 -3,155 -3,374 -2,634 -3,254
Changes in working capital (C) 1,167 -132 1,734 1,473 292 2,650 3,211 -1,951 -209 1,005
Simple FCF (NI + A + B - C) 1,817 2,673 231 2,003 4,240 2,730 4,179 11,325 11,049 12,706
Source: Shared Research based on company data
Note: Figures may differ from company materials due to differences in rounding methods.

Cash flows from operating activities


Cash flows from operating activities fluctuate mainly according to pretax profit, depreciation, and income tax payments.

Cash flows from investing activities


The main factor affecting cash flows from investing activities are outflows for the purchase of property, plant, and equipment and
intangible assets.

Cash flows from financing activities


The main components of Pigeon’s cash flows from financing activities are dividend payments and inflows (outflows) from change
in interest-bearing debt. In FY01/18, the company repaid its debt by JPY5.7bn. As a result, cash flows from financing activities
showed a net outflow of JPY12.8bn.

Simple free cash flow


Simple free cash flow has been positive since FY01/08. The temporary slow-moving stock problem in China during FY01/11
concerned distributors’ inventory and was resolved relatively quickly with little impact on days in inventory (based on year-end
comparisons). Efforts to cut inventory have been successful, resulting in a recent improvement of inventory turnover.
Cash conversion cycle FY01/09 FY01/10 FY01/11 FY01/12 FY01/13 FY01/14 FY01/15 FY01/16 FY01/17 FY01/18
Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons.
Accounts receivable turnover 5.2 6.1 6.1 6.0 6.3 6.7 6.0 6.3 6.3 6.3
Accounts receivable days 69.6 59.8 59.6 61.3 57.6 54.4 60.4 57.7 57.8 57.9
Inventory turnover 7.1 7.4 6.0 5.5 5.4 5.8 5.5 5.6 6.1 6.4
Days in inventory 51.4 49.5 61.1 66.7 67.0 62.9 65.9 64.8 60.1 57.3
Accounts payable turnover 7.0 7.5 8.1 9.0 9.8 10.3 10.2 9.9 8.4 7.7
Accounts payable days 51.8 48.4 44.8 40.6 37.3 35.6 35.8 36.7 43.5 47.5
Cash conversion cycle (days) 69.2 60.9 75.8 87.4 87.3 81.8 90.6 85.8 74.4 67.6
Source: Shared Research based on company data
Note: Figures may differ from company materials due to differences in rounding methods.

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News and topics


September 2017
On September 4, 2017, the company announced revisions to its earnings forecast.

Revised full-year FY01/18 forecasts are as follows:

▷ Sales: JPY101.2bn (previous forecast: JPY99.8bn)


▷ Operating profit: JPY18.7bn (JPY17.0bn)
▷ Recurring profit: JPY18.6bn (JPY17.0bn)
▷ Net income*: JPY13.0bn (JPY11.8bn)
*Net income refers to net income attributable to parent company shareholders.

Reasons for earnings forecast revision


In 1H FY01/18, earnings grew in the China segment centered on e-commerce channels. Earnings were also brisk in the Overseas
segment, mainly Lansinoh Laboratories Inc., which operates in North America and Europe. Sales of the Domestic Baby & Mother
Care segment increased YoY thanks to higher inbound demand. As a result, consolidated sales were up YoY. Profits were also up
YoY at all levels due to higher gross profit stemming from sales growth and lower CoGS-to-sales ratio and efficient use of SG&A
expenses. The company’s forex assumption for 2H on which it bases the revised full-year forecast is around JPY108/USD
(JPY112.33/USD in 1H) and JPY16/CNY (JPY16.38/CNY in 1H).

On the same day, the company announced a dividend hike and revisions to its dividend forecast.

The company plans to increase its interim dividend by JPY3 per share from the most recent forecast to JPY31 per share, and final
dividend also by JPY3 per share to JPY31 per share for a total of JPY62 per share (+JPY9 per share from FY01/17) to reflect
consolidated earnings performance in 1H FY01/18.

April 2017
On April 17, 2017, the company announced a change in status of an affiliated company from an equity-method affiliate to a
consolidated subsidiary.

At the board of directors meeting held on the same day, the company resolved to transfer all shares of an equity-method affiliate–
P.T. Pigeon Indonesia (“Pigeon Indonesia”)–it holds (total of 3,500 shares; 35% ownership) to its wholly-owned subsidiary,
Pigeon Singapore Pte. Ltd. (“Pigeon Singapore”) through an investment in kind (capital increase). The company also resolved
that Pigeon Singapore acquire additional shares of Pigeon Indonesia (3,000 common shares; 65% ownership after acquisition) as
it prepares to make Pigeon Indonesia a consolidated subsidiary. The acquisition value of additional shares amounts to USD8.8mn
and the transaction is set to take place in November 2017.

According to Pigeon, making Pigeon Indonesia a consolidated subsidiary will give the company a more accurate grasp of the
Indonesian market environment, which will allow it to release new products and expand product procurement system locally in a
timely manner. The company plans to expand Pigeon group’s business in Indonesia through these efforts.

In FY12/16, Pigeon Indonesia posted sales of IDR200.2bn (+21.7% YoY), operating income of IDR21.7bn (+59.8%) and net
income of IDR10.0bn (+18.5%).

September 2016
On September 5, 2016, Pigeon Corp. announced earnings results for 1H FY01/17 and revised its full-year earnings outlook and
dividend forecast.

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Other information

History
Before founding Pigeon, Yuichi Nakata worked in the textile industry before the war. He returned to Japan after the war and made
a fortune selling uniforms to Tokyo metropolitan government officials. Nakata then decided he wanted to help children, the
future of the peaceful nation, to grow up healthy. That was the start of the business focused on infants. In 1951, Nakata invested
in and supported a company called Doufu Boeki, which imported nursing bottles. At the time, there were very few types of
high-quality nursing bottles in Japan. Two years earlier, in 1949, the company started selling Japan’s first wide-necked, cap-type
bottle. It was more hygienic than older models, which had a nipple connected directly to the bottle. In 1950, the A-type bottle,
which became the prototype for the current Pigeon bottles, entered the market. In 1951, using the famous peace symbol for
inspiration, the company adopted the “Pigeon” brand name (pigeon and dove are the same word in Japanese). Adding the word
for nursing bottle, “honyuki,” the company changed its name to Pigeon Honyuki. Nakata became president in 1952 and
established a new company in 1957—Pigeon Honyuki Honpo Co., Ltd.—changing the name to Pigeon Corporation in 1966.

Yuichi Nakata desired to develop the best nipple shape for his bottles—he wanted to find the form that would be as close to
nature as possible. The “formalin incident” of 1969, in which trace amounts of formalin were detected in the company’s nipples,
was a major turning point (formalin is a liquid form of formaldehyde, is colorless, has a pungent odor, and is widely used to fix
and preserve biological specimens). To apologize for the problem, Pigeon sent each of Japan’s 40,000 to 50,000 pharmacies two
dozen nipples at no charge. The pharmacies sold the free nipples, and Pigeon’s nipples spread nationwide as a result.
Accordingly, the company’s ceaseless efforts to respond to the incident generated a great deal of trust among consumers.

After the incident, business grew steadily. In 1975, Pigeon entered the elder care market utilizing some of the transferable
know-how from its baby products expertise. In 1993, the company started a child-care business.

In 1995, the company listed on the Second Section of the Tokyo Stock Exchange. It moved to the First Section in 1997.

In the early 1990s, domestic sales growth began to slow due to the market’s maturity. Pigeon responded by beginning exports to
China in 1996. It set up a Chinese subsidiary in 2002. In 2006, the company set up a factory in Shanghai and another in
Changzhou in 2009.

In North America, Pigeon added Lansinoh Laboratories, Inc. to its portfolio of brands in 2004; Lansinoh in turn bought the
mOmma brand in 2010 and the “earth friendly baby” brand in 2011.

Pigeon began operations in India in 2009, setting up a local subsidiary, Pigeon India Pvt. Ltd., and pursuing sales in Delhi,
Mumbai, and other major cities.

In China, the company began to sell disposable diapers in July 2013.

The company is also preparing to enter the Brazilian market, where it established a subsidiary in March 2014.

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Major shareholders
Amount
Top shareholders
held
The Master Trust Bank of Japan, Ltd. (Trust account) 5.6%
Japan Trustee Services Bank, Ltd. (Trust account) 4.8%
JP MORGAN CHASE BANK 385164 2.8%
BBH FOR MATTHEW S ASIA DIVIDEND FUND 2.6%
Yoichi Nakata 2.5%
Y.N. Corporation 2.5%
THE BANK OF NEW YORK MELLON 140044 2.4%
Ueda Yagi Tanshi Co., Ltd. 2.2%
Japan Trustee Services Bank, Ltd. (Trust account 5) 1.9%
THE BANK OF NEW YORK, NON-TREATY JASDEC ACCOUNT 1.6%
Source: Shared Research based on company data
As of January 2018
Amounts held excludes treasury stock (1,892,329 shares)

Corporate governance and top management


Status of corporate governance
Capital structure
Controlling shareholders None
Parent company ticker N/A
Form of organization; directors
Organizational type Company with corporate auditors
Number of directors under Articles of Incorporation 15
Directors' terms under Articles of Incorporation 2 years
Number of outside (independent) directors 3
Voluntary committee equivalent to nomination committee or compensation committee None
Number of members of Audit & Supervisory Board under Articles of Incorporation 4
Number of external (independent) members of Audit & Supervisory Board 2
Independent officers (outside directors and external auditors) 5
Other
Disclosure of directors' compensation Total amount disclosed
Policy on determining amount of compensation and calculation methodology In place
Corporate takeover defenses None
Source: Shared Research based on company data

Top management
Chairman and Chief Executive Officer Akio Okoshi (born 1950) joined Pigeon in 1969. After his posting in Singapore, he left the
company in 1985 and worked at a subsidiary of Mitsubishi Chemical and other manufacturers.

Okoshi rejoined the company in 2000 when one of his contemporaries, former Chairman Seiichi Matsumura, was appointed
president and chief operating officer after listing the company in the late 1990s. Subsequently, Okoshi helped the company shift
away from an owner-driven culture and build one in Mr. Matsumura’s style. After serving as managing director in 2006, Okoshi
was appointed president and chief operating officer in 2007. In 2013 he became chairman and CEO. As Okoshi spent some time
outside the company, he is able to see it from an objective viewpoint, in SR Inc.’s view.

President Shigeru Yamashita (born 1958) joined the company in 1981. After working in overseas sales for around 15 years, he was
appointed managing director of Pigeon’s Thai manufacturing subsidiary in 1997. Subsequently, in 2004 he became managing
director of Lansinoh Laboratories, Inc., and then in 2007 he was appointed an executive officer of the parent company,
responsible for overseas operations.

Yamashita was appointed president in April 2013, and at the results briefing held in March 2013, he commented ambitiously,
“Company founder Yuichi Nakata laid the tracks. Chairman Okoshi got the train running. I am making it my job to bring the train
up to speed.”

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Employees
The company had 4,306 employees (as of end of FY01/18) and an average of 1,729 temp workers. The parent had 984
employees and an average of 587 temp workers.
Number of employees by segment
Segments No. of employees
Domestic Baby & Mother Care 250(88)
Childcare Services 635(489)
Health & Elder Care 16(4)
Overseas 17(4)
Company-wide 66(2)
Total 984(587)
Source: Company data
1. Figures in parentheses are average annual temp workers and are not included in the numbers of employees.
2. Company-wide (common) employees are those belonging to the administrative division

In FY01/17, key statistics for the parent’s employees were as follows:

▷ Average age: 43.3 years old


▷ Average years of service: 10.4 years
▷ Average annual salary: JPY4.7mn

Investor relations
The company holds interim and annual results meetings every year.

By the way
The company has a wild boar statue outside its head office. Wild boars represent fertility, and Pigeon has had the statue there
since 1973. The boar became a popular tourist attraction in Kanda, Chiyoda Ward, Tokyo. Even after the company moved its
head office in May 2006 from Kanda to Nihombashi, Chuo Ward, passersby still stop to rub the beloved boar’s nose in the belief
that it brings good luck.

Photo by Shared Research,

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Company profile
Company Name Head Office
4-4, Hisamatsu-cho
Pigeon Corp. Nihonbashi Chuo-ku
Tokyo, Japan 103-8480
Phone Listed On
+81-3-3661-4188 Tokyo Stock Exchange 1st Section
Established Exchange Listing
August 15, 1957 September 9, 1988
Website Fiscal Year-End
http://www.pigeon.com/ January
IR Contact IR Web
- http://www.pigeon.com/ir/

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