CFA Institute Research Challenge

hosted by CFA Society Japan

Team F

The CFA Institute Research Challenge is a global competition that tests the equity research and valuation,
investment report writing, and presentation skills of university students. The following report was submitted
by a team of university students as part of this annual educational initiative and should not be considered a
professional report.

 [Team F] Student Research
This report is published for educational purposes
only by students competing in the CFA Institute
Research Challenge.
Ticker: 7951:JP
Exchange: Tokyo Stock Exchange
Sector/Indusry: Recreational Products
Figure 1: Yamaha vs. TOPIX
Source: Factset
Figure 2: Yamaha Summary
Source: Thomson Reuter and Factset
Figure 3: Ratios Analysis
Source: Yamaha Corp. IR
Figure 4: Valuation summary
Source: Team Estimation
Figure 4: Monte Carlo simulation
Source: Team Estimation
Important disclosures appear at the back of this report
Yamaha Corporation
Date: 10/27/2017
Recommendation: BUY
Price (As of 9/29/2017): JPY 4,150
Price Target (32% increase): JPY 5,474
Highlights
Given the strong macroeconomic growth, high customer demand, and favorable intrinsic value, we suggest
BUY recommendation with a target price of JPY 5,474, which is approximately 32% upside from its closing
price of JPY 4,150 on September 29, 2017.
• Valuation: Discounted Cash Flow model (DCF) was used to determine the target price of JPY 5,474
(32% upside). The forecast is based on fundamental analysis and the company's mid-term plan.
• Monte Carlo simulation: 52% supports BUY recommendation, 29% supports SELL recommendation,
19% supports HOLD recommendation.
Investment Thesis and Key Drivers
Operating globally, Yamaha is the world's only comprehensive manufacturer of musical instruments and
holds the number one position in global market share. Not limited to this industry, the company also
specializes in other industries: audio equipment and industrial machinery/ components & others. There are
four investment drivers of Yamaha:
• Potential expansion global market share. Given the company strong position in the global musical
instrument industry, and 9% share in global audio equipment industry, we expect the company will
further expand their global market position.
• Increasing demands. It is expected that the global market for musical instruments and audio
equipment products will advance because of the rising popularity of western music, increasing in live
performances via streaming technology, products' flexibility, and high customer satisfaction.
• Growth prospect from business expansion. In February 2017, Yamaha Corporation announced that
they will establish a new manufacturing subsidiary in Indonesia and build two manufacturing plants in
Indonesia and India. The initiative intends to meet the growing demands for musical instruments and
audio equipment in emerging economies. The company also plans to invest more capital in Africa and
the Middle East, where they can consequently export products to Europe as well as North America at
cheaper logistics cost. Therefore, significant increases in sales from overseas markets are expected.
• Potential growth due to macroeconomic recovery. The Improvement of the economy via Gross
Domestic Product (GDP) based on Purchasing Power Parity (PPP) in the European and North American
regions will stimulate company revenue. With sustainable economic development of 1.2% increase in
GDP in 2016 as compared to last year, China's sales are foreseen to stabilize. Meanwhile, Japan
experiences growth in employment rate and GDP per capita growth of 1.1% in 2016 as compared to
2015. The overall macro-economic factors provide auspicious prospects for Yamaha's cyclical financial
performance.
Main risks: (1) Macroeconomic uncertainties in each region where the company operates make sales
generation fluctuate accordingly. (2) Emerging market's risk is another factor that significantly impact the
company’s profitability.
Business description
Company profile
Yamaha is a multinational conglomerate with headquarters located in Hamamatsu, Japan. It was founded in
1897 by Torakusu Yamaha and originally named Nippon Gakki Co., Ltd. The company has three business
segments: musical instruments, audio equipment, and industrial machinery/components & others (Figure 5).
In FY2017, 63% of Yamaha’s sales came from musical instrument segment, 28% of company sales derived
from audio equipment segment and the remaining 9% generated from the others segment (Figure 7).
Furthermore, 66.1% of Yamaha sales were generated overseas, with the remainder from Japan (Figure 9).
The growth rate of musical instruments has been decreasing yearly to a point of stagnation. It appears that
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Figure 5: Yamaha Segments
Source: Yamaha Annual Report
Figure 6: Historical and Forecast
Sales and EBIT
Source: Yamaha Annual Report
Estimation
Figure 7: Net Sales by Segments
As of FY2017
Source: Yamaha Annual Report
Figure 8: EBIT by Segments
As of FY2017
Source: Yamaha Annual Report
Figure 9: Sales by regions
Source: Yamaha Annual Report
Date 27.10.2017
the sales and profitability has shifted to audio equipment and others segment as the company allocates most
of its research and development expenses (R&D) to it.
Yamaha's financial performance is cyclical as it follows the pattern of the global economy. Outside Japan, it
strongly depends on the Gross Domestic Product (GDP) based on Purchasing Power Parity (PPP) growth.
Sales increase alongside with improved economic performance. Nevertheless, sales growth within Japan is a
function of population growth.
Main strength: Well-branded company with high quality and innovative products
Yamaha is a global brand that is known by many musicians and audio technicians. It is especially known as
a top piano seller in the world for its great quality as well as design and innovation. Moreover, with its
continuously innovative products and aggressive brand-strengthening activities abroad, its overseas sales
ratio experienced 16% increase from JPY 272,138 million in FY2008 to JPY 315,669 million in FY2017.
Business segments
Yamaha operates in three segments: musical instruments, audio equipment, and others segment (consisting
of industrial machinery and components, golf products, resorts, etc.). In FY2017, musical instrument and
audio equipment segment contributed 91.4% to net sales (Figure 7) and 96.13% to operating income (Figure
8).
& Team Musical instruments
This segment manufactures and sells pianos, digital musical instruments, wind instruments, string
instruments, percussion instruments, marching instruments, soundproof rooms and music production
software. The segment also engages in the operation of music schools inside and outside Japan to promote
its business brand. In addition, it also engages in music publishing and distribution, music production,
concert and event productions and other music-related activities.
As the founding segment of the company, musical instrument is the main profit driver. In FY2017, this
segment contributed 63% of net sales and over 72.5% of its operating income. Even though sales in FY2017
declined (Figure 10) due to forex conversions and music school management transfer, its actual sales, which
if not for the effect of forex, climbed. This happened as a consequence of the company's successful efforts to
revise selling prices and lower manufacturing costs thereby offsetting the impact of forex fluctuations.
Despite being Yamaha's main profit generator, the musical instrument sector is starting to reach a point of
stagnation as seen from constant sales in the last five years (Figure 10). In spite of this, operating income in
this segment has room for growth as can be seen from the upward trend over the last five years (Figure 11).
Yamaha's successful efforts to revise prices, reduce costs, and plan to expand to other countries such
Indonesia and India show its efforts in enhancing this segment.
Audio equipment
This segment manufactures and sells Audio Visual (AV) products including AV receivers, sound bars,
wireless streaming amplifiers, speakers, home theater systems, headphones and earphones. Additionally, it
also manufactures Professional Audio (PA) equipment, as well as USB conference speakerphones and audio
conference systems.
There is an increasing trend of sales and operating income for this segment in the last five years (Figure 12
and 13). In FY2017, the audio equipment segment contributed 28% to Yamaha sales and 24% to the
company’s operating income. Compared to FY2016, sales in FY2017 dropped by 4% while operating
income increased by 22.4% (from JPY 8,536 million to JPY 10,447 millions). This improvement resulted
from the launch of new network in AV products as well as high demands for PA equipment from developed
countries in Europe and North America.
On the other hand, the trend for R&D expenses in this division has been rising for the last five years that it
has surpassed that of musical instrument segment, signaling that Yamaha is shifting its focus towards the
more profitable audio equipment market.
Other segments
Yamaha also manufactures and sells network devices, electronic devices, automobile interior components,
factory automation and golf products and equipment; as well as the operation of resort facilities. In FY2017,
this segment accounts for 9% of total net sales and 1.7% of operating income. In the same year, while sales
fell by 5.7%, its operating income reached a significant increase of 290.8% compared to FY2016 (from JPY
439 million to JPY1, 716 millions). This significant improvement consists mainly of Yamaha's reduced
operating expenses.
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Figure 10: Sales of musical
instrument segment (millions of yen)
As of FY2017
Source: Yamaha Financial Data
Figure 11: Operating income of for products and services, including musical equipment, weakens. Declining birth rate plays a huge role in
musical instrument segment (Millions influencing Yamaha’s sales as there is a significant correlation between its sales and the declining population
of yen)
As of FY 2017
Source: Yamaha Financial Data
Figure 12: Sales of audio equipment effect of QE in the Japanese economy is expected to depreciate Yen further against Euro which promises
segment (Millions of yen)
As of FY2017
Source: Yamaha Financial Data
Figure 13: Operating income of audio strengthen against the yen (Figure 16). With the depreciation of the yen. Yamaha’s sales are expected to
equipment segment (Millions of yen) grow.
As of FY2017
Source: Yamaha Financial Data
Figure 14: Euro to Yen
Source: Factset
Date 27.10.2017
Industry overview and competitive positioning
Macroeconomic
The prevailing macroeconomic factors indicate auspicious prospects for Yamaha. Japanese government
intervention to revitalize the economy; sustained regional economic recovery and growth in Europe and
North America; robust economic expansion of China and the rapid rise of the middle-class population in
developing countries are all contributing factors for a hike in demand for recreational products.
Economic growth in Japan
Even though Japan has been undergoing positive growth in real GDP since 2011, it confronts several
complications. International Monetary Fund (IMF) forecasts that the country will continue to experience
positive growth in real GDP until 2022 (Figure 19). However, Bank of Japan’s (BOJ) failure to achieve 2%
inflation rate (Appendix 9) and the ongoing deflation have an adverse impact on the economy that causes
domestic companies like Yamaha to hold cash rather than spending. Stuttering quarterly economic growth
rate of Japan among its peers (Appendix 10) proves that its economy is slowing down. As a result, demand
thereby diminishing demand (Appendix 11&12). The government has implemented Abenomics consisting of
policies to rekindle the economy via Quantitative Easing (QE). Consequently, the citizens' disposable
income increases, hence generating more demand and sales for the company's products. Furthermore, as the
result of QE, stocks for Japanese companies, including Yamaha, soared since the introduction of QE in 2013
and it is expected to continue in the future.
Economic growth in Europe
Despite some uncertainty in Europe, its economic recovery is noticeable. Based on data from the IMF, as the
European Central Bank (ECB) keeps purchasing assets, Euro area real GDP growth is projected to be 1.7%
in 2017 and 1.6% in 2018 and it will stay above 1.5% until 2022 (Figure 20). There is a correlation between
Yamaha’s sales in Europe and the GDP PPP of Europe (Figure 16). Consequently, the forecast of rising
GDP provides positive prospect to Yamaha's cyclical financial performance. Furthermore, as a result of
economic recovery, Euro currency shows a strong appreciation against the Yen (Figure 14). The continuous
Yamaha an increase in sales in its European market.
Economic growth in North America
Macroeconomic factors in North America (NA) indicate a bright future, in spite of uncertainty brought by
numerous regulations and policies changes. Nevertheless, consumer confidence level has reached a 17-year
apex, according to Infocomm (2017). In addition, unemployment rate has been gradually decreasing since
2011. The Federal Reserve Bank (FRB) failed to reach its 2% inflation target; however, it will pick up
considering the recovery of both wage growth and oil price. According to the IMF, United States and
Canada real GDP growth are projected to be 2.3% and 2.0% respectively in 2018 (Figure 21). Significant
correlation is also found between Yamaha sales in North America and North America’s GDP PPP (Figure
17), hence giving a promising outlook for Yamaha as GDP in the region is predicted to grow. Combining all
favorable macroeconomic factors with positive expectations in the mix, the US dollar can be expected to
Economic growth in China
The country's economy has exhibited positive growth in GDP albeit slight increase of the Chinese Yuan
against the yen in the last five years. We combined the sales of Yamaha in China and other regions that have
not been mentioned and we merged the GDP PPP of those regions (Figure 18). Based on that, significant
correlation can be seen between sales and GDP PPP. High revenue can be foreseen in the future according to
the IMF’s estimation of China GDP growth between 2017 and 2021 which will average to 6.4% (Figure 22).
This robust economic expansion is associated with lofty infrastructure spending and increasing disposable
income. Moreover, a growing population and high demand of musical education in the region will boost
sales even further.
Economic growth in other regions
Other regions consist of countries in Asia, Oceania, and Latin America. Overall economy in these regions
has been growing. The IMF forecasted, East Asian and Pacific area will achieve 6.2% and 6.1% growth in
2017 and 2018 respectively. In Latin America, GDP will strengthen 0.8% in 2017 as Brazil and Argentina
are expected to recover from recession. Furthermore, emerging markets and developing economies as a
whole will pick up to 4.1% growth in 2017 as compared to only 3.5% in 2016. As mentioned in the above
section, we find strong correlation between GDP PPP of these regions and sales in the Chinese market
combined (Figure 18). Thus, an expanding economy in this region translates to higher revenues for Yamaha.
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Figure 15: Dollar to Yen
Source: Factset
Figure 16: GDP PPP to Sales in
Europe
As of FY2013 to FY2017. Y-axis is Sales in
Europe, X-axis is GDP PPP in Europe.
Source: IMF & Yamaha Annual Report
Figure 17: GDP PPP to Sales in N.A
As of FY2013 to FY2017. Y-axis is Sales in
North America (N.A), x-axis is GDP PPP in
N.A.
Source: IMF & Yamaha Annual Report
Figure 18: GDP PPP to Sales in
China and Others
As of FY2013 to FY2017. Y-axis is Sales in
China and Others, x-axis is GDP PPP in
China and others.
Source: IMF & Yamaha Annual Report
Date 27.10.2017
Competitive positioning
Musical instrument
There are five main factors that differentiate Yamaha from other competitors: (1) high quality products, (2)
improved customer awareness of the brand, (3) innovative technology, (4) after-sales service and (5) price.
Yamaha has raised customers' brand awareness by opening more musical schools not only in Japan, but also
in US and Asia. In 2013, to celebrate their 125th Anniversary, the company held musical concerts all over the
world featuring celebrities such as Elton John. Moreover, Yamaha invests heavily in R&D in order to
converge technology as an essential part of musical instruments. Meanwhile, small companies will find it
challenging to participate in the market since they need to invest a considerable amount in R&D and quality
control in order to compete with major players. Furthermore, Yamaha provides after-sale service for all
instruments in order to raise customer satisfaction. Results from customer satisfaction surveys in 2016 show
that 81.5% of customers are satisfied with supports and 60% of customers are more than satisfied.
Additionally, the company’s continuing effort to readjust prices has improved profits by JPY 3.5 billion in
FY2017.
To get more customers to buy products, within the industry, Yamaha has managed to produce diverse kinds
of musical instruments, while other competitors specialize in only a few products. Therefore, Yamaha is
acknowledged and considered as a threat for all musical instrument competitors. In the drum segment,
Yamaha and Roland are the only major players, whereas in the keyboard sector, there are seven major
competitors: Korg, M-Audio, Nord, Casio, Roland, Kurzweil, and Williams. Even though Yamaha is one of
the top five global guitar manufacturers, it faces intense competition in this fragmented industry with 30
other brands competing. Nevertheless, Yamaha has gained recognition and popularity in each product
category of musical instruments.
Audio equipment
High quality products and innovative technologies are the two main factors that distinguish Yamaha from
others. Audio equipment consists of AV products and PA products, in which customers demand high-quality
sound, system stabilization, multi-function, portability, and product ease-of-use. To cope with these needs,
Yamaha provides cutting-edge software, signal processing system, and network technologies. These
innovations help Yamaha stand out from its competition.
Being one of the global leading audio equipment manufacturers, Yamaha experiences intense competition.
However, due to sluggish competitors' innovation, Yamaha's competitive price and continuous product
improvement prove that they can dominate the global market with at least 7% share (Annual Report, 2017).
The future of audio equipment, which will be explained further in the next section as Yamaha competes with
Bose, Fender, Denon DJ, Pioneer, Pyle, Rockville, MUSIC Group and Behringer.
Investment summary
We issue a BUY recommendation on Yamaha Corp with a target price of JPY 5,474 (32% upside) by DCF
Valuation, complemented by multiple analysis, sensitivity analysis and Monte Carlo simulation.
Investment drivers
Potential sales growth due to macroeconomic recovery
Yamaha's sales have a direct correlation with the GDP and PPP of its respective regions excluding Japan.
Consequently, the improvement of the economy and rising PPP in those regions enhance the company's
revenue. Nevertheless, sales in Japan are also driven by macro-economic factors as there is a direct
correlation between domestic sales with the population. As the country's population decreases, the demand
for Yamaha's products and services will decline especially for the music schools' sales. Despite declining
sales trend in its home country in the last five years, the government continuously supports QE, which
potentially depreciates the value of yen in the future, and promotes export. Furthermore, QE is expected to
trigger the inflation in the future, which may improve income and PPP.
Potential growth by segments
Musical Instruments: Due to gradual global economic recovery, favorable company market share,
macro-economy situation and low competition level, growth in this segment will continue.
Yamaha is best positioned to increase its market share. It has dominance in the musical instrument industry
with 24% of global market share. Moreover, considering the overall recovery and increase of the world’s
GDP, the market demand of the industry, the continuous innovation, and the low level of competition due to
large unmet debt of its competitors, Yamaha has potential to expand its market. In addition, the increasing in
popularity of musical instruments around the globe especially China also gives opportunity for the company
to penetrate new markets.
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Figure 19: Real GDP growth in Yamaha may potentially enjoy huge opportunities to upgrade their sales. The piano market, which includes
Japan electronic and hybrid piano, is expected to reach 1.3 million units by 2022 with projected 2.6%
Compounded Annual Growth Rate (CAGR) sales from 2015 (NAMM Global Report, 2015). Increasing
income per capita and musical instruments' popularity will boost sales in developing countries as 60% share
was dominated by Asia Pacific region (Global Info Research, 2017). Thus, Yamaha’s plan to expand in the
Asia Pacific regions is a suitable strategic approach.
It is expected that the global portable keyboard market grows from 2016 at a CAGR of 3% by 2020
(Technavio, 2015). Flexibility and high satisfaction of the users are main drivers of sales. Yamaha’s
diversity in sound, music, and functionality make it capable of enlarging market share. Specifically, the U.S
will be an exquisite market for keyboard stringed instruments because of the continuous trend in demand and
huge imported production in the past.
Source: IMF Yamaha is considered as one of the top five guitar manufacturers with a dominant market share. Even
though electric guitar’s share in the market plummeted (Quartz, 2017), it is expected that the global guitar
Figure 20: Real GDP growth in
market will increase at a CAGR of 2.11% to $4.41 billion by 2021 considering the rise in youth’s interest in
Europe
musical band, the rapid growth in e-commerce retailers, and the expansion of global concerts (Research and
Markets, 2017).
Since Yamaha has top dominance in the wind instrument market for more than 30% global market share,
growth will be expected in emerging economies as popularity in western music rises year by year.
Percussion industry has been growing slowly due to high cost of manufacturing. The industry has the
potential to reach USD $2 billion by 2020 with CAGR of close to 1% (Technavio, 2016). In 2015, the global
percussion industry is led by the Americas, holding 53% market share. Moreover, the interest of music
enthusiast in the region has been escalating as a result of the emerging number of live events and concerts.
Yamaha’s continuous innovation potentially grasps the attention of music enthusiasts. Recently, Yamaha
released the world’s first smart piano "CSP-150" that is recommended by pianists (Appendix 13). Demo for
Source: IMF this product was posted on YouTube (August, 2017) and received commendable comments. Furthermore,
another plan to release Venova, an ingenious saxophone design, has the potential to capture customers'
Figure 21: Real GDP growth in U.S preferences (Interview September, 2017).
and Canada
Audio equipment:
Real GDP growth in U.S
High growth because of favorable macro-economic situation, increasing global demand, potential
growth in the concert industry, and innovative technology
The audio equipment market continues to grow as the demand of the products expands with positive global
economic rebounds. In 2017, global recorded music sales increase by 5.9% from 2016 mostly due to 60.4%
growth in paid streaming subscriptions, developing music markets especially in China for 20.3% from 2016
(International Federation of the Phonographic Industry, 2017). Office and household audio visual and
public-address system will grow as the demands rises. As Yamaha contributes most of the R&D expenses in
the audio equipment segment, we expect significant amount of innovations to compete and modest increases
in sales and global market share growth. In addition, Yamaha’s 9% dominance and recognition will help
increase the global market share.
The market is very fragmented. However, companies may take on the challenge to take on many customers
Real GDP growth in Canada because the global home audio equipment is forecasted to exceed US$ 24,3 billion by 2023 and in Asia
Pacific for more than USD 6.5 billion by 2022 (Appendix 14&15).
The demand and sales of audio equipment continue to increase. Global loudspeakers market will grow with
CAGR of almost 8% as technological advances and lifestyles preferences will boost the demand of the
products (Appendix 16). Other products such as microphones, headphones, and public-address system will
also grow. Audio visual industry will play a large role in the audio equipment industry as large regions are
expected to grow year by year such as North America (US $83 billion by 2022 from US $65 billions),
Europe (CAGR 4% to 2022), China (CAGR 4% to 2022), and the Asia Pacific region (CAGR 5% to 2022)
(Infocomm International, 2017). Increasing home audio productions is expected to increase by 22% from
2013 – 2022 (Appendix 17). More live concerts, recordings, and bands markets will increase spending in
Audio Equipment as live music revenue will grow at a CAGR of 3% until 2021 and 20.7% of music
streaming (PwC, 2017). With favorable macroeconomic conditions such as GDP increase, customer’s
Source: IMF spending, purchasing power, recovery of global economics, and passions for music and concerts, it is
expected that the industry will be profitable for companies.
Figure 22: Real GDP growth in
China Price, reliability, and brand-awareness
There are two types of customers: early entry customers which are just starting to learn playing music and
experienced customers. For early entrants, they are generally more concerned about the price of the musical
equipment, whereas the experienced ones tend to buy based on their brand loyalty and the reliability of the
brand. If Yamaha is able to adjust its price and raise brand awareness in their current target markets, such as
Indonesia and India, we can expect revenues to surge.

Source: IMF

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Figure 24: Target Price scatter
Source: Team Estimation
Figure 25: WACC Summary
Source: Team estimation
Date 27.10.2017
Catalyst
There are two potential catalysts in the near future. First, earnings announcement especially operating
income ratio will be one of the key catalysts that drive share price. Yamaha always announces their quarterly
earnings announcement. With dividend payout ratio significantly driving share price increases. Yamaha’s
strategy in increasing the dividend payout ratio from 20.9% to 30% in the future will promote a share price
uptrend.
Figure 23: Yamaha Stock Price
Source: Factset
Investment risks
Key risks in investing in Yamaha include: internal risks which are high median age in the labor pool and
traditional Japanese management style. External risks are economic risks such as Japanese declining
population, risk in foreign and emerging market, and natural calamities.
Valuation
We issue a BUY recommendation on Yamaha Corporation with target price of JPY 5,474 (31% upside)
calculated by DCF Valuation.
Five-year DCF model
We valued Yamaha Corporation based on Discounted Cash Flow Model using 2-stage model. The 1st stage
is the estimation for the next five years based on the company mid-term plan and fundamental analysis. The
second stage is the estimation of Terminal Value using permanent growth rate of 0.47% based on 10-year
CAGR of Japanese real GDP.
WACC
To sufficiently estimate the DCF model, the WACC is calculated using the following steps. Firstly, using
Yield-to-maturity method, we calculated the cost of debt from the company’s long-term debt interest rate of
1.8% and the statutory corporate tax rate of 30.2%. Secondly, using Capital Asset Pricing Model (CAPM),
we calculated the cost of equity with risk-free rate of 0.8%, which is the average of 10-year Japanese
Government Bonds (JGB). Thirdly, we estimated market risk premium at 3.7% based on the subtraction of
risk free rate of 0.8% from expected market return of 4.5% based on CAGR of TOPIX over 10 years from
Sep 2007 to Sep 2017. Lastly, combining with debt-to-equity ratio of 0.03 provided by Yamaha, we obtained
WACC of 4.48%. We assumed the present value of shareholders’ capital is equivalent to the market
capitalization of Yamaha Corporation as of 9/29/2017.
Cash flow estimation
Based on the sales forecast presented in the investment thesis, we projected sales expenses, SG&A expenses
and operating income accordingly. Given the company's intention to invest JPY 28,400 million in Capital
Expenditure (CAPEX) in FY2018, we expected the company will keep investing in CAPEX due to its
strategy to expand overseas, and to capture customers' demand, and to dominate competition. Additionally,
the company plans to keep the depreciation expenses on par with FY2017, we expected little change
regarding depreciation in FY2018 onwards.
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Figure 26: Multiple analysis
summary
Debt to Equity (D/E)
• Monte Carlo simulation (Appendix 1)
Source: Factset
Figure 27: Multiple analysis result
• Multiple valuation (Figure 27) (Appendix 2)
Source: Team Estimation
Date 27.10.2017
Terminal growth
Yamaha experienced high growth in profits and free cash flow historically. Therefore, we expected that in
order to keeping up with its growing profits, the company will invest in CAPEX. However, we expected
minor changes in free cash flow due to the expansion of dividend payout ratio thereby reducing risks of
shareholder activism that potentially affect company’s reputation and stock price.
Table 1: DCF Model
Source: Team estimation
Table 2: DCF Scenario
Source: Team estimation
Other valuation methods
Other valuation methods include: multiple valuation, Monte Carlo simulation, sensitivity analysis. All three
support our BUY recommendation.
We used the simulation to examine the sensitivity of our DCF model to our adopted assumptions. We tested
the variables: risk-free rate, beta, market return, and terminal growth rate. The result closely relates to our
estimated target price.
To conclude, the probability for buy recommendation with a target price of JPY 4,565 (10% upside) is 52%,
the probability for sell recommendation with target price under JPY 3,735 (10% downside) is 29%, and the
probability for hold recommendation with target price between JPY 3,735 and JPY 4,565 is 19%.
Multiple analysis is provided to ensure the accuracy of our DCF model. The multiple valuation suggests that
the stock price we got from DCF model falls in line with the multiple valuation results. For the peer group,
companies that are used: operate in the recreational industry, have more than 20 billion yen in market
capitalization, have debt-to-equity ratio below 50 multiple and have the similar geographical exposure as
Yamaha.
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• Sensitivity Analysis
Figure 28: ROE vs. ROA
Source: Yamaha IR & Team estimation
Figure 29: Liquidity summary
Source: Yamaha IR & Team estimation
Date 27.10.2017
Table 3: Sensitivity analysis
Year Average Global GDP Real Stock Price Stock Prediction
2014 31112 1430 1680
2015 32038 2812 2421
2016 33108 3110 3112
2017 34107 3604 3743
2018 35019 5569
Source: Team Estimation
Statistical correlation between Yamaha's stock price movement and average global GDP based on PPP
(Appendix 5) is the basis of this sensitivity analysis. Real stock price from 2014-2017 is nearly similar to
stock price predictions, especially in 2016 and 2017, suggesting that Yamaha's stock price in 2018 will
potentially reach JPY 5,569.
Financial Analysis
Sales Assumption
We estimated the sales based on GDP PPP growth in each region excluding Japan. Based on statistical
regression, sales growth estimated for each region were greatly correlated with GDP PPP expansion of that
region, except for Japan, whose historical CAGR is used as the basis for sales growth. Based on IMF GDP
PPP Data, it is expected that the regions Yamaha is selling from 2017 until 2022 will grow such as Europe
(20%), North America (17.34%), China and other regions (36.90%). In general, the sales will increase to
JPY 511,057 million (2022) from JPY 408,248 million (2017) whereas operating income will increase to
JPY 76,659 million (2022) from JPY 44,304 million (2017).
Table 4: Ratios analysis
Source: Yamaha IR & Team estimation
Continuous improvement in profitability ratios
Yamaha’s last five years have shown sustainable growth in both ROE and ROA (Figure 28) due to sound
management, gradual expansion in profit margin, and mitigation in financial leverage (Table 4). In FY2017,
the ROE peaked at 14% due to the application of the "Revised Implementation Guidance on Recoverability
of Deferred Tax Assets" (ASBJ Guidance No.26, March 28, 2016), which inflated the company’s net income
to JPY 46,719 million (11.44% upside compared to FY2016). At the same time, in FY2017, company's
ROA also peaked at 9.4% compare to 6.5% in FY2016. Although, ROE and ROA increased, the asset
turnover moderately dropped due to its expansion in fixed assets to expand business, and fluctuation in sales
conversion that is greatly dependent on the currency exchange rate.
Company with high liquidity
Yamaha is a company that has high liquidity (Figure 29). In FY2017, 20% of its total assets is cash and
deposits. Furthermore, in the past five years, its current ratio, quick ratio and working capital steadily
improved. We expected that, in the future, with sound management and strong capital structure, the company
will maintain or improve its liquidity further. Moreover, the company's financial leverage is low with
debt/equity result which is 0.03. This shows that Company's using a very low amount of debt to finance its
assets and operating activities. For the last 10 years, Yamaha's maximum debt-to-equity is 0.53. However,
the company has the ability to manage the financing activities, thus, resulting in a very low ratio.
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 CFA Institute Research Challenge
Figure 30: Capital Structure
Total Liabilities/Equity
Source: Yamaha IR & Team estimation
Figure 31: Risk Assessment
Source: Team Analysis
Date 27.10.2017
Capital Structure
The company debt to equity ratio has minimized from nearly 80% in FY2013 to nearly 40% in FY2017
(Figure 30). This indicates that the company has moved its capital structure from being debt-intensive to
equity intensive. Yamaha has high cash generation capability to cover its debt and invest yearly. It has high
ability to meet any short-term and long-term obligations in the future. This healthy structure will positively
make the company attractive to investors. However, with the low debt to equity ratio and high level of cash
reservation, the company may be confronted with shareholder activism for more dividends payout.
Healthy company
Based on the estimation from Altman Z-score model (1968) for manufacturing company, Yamaha is a
financially healthy company with score nearly five points. (Appendix 3)
Investment Risks
Internal risks
[I1] Composition of workforce [severity: low; probability: medium]
There are two inherent problems in Yamaha workforce composition: high median age in the labor pool and
top management positions, which are mainly held by Japanese. With the company’s employees approaching
retirement age, Yamaha is racing against time to transfer the manufacturing knowledge to new generation of
employees. Failure to do so will result in adverse impact to future business activities and growth. In addition,
top positions which are exclusively held by Japanese national will impact Yamaha due to lack of diverse
perspective in the management and will restraint Yamaha ability to adapt to varied overseas markets in the
long run.
[I2] Defect in Products and Service [severity: low; probability: low]
Yamaha had created filters to prevent product and service defection such as corporate quality assurance,
quality rules and insurance. However, there is still no guarantee that the products and services will defect-
proof. If sales returns are large in sizes, major recall will be conducted and insurance premium will soar
moreover the company’s reputation will be tarnished and drive down sales thereby reducing its earnings.
External risks
[E1] Economic risks [severity: medium; probability: medium]
As a cyclical company, Yamaha's product and services depend strongly on the economic condition. In
addition, Yamaha global expansion also makes its operation subject to overseas economic risks in respective
regions. Consequently, economic risks, such as recession and reduced demand in certain areas can have
unfavorable effect on Yamaha’s business. One of the current economic risks is stagnating Japanese economy
and deflation, causing decreased demand in Japan due to reduced population income. However, the
government is expecting an increase in spending with its QE policy. This not only improves Yamaha's sales
in Japan. But, the constant QE each year has also increased the prices of Japanese stocks. However, if BOJ
discontinue QE, it will have an adverse impact on the economy, leaving many Japanese stocks to fall
including Yamaha's. Nonetheless, if QE is halted, Yamaha has sufficient cash to withstand the impact for
several financial years evident from FY2017 current ratio of 3.3 which is projected to stay for five years.
[E2] Japanese declining population [severity: medium; probability: high]
As our research implies Japan's declining population and birth rate results in a decreasing demand for
musical products and services. This trend leads to a decrease in sale for instruments and musical schools,
which are both Yamaha’s important sale channels, in domestic market. To circumvent this risk, Yamaha is
shifting its focus to overseas markets evidenced by gradual increase of overseas sales percentage.
[E3] Foreign and emerging markets [severity: medium; probability: medium]
By shifting its focus overseas, Yamaha will face certain risks in overseas markets namely: fluctuation in
foreign currency exchange rates; introduction of adverse policies and regulations; difficulty in raising labor;
spike in local commodity price and minimum wage; and social, economic, and political uncertainty. In
FY2017, over 60% of Yamaha sales generated from outside Japan, which make the company highly
sensitive with currency exchange fluctuation. In the same year, forex alone had reduced company's operating
income by 11.1 billion yen. If the currency exchange rate worsens, it will be a threat the company’s
profitability.
[E4] Natural risks [severity: medium; probability: low]
The majority of Yamaha's production plants are located in Japan, which means they are constantly
vulnerable to natural disasters. In addition, Yamaha’s overseas manufacturing companies in China, Malaysia
and Indonesia are also under the threat of unpredicted natural disasters. In the event of calamities, the
facilities may suffer damage, and the company may be required to suspend or postpone operations.
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CFA Institute Research Challenge Date 27.10.2017

Corporate Governance
Shareholder Commitment
Yamaha strives to create an environment where shareholders can enjoy equal rights and treatments. Yamaha
makes effort to schedule the General Shareholder's Meeting at a convenient time and make a three-week
advance notice for its shareholders. As for voting rights, the company also applies electronic voting systems
through along with e-mail votes to support investors that cannot attend the meeting.

Disclosure of Information
Yamaha commits to prepare financial report and IR activities in Japanese and English in an accurate and
timely manner. Aside from annual General Shareholder's Meeting, Yamaha also communicates with its
investors through briefing sessions and online website. The company also releases its policies on corporate
governance and corporate social responsibility.

Board Structure
Since June 22th, 2017, Yamaha decided to change to Three Committees organizational model, which
includes Nominating, Audit, and Compensation committees. The purpose of this transition is to separate the
management oversight function and business execution. As two-thirds of Yamaha Board of Directors are
external directors, the governance is expected to remain strong.

Corporate Social Responsibility (CSR)

Yamaha does not only target shareholder's rights, it also cares for the employees, business partners and local
communities. The company encourages an environment where staffs show their creativity and individuality.
It also tries to maintain a good amount of trust and understanding in relationship with its partners. Moreover,
working in different countries inspires Yamaha to follow and appreciate regional standards as well as to
involve in activities that dedicates to the development of the societies that the company operates in.
Yamaha does not make quality the only criteria for its products, they also need to be environmentally
friendly. Yamaha's environmental issues division takes part in assessing the influence of its manufacturing
process on the environment and from then making it a mission to reduce the negative impacts with its
products and technologies.

Figure 32: Yamaha’s CSR

Source: Company Data

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[Appendix 1] Monte Carlo Simulation

We conducted the Monte Carlo with 10000 simulations to examine the probability of getting target price based on
numerous scenarios that affect the DCF model. We examined the variables such as risk-free rate, market return, beta,
which influence the cost of equity since it greatly takes up huge proportion of WACC and terminal growth rate which link
to terminal value.

Estimated Parameter Explanation

We estimated the risk-free rate of 10-year JGB. The estimation

Max: 1% aims to reduce the effects of negative interest rate policy.
Risk-free rate 0.8% However, the probability to have negative interest rate is
Min: -1% unpredictable; we expect the risk-free rate can possibly turn
negatively.

We estimated market return from CAGR of TOPIX over 10

Max: 6% years from Sep 2007 to Sep 2017. However, the market return
Market Return 4.5%
Min: 4% may change accordingly to the timeframe and input data; we
simulated ± 2% change in market return.

Max: 1.2 Yamaha's Beta was extracted from Thomson Reuter.

Beta 1.02 Competitors' beta ranging from 0.8 to 1.2, which applies to
Min: 0.8 Yamaha.

The terminal growth rate was estimated to be moderate and it is

Max: 1% very challenging to predict given the market uncertainty in the
Terminal Growth 0.5%
Min: -1% future. For this, we created scenarios for both positive and
negative growth.

Overall, the probability for BUY recommendation with target price over JPY 4,565 (10% upside) is 52%, the probability
for SELL recommendation with target price under JPY 3,735 (10% downside) is 29%, and the probability for HOLD
recommendation with target price between JPY 3,735 and JPY 4,565 is 19%.

Source: Team Analysis

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CFA Institute Research Challenge Date 27.10.2017

[Appendix 2] Multiple Analysis

Shares
Stock Shares Market Enterprise
Company Outstanding
Price Outstanding Cap Value
Diluted
Yamaha 4,300 197 848,197 187 765,778
Nintendo 42,920 142 6,080,430 120 5,130,280
BANDAI NAMCO 3,825 222 849,150 220 666,401
Shimano 14,850 93 1,376,890 93 1,169,100
Square Enix 4,335 122 530,548 122 415,302
Kawai Musical Instruments 2,436 9 21,952 9 18,003
Casio Computer 1,668 259 432,047 251 410,523
TDK 7,830 130 1,014,690 126 1,166,820
Royal Philips 4,633 941 4,359,070 940 4,630,240
Sony 4,226 1,265 5,344,140 1,290 5,254,600
Average 4,035 239 909,591 240 857,427
Median 4,335 122 849,150 120 666,401

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 CFA Institute Research Challenge Date 27.10.2017

Return on Equity

Company 2012 2013 2014 2015 2016 2017

Yamaha -13.2 1.8 9.2 8.1 10.1 14.0
Nintendo -3.5 0.6 -2.0 3.7 1.4 8.5
BANDAI NAMCO 9.1 14.1 9.7 13.2 11.2 13.3
Shimano 13.9 14.5 17.1 21.7 13.4
Square Enix 4.5 -10.8 5.3 7.0 12.3 11.4
Kawai Musical Instruments 11.3 6.4 9.4 6.0 9.3 7.7
Casio Computer 1.7 7.5 9.2 13.6 15.4 9.2
TDK -0.1 0.2 3.2 7.2 9.2 19.8
Royal Philips 2.2 10.4 2.0 3.6 8.5
Sony -20.0 1.8 -5.8 -5.5 6.2 3.0
Average 12.2 14.6 5.3 7.8 9.7 10.4
Median 9.1 6.4 9.4 7.0 11.2 10.0

Source: Factset & Team estimation

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 CFA Institute Research Challenge Date 27.10.2017

[Appendix 3] Altman Z-score bankruptcy prediction model (1968)

We used Altman Z-score model (1968) to estimate the financial health of Yamaha. The model is as follows: Z-Score =
1.2A + 1.4B + 3.3C + 0.6D + 1.0E. Where: A = working capital / total assets; B = retained earnings / total assets; C =
earnings before interest and tax / total assets; D = market value of equity / total liabilities; E = sales / total assets.
If the Z-score < 1.8, the company is likely to be bankrupt. On the other hand, if the Z-score > 3, the company is
considered financially healthy.

In general, Yamaha has experienced significantly increases in Z-score and we concluded that Yamaha is a financially
sound company with relatively low probability of bankruptcy in the future.
Source: Team Estimation

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 CFA Institute Research Challenge Date 27.10.2017

[Appendix 4] Financial Statements

Balance Sheet
FY2017 FY2018E FY2019E FY2020E FY2021E FY2022E
(million JPY)
Current Assets 272,720 280,082 305,394 333,812 366,031 403,053
Cash and deposits 105,859 103,606 119,054 139,234 165,070 196,759
Notes and account receivables (1) 50,995 54,093 57,068 59,636 62,021 63,882
Inventories (2) 93,127 98,709 104,138 108,824 113,177 116,572
Other 22,739 23,674 25,135 26,118 25,763 25,840
Fixed Assets 249,641 263,884 286,290 296,742 307,248 316,151
Property Plant & Equipment (3) 105,475 119,000 136,000 139,000 145,100 147,000
Investment securities 132,771 132,771 134,771 142,771 147,771 152,771
Long-term loans receivable 108 113 119 124 130 133
Others 11,287 12,000 15,400 14,847 14,247 16,247
Total Assets 522,362 543,965 591,684 630,554 673,279 719,204
Current Liabilities 82,565 87,187 91,598 95,404 98,941 101,699
Notes and account payable – trade 17,828 19,041 20,088 20,992 21,832 22,487
Short-term loans payable 11,170 11,857 12,509 13,072 13,595 14,003
Accounts payable – others 43,961 46,736 49,307 51,526 53,587 55,194
Income taxes payable 2,410 2,553 2,694 2,815 2,927 3,015
Others 7,153 7,000 7,000 7,000 7,000 7,000
Total noncurrent liabilities 72,359 71,787 71,787 71,787 71,787 71,787
Deferred tax liabilities 22,161 22,161 22,161 22,161 22,161 22,161
Deferred tax liabilities for land revaluation 9,587 9,587 9,587 9,587 9,587 9,587
Net defined benefit liabilities 23,039 23,039 23,039 23,039 23,039 23,039
Others 17,569 17,000 17,000 17,000 17,000 17,000
Total Liabilities 154,924 158,974 163,385 167,191 170,728 173,486
Total shareholder's equity 295,507 324,471 356,369 391,433 430,621 473,788
Capital stock 28,534 28,534 28,534 28,534 28,534 28,534
Capital surplus 40,054 40,054 40,054 40,054 40,054 40,054
Retained earnings 250,649 279,614 311,512 346,576 385,764 428,931
Treasury stock -23,731 -23,731 -23,731 -23,731 -23,731 -23,731
Accumulated other comprehensive income 69,616 58,205 69,616 69,616 69,616 69,616
Unrealized holding gain on securities 80,282 80,282 80,282 80,282 80,282 80,282
Unrealized gain (loss) on hedging int. 103 103 103 103 103 103
Revaluation reserve for land 16,095 684 684 684 684 684
Foreign currency translation adjustments -24,219 -20,219 -24,219 -24,219 -24,219 -24,219
Remeasurements of defined benefit plans -2,645 -2,645 -2,645 -2,645 -2,645 -2,645
Non-controlling interests 2,314 2,314 2,314 2,314 2,314 2,314
Total net assets 367,437 384,990 428,299 463,363 502,551 545,718
Total liabilities and net assets 522,362 543,965 591,684 630,554 673,279 719,204

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 CFA Institute Research Challenge Date 27.10.2017

(1) Notes and account receivables: we predict it would be 12.5% of Sales based on historical data.
(2) Inventories: predicted to be 22.81% of Sales. Our theory is that the company wants to stock inventories to avoid out-
of-stock situation
(3) Property plant and equipment (PP&E): Based on the strategy mentioned in midterm plan, the company plans to
expand business overseas and they are building plant in India and Indonesia. We expected that in the future, the PP&E of
Yamaha will keep increasing.
Profit and Loss Statement
FY2017 FY2018E FY2019E FY2020E FY2021E FY2022E
(million JPY)
Net Sales (4) 408,248 432,743 456,544 477,088 496,172 511,057
Cost of Sales (5) 242,451 255,318 265,594 276,711 287,780 291,302
Gross profit 165,797 177,425 190,950 200,377 208,392 219,754
SG&A (6) 121,493 128,092 134,680 138,356 138,928 143,096
Operating income 44,304 49,333 56,270 62,021 69,464 76,659
Interest Expense 290 302 299 301 298 304
Other income (expense) -1,116 1,203 1,300 1,275 1,300 1,300
Income before taxes EBT 42,898 50,838 57,869 63,597 71,062 78,263
Provision for income taxes -3,978 10,676 12,152 13,355 14,923 16,435
Net income from continuing operations 46,876 40,162 45,716 50,242 56,139 61,827
Others -157 -150 -148 -151 -156 -160
Net income 46,719 40,012 45,568 50,091 55,983 61,667

(4) Net Sales: we estimated net sales geographically firstly, then we aggregated all regions to get accumulated net sales.
(5), (6) Cost and Sales and SG&A: given the plan to reduce costs, we estimated that the cost of sales to sales ratio and SG&A to sales
ratio will gradually decrease year on year.

Statements of Cash Flows FY2017 FY2018E FY2019E FY2020E FY2021E FY2022E

(million JPY)
Income before tax and minority interests 42,898 50,838 57,869 63,597 71,062 78,263
Depreciation & Amortization (7) 11,145 12,000 12,000 12,500 12,500 13,000
Amortization of Goodwill 2,307 - - - - -
Decrease (increase) in Inventories -3,387 -5,582 -5,429 -4,686 -4,353 -3,395
Decrease (increase) in Notes and Acct. Receivables -3,036 -3,098 -2,975 -2,568 -2,385 -1,861
Increase (decrease) in Account Payable -550 1,213 1,047 904 840 655
Increase (decrease) in other non-cash items -4,698 -5,000 -5,000 -5,000 -5,000 -5,000
Subtotal 44,679 50,371 57,512 64,747 72,663 81,662
Income taxes paid -8,520 -10,168 -11,574 -12,719 -14,212 -15,653
Others 2,985 3,000 3,000 3,000 3,000 3,000
Net cash provided by operating activities 39,144 43,203 48,938 55,028 61,451 69,009
Capital Expenditure -17,542 -28,400 -20,000 -20,000 -20,000 -20,000
Other investing activities 7,879 -2,000 -2,000 -2,000 -2,000 -2,000
Net cash used for investing activities -9,663 -30,400 -22,000 -22,000 -22,000 -22,000
FCF 29,481 12,803 26,938 33,028 39,451 47,009

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Dividend paid -9,768 -11,046 -13,670 -15,027 -16,795 -18,500

Other financing activities -2,820 -2,820 -2,820 -2,820 -2,820 -2,820
Net cash provided by (used for) financing activities -12,588 -13,866 -16,490 -17,847 -19,615 -21,320
Effect of exchange rate changes -1,238 4,000 5,000 5,000 6,000 6,000
Net change in cash 15,651 -1,063 10,448 15,180 19,836 25,689
Cash at beginning of period 85,018 100,669 103,606 119,054 139,234 165,070
Cash at end of period 100,669 103,606 119,054 139,234 165,070 196,759

(7) Depreciation and Amortization: given the estimation provided by Yamaha, although the company continues investing
in CAPEX in the future, the depreciation will stay on par with FY2017.

Source: Team estimation

(8) We first came up with sales by regions then came up with sales by segment. The sales in Europe, North America and
China & Others were estimated based on GDP PPP of each region. This estimation holds strong because of the statistical
evidence we provide in Appendix 5, Appendix 6, figure 16, figure 17, and figure 18 mentioned above. Sales in Japan was
found to be statistically correlate with population; however, we used five-year CAGR of sales in Japan to estimate sale
growth in home country in the future.
(9) With total sales forecasted by regions, we forecasted sales by segments. Based on the interview with company IR, the
company's plan is to make the Audio Equipment segment' sales equal to Musical Instrument sales, we estimated that in
the future, the sales of Audio Equipment to total sales will gradually rise, while that of Musical Instrument will
moderately fall. At the same time, the Others segment will gently improve its profitability and the segment sales to total
sales will raise annually.

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 CFA Institute Research Challenge Date 27.10.2017

[Appendix 5] Regression between Global GDP and Yamaha's Stock Price

Overall global GDP based on PPP has significant impacts on Yamaha's stock price. Based on 4 years overall global GDP
mainly on Europe, North America, China, and other Asia Pacific regions, and Yamaha's stock price based on one day
after Yamaha's oral earnings announcement each year, 90% R square was found by using regression technique. This can
be one of the reasons why Yamaha's stock price increases due to fundamental reasons.

Source: Team Analysis

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 CFA Institute Research Challenge Date 27.10.2017

[Appendix 6] Regression between GDP PPP outside Japan and Yamaha's Sales
Regressions between GDP outside Japan based on PPP and Yamaha's sales of each regions for the last five years prove that Yamaha's
overseas sales is fully dependent on the GDP outside Japan. Moreover, with increasing overall GDP every year, Yamaha's sales is
expected to keep the uptrend.

Source: IMF and Team estimation

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[Appendix 7] Five Forces Analysis for Yamaha

Musical Instruments
Threat of new entrant: Low
For the musical instrument, the barrier of entry is high due to
significant capital required inherent in the industry. New
companies must invest significant capitals in order to compete
with big companies.
Bargaining power of consumers: Medium
The consumers in this industry is not consolidated thus
lowering their bargaining power. The demand for music is
highly dependent on the macroeconomic condition, which is
expected to increase due to economic recovery in developing
countries, North America, Europe and others. Customers’
demand are also highly dependent on their disposable income.
In addition, customers who are at beginner levels of learning
music are generally highly sensitive with price compared to
those with experience. Due to the rise of internet, customers
have more access to information regarding product prices and
quality reviews, hence; increasing their bargaining power year
after year.

Bargaining power of suppliers: Medium

Yamaha musical instruments depend largely on timber. As the timber market is fragmented, meaning many suppliers join the
price competition, Yamaha bargaining power over suppliers is high.
Competition: Medium
Yamaha lead industry domestically and keeps improving their dominance internationally. However, Yamaha needs to be
careful from innovation from future competitors.
Competition is not a serious problem in Japan as Yamaha dominates 39% of the industry. However, macroeconomics situation
is critical for the industry as the declining birth rate increases every year which leads to negative population growth (Appendix
12). Evident the competitors by analyzing through innovative products and financial data, Yamaha will be more dominating the
market than before as the competitors are struggling and not having any attempts to innovate their products.
Yamaha keeps moving forward to beat the market in other countries such as Europe, China, and North America as their
dominance in each of those emerged countries already holds at least 20% of the industry. As the international competitors are
facing difficulties in innovations and finances as well such as debts and declining demands in rock musical instruments,
Yamaha will once again emerge to become world’s musical instrument leader in the industry. Moreover, declining interest rate
in some countries, increasing demand in musical instruments in China and Europe (according to Yamaha's FY2017 annual
report), recovery of developed countries’ economics, and improved exchange rates are the opportunities for Yamaha to lead the
global industry. Since Yamaha always focuses on improving and innovating products such as the world's first iTunes-scanning
piano, this could be the company’s competitive advantage to its competitors.
However, one new competitor emerged and shocked the instrument market as it created “Smart” Musical instruments that can
change into different tunes by using the same one product. Although it is still a small market for the competitor, the new
innovative product could someday dominance the market as they keep trying to make all musical instruments "Smarts".
Substitutions: Medium
“Smart” musical instruments are potential threat that can replace traditional ones. However, Yamaha is also developing its own
line of "smart” musical instruments such as Yamaha's CSP150 that triggered a lot of excellent reviews. Musical instrument apps
could also replace the purchase of real musical instrument. Entertainments and electronic gadgets such as mobile devices could
attract people to reduce their passions in playing musical instruments.

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Audio Equipment
Threat of new entrant: Low
There are not many new company entering the audio
equipment industry. The first contributing factor is the
high technology expertise required to assemble one and
continuous cost to improve it in order to stay
competitive. High capital and effective distribution
channel requirements are also contributing factor
discouraging new competitor to enter the industry.
Bargaining power of consumers: Medium
The customer concentration in this industry is not very
high thus rendering their power low. However, the
switching cost of customers is low as audio equipment
can connect to equipment from different brands hence
increasing customer’s power. There are two kinds of
customer:

Bargaining power of suppliers: High

Yamaha audio equipment products depend largely on electronic circuit and semiconductor. As those markets are
fragmented, meaning many suppliers join the price competition, Yamaha bargaining power over suppliers is high.
Competition: Medium
Tough competition is both domestically and internationally as the market is very fragmented. However, the market will
grow larger than before as the demands increase.
The market is exceptionally divided, yet it is an open door for organizations to substantiate themselves to attract the
greatest number of clients as they can in light of the fact that it is normal that worldwide home sound gear will surpass
US$ 24,3 billion by 2023 and in Asia Pacific for more than USD 6.5 billion by 2022 (Appendix 4&5). The request and
offers of sound hardware continues expanding. Worldwide Loudspeakers market will develop with CAGR of
approximately 8% as mechanical advances and ways of life inclinations will help the request of the items. Others, for
example, Microphones, Headphones, and Public-address framework will likewise develop. Varying media industry will
assume expansive part in the audio equipment industry as substantial districts are relied upon to develop step by step, for
example, North America (US $83 billion by 2022 from US $65 billions), Europe (CAGR 4% to 2022), China (CAGR 4%
to 2022), and Asia Pacific region (CAGR 5% to 2022) (Infocomm International, 2017). Expanding home sound
preparations is relied upon to increment by 22% from 2013 – 2022 (Appendix 6).
With these, it is almost certainly that the players in audio equipment industry will do all that they can to pull in clients.
Contenders, for example, Bose, Fender, Denon DJ, Pioneer, Pyle, Rockville, MUSIC Group and Behringer will keep
vanquishing their strength in worldwide sound hardware. Notwithstanding, price competition and creative items from
Yamaha demonstrates that they could predominance the world's worldwide offer for least 7% in the business (Yamaha's
FY2017 annual report). Contenders likewise set aside opportunity to develop their items for quite a long while.
Increment in Live Concerts, Recordings, and Bands markets will expand spending in Audio Equipment as unrecorded
music income will develop at a CAGR of 3% until the point when 2021 and 20.7% of music gushing (PwC, 2017). With
the help of macroeconomics circumstances, for example, increment in GDP, client's spending, buying power,
recuperation of worldwide financial aspects, and interests in Music and shows, it is conceivable that the business will
help enhance benefit of organizations. Nevertheless, it leaves to organizations who need to accept this open door.
Substitutions: Medium
With technology advance, entertainments (game industry) or gadgets (mobile devices) keeps improving. Consumers can
use applications on smart phones that cause the consumers to lose interest in purchasing audio equipment unless for
important or professional occasions (e.g. concerts).

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[Appendix 8] SWOT Analysis

Yamaha is considered as a giant corporation in the manufacture and sale of musical instruments, audio equipment, electronic products,
and other products. Through 75 subsidiaries in Asia, Europe, Americas, Oceania, Middle East and Africa, there is doubtless that the
organization engages competitively in the market especially dominating 24% of the Global Market Share in Musical instrument market
with extraordinary bargaining power. increment in counterfeit items may adversely affect the brand picture of the organization and,
thusly, influence the sales adversely.
Strengths
Yamaha always sets its focus on developing its products through innovations. Innovations such as Piano’s CSP-150 and CSP-170 and
still ongoing process on Saxophone could bring a huge impact to the market. While other competitors seem to slow their innovations,
there is a huge possibility that Yamaha has the ability to conquer more than 24% of the musical instrument market.
By doing CSR activities such as developing music schools in developing countries, Yamaha’s brand recognition around the world will
always be in people’s mind and memories that people will never forget the Yamaha brand in the market.
By diversifying their business not only in the musical instruments, but also in audio equipment and other electronics markets, Yamaha
could increase their sales and diversify their risks as well.
Weakness
Japanese economy plays significant role to the sales of Yamaha. Since Yamaha is a multinational company that operates around the
globe, exchange rate and the world’s economy also have a huge impact on the sales. In 2016, Yamaha recorded a decrease in sales due
to exchange rates and Japanese economy. The better the economy, the better sales Yamaha records because economic recovery
indicates better life standard and better income for people that can use purchasing power to buy the products.
Low birthrate in several countries such as Japan brings huge impact to the sales. Declining in birth rate each year could force Yamaha
to change its focus from the home country. However, because most of the sales came from Japan, it could affect the sales adversely.
Opportunities
The global music instrument industry has been growing at a steady rate in the recent times. According to industry estimates, its global
market is expected to surpass $17.5 billion by the end of 2020. The growth is attributable to increasing disposable income of
consumers as well as growing interest in leisure activities.
Threats
Yamaha has strong presence in its household showcase, Japan. The organization's head office, household plants and significant
subsidiaries are situated in Shizuoka Prefecture in the Tokai district of Japan, in which a significant earthquake has been anticipated
for quite a long time. Japan is inclined to tremors, tidal waves and other cataclysmic events. Moreover, the organization's abroad
manufacturing plants are amassed in China, Indonesia and Malaysia which are the key nations where the flare-up of sudden
catastrophic events may emerge. Any such event of catastrophic events and unanticipated crises may influence the organization's
business execution in the future.
The electronics producing industry is attempting to rival with the black market, parallel import and pirated products. Yamaha faces a
solid risk from these merchandises as the organization produces electronics for customer. China remained the essential source nation
for counterfeit products.

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 CFA Institute Research Challenge Date 27.10.2017

[Appendix 9]
That thus keeps down swelling, which BOJ has neglected to go anyplace close to its inflation objective of 2% in spite of
an exceptionally forceful fiscal arrangement. Stagnating or falling costs are considered bad news for the economy.
Customers put off purchasing decisions while companies think that it is difficult to expand benefits, abandoning them
with less trade to contribute out new items or higher wages.

Source: OECD
[Appendix 10]
Japanese workers are about a third less profitable than their U.S. peers, as per Capital Economics. Also, the sum put in the nation by
remote organizations is modest contrasted with other rich economies.

Source: OECD

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 CFA Institute Research Challenge Date 27.10.2017

[Appendix 11]
Japan's continuous declining birth rate for more than 40 years is a huge concern in the company as Yamaha's sales in
Japan has been decreasing for more than five consecutive years. We found that the sales in Japan statistically correlate
with Japanese population declining rate.

Source: Worldbank, Yamaha & Team estimation

Source: Worldbank Database

[Appendix 12]
Japan's gender and age breakdown in 2015 shows that the
country's population especially female that has similar
number of individuals between aged 25- 54 and aged 55-
89. Next, there are more existence of individuals aged 55
above than children which concerned the whole country.
Source: The Japan Times

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 CFA Institute Research Challenge Date 27.10.2017

[Appendix 13]
On August 2017, Yamaha released world first smart keyboard
"CSP-150" that is able to track iTunes song and convert it into
music sheets so that user can play the selected song.
Source: Yamaha

[Appendix 14]
A highly opportunity for Yamaha to increase their sales as global home audio equipment market including home theater and sound
bars, could exceed US$24,3 billion by 2023. Moreover, due to existence of advance technology in wireless noise cancellation
technology, integration with Bluetooth device, and compact devices, along with the increase of global disposable income, the demand
for wireless audio products has the chance to grow further.

Source: Credence Resource

[Appendix 15] Asia Pacific home audio equipment market size by product, 2012-
2022 (USD billions)
Home audio equipment was recorded $17.41 billion in 2014 in Asia pacific region (Global market insights, 2017), it is expected that
home audio equipment market to grow at CAGR of 4% to 2022. Rise in the region's disposable income is the key driver for the market
sales. Home theater market is expected to grow at CAGR of 5.8% and exceed USD 6.5 billions by 2022. Rise in demands in audio
visuals, home audio speakers and Bluetooth devices will contribute to continuous sales in the industry.

Source: Global Market Insights

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 CFA Institute Research Challenge Date 27.10.2017

[Appendix 16]
Global loud speakers market has capability to grow at
CAGR of approximately 8% from 2017- 2021. Technology
advancements and lifestyle preferences play a huge role in
increasing the total revenue to USD 2.89 billion by 2021
supported by increasing demand of growing number of
homes
Source: Technavio

.
[Appendix 17]
Home audio market including wireless speakers, AV receivers and speakers developed by 22% to deliver 71 millions
units during 2013 - 2019. Exchange esteem additionally developed by 22%, producing just under $10 billions worth of
income in 2014.The remote speaker market was fueled by solid development in Bluetooth speakers in the lower end of
the value range and multi room audio at the top-notch end.

Source: Futuresource Consulting

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 CFA Institute Research Challenge Date 27.10.2017

[Appendix 18] Yamaha's board of directors

Source: Yamaha Homepage

[Appendix 19] Corporate Governance Assessment

Source: Team Analysis

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 CFA Institute Research Challenge Date 27.10.2017

[Appendix 20] Endnotes

CNBC. (2017, 06 26). Why this analyst thinks the US dollar will actually strengthen going forward. Retrieved
from https://www.cnbc.com/2017/06/26/us-dollar-will-be-actually-strengthen-going-forward.html
Crutsinger, M. (2017, 09 28). U.S. economic growth revised up to 3.1% rate in Q2. Retrieved from
https://www.usatoday.com/story/money/2017/09/28/u-s-economic-growth-revised-up-3-1-rate-q-
2/711674001/
Edgers, G. (2017, 06 22). Why my guitar gently weeps? The slow, secret death of the six-string electric. And
why you should care. Retrieved from https://www.washingtonpost.com/graphics/2017/lifestyle/the-
slow-secret-death-of-the-electric-guitar/?utm_term=.05005a544bd1
GlobalInfoResearch. (2017, 05). Asia-Pacific Musical Instrument Market by Manufacturers, Regions, Type
and Application, Forecast to 2022.
Industry Outlook and Trends Analysis (IOTA). (2017). Regional IOTA Reports. Retrieved from
https://www.infocomm.org/cps/rde/xchg/infocomm/hs.xsl/46943.htm#europe
International Federation of the Phonographic Industry (IFPI) (2017). IFPI Global Music Report 2017.
International Monetary Fund (IMF). (2016, 06 13). Japan: selected issue. Retrieved from
https://www.imf.org/external/pubs/ft/scr/2016/cr16268.pdf
International Monetary Fund (IMF). (2017). Real GDP growth annual percent change. Retrieved from
http://www.imf.org/external/datamapper/NGDP_RPCH@WEO/OEMDC/ADVEC/WEOWORLD
Musically (2017, 08 30). Mind Music Labs wants to make every instrument 'smart'. Retrieved from
http://musically.com/2017/08/30/mind-music-labs-instrument-smart/
NAMM. (2015). The 2015 NAMM Global Report.
PricewaterhouseCoopers. (2017). Perspectives from the Global Entertainment and Media Outlook 2017–2021.
Retrieved from https://www.pwc.com/gx/en/entertainment-media/pdf/outlook-2017-curtain-up.pdf
Quartz. (2017, 06 26). Rock and roll is dead. Nobody wants an electric guitar anymore. Retrieved from
https://qz.com/1013293/rock-and-roll-is-dead-sales-of-fender-and-gibson-electric-guitars-prove-it/
Research and Markets. (2017). Global Guitar Market 2017-2021
Soper, T. (2017, 09 18). Amazon has 76% smart home speaker U.S. market share as Echo unit sales reach
15M, new study finds. Retrieved from https://www.geekwire.com/2017/amazon-75-smart-home-
speaker-u-s-market-share-echo-unit-sales-reach-15m-new-study-finds/
Technavio. (2016). Global Digital Keyboard Market 2016-2020. .
Technavio. (2016). Global Percussion Instrument Market 2016-2020.
Xinhua. (2017, 07 27). China's per capita disposable income up 8.8% in H1. Retrieved from
http://www.chinadaily.com.cn/business/2017-07/17/content_30140898.htm
Yamaha Corporation. (2017). Annual Report 2017.

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any security. This report should not be considered to be a recommendation by any individual affiliated with [society name],
CFA Institute, or the CFA Institute Research Challenge with regard to this company’s stock.

Note:
The report was done as the report for CFA Institute Research Challenge 2017. It was done by four members: Ho
Duc Huy (leader), Tran My Linh, Matthew Addrian, Alexander Theodore Solaiman.