Kirin's Q3 Weakness No Surprise; Slow Domestic On-Trade Recovery and Cost Inflation Key Risks

Narrow-moat Kirin’s third-quarter weakness was no surprise, given the prolonged lockdowns in Japan and Australia amid the delta surge. Despite sluggish on-trade volume, the healthy growth of newly launched premium alcoholic items in Japan substantiates the company's strategy to lift margins through product innovation and premiumization. We have reduced our profit estimates for mainly 2021 and 2022 by 3% to reflect slow recovery in Japan’s restaurant traffic for the fourth quarter and cost inflation for 2022. The adjustments, largely offset by the increased time value of money, leave an immaterial impact on our JPY 2,500 fair value estimate. Our projection of double-digit profit growth in 2022, factoring in on-trade recovery from the second quarter, remains susceptible to the timing of COVID-19 to come to an end. Cost inflation is another negative to weigh on domestic profits into 2022. We reckon price hikes are possible in 2023 if the commodity price trends show no signs of reversal in 2022. We continue to view Kirin as undervalued, trading at a 20% discount to our fair value estimate. Slow progress on unwinding Myanmar Brewery's partnership may continue to overshadow Kirin’s share performance, although management hints legal action within 2021. Our 2021 net profit forecast is 3.5% below company guidance.