Company Reports

Kirin is stepping up investment to transform itself into a wellness specialist over the long run. The secular volume decline in the domestic beer market has prompted Kirin to seek new growth avenues, of which it identifies wellness leveraging its pharmaceutical know-how and beverage resources as the third growth pillar. Meanwhile, margin expansion of the cash cow brewery business combined with overseas growth of the pharmaceutical sales will bolster mid-term profits. Kirin is pining hopes on the underpenetrated craft beer to invigorate the torpid beer consumption at home.

Narrow-moat Kirin beat its full-year business profit target as we had expected, although the result slightly fell short of our forecast. The further write-down of Kyowa Kirin’s assets stemming from a worsening profit outlook for specialty ingredients doesn’t bode well for its health science growth strategies. The guidance of flat business profit, depressed by persistent cost pressure and increased investment for 2024, looks cautious. We have fine-tuned our assumptions after rolling our forecasts to 2024, which leaves an immaterial impact on our JPY 2,600 fair value estimate. Our business profit projection for 2024 remains a touch above the guidance. As we have stressed, turning Kyowa Hakko into profitability will help alleviate market concerns that have been weighing on Kirin’s share performance. We continue to view shares, trading at 19% discount to our intrinsic value, as undervalued.

Narrow-moat Kirin looks on track to beat its full-year profit guidance despite mixed third-quarter results, with sales up 6.9% year on year and core business profit up 5.2%. Despite improved profits across most of the core businesses, the moaty domestic brewery business saw sales and profit decline due to a tough comp. Widened losses in Kyowa Hakko Bio might deepen market’s concern over the growth prospect of the health science business and management’s execution capabilities. As we have pointed out, turning Kyowa Hakko Bio into profitability will help restore the market’s confidence in Kirin’s strategic move into the health science industry. We have maintained our forecasts and fair value estimate of JPY 2,600 and view Kirin’s shares as undervalued with 20% upside to our intrinsic value. While we see limited downside at the current share price level, we think the persistent uncertainty surrounding the health science growth is likely to weigh on Kirin’s near-term share price.

Kirin is stepping up investment to transform itself into a wellness specialist over the long run. The secular volume decline in the domestic beer market has prompted Kirin to seek new growth avenues, of which it identifies wellness leveraging its pharmaceutical know-how and beverage resources as the third growth pillar. Meanwhile, margin expansion of the cash cow brewery business combined with overseas growth of the pharmaceutical sales will bolster mid-term profits. Kirin is pining hopes on the underpenetrated craft beer to invigorate the torpid beer consumption at home.

Narrow-moat Kirin’s share price underperformance has prompted management to address the market’s concerns over its business transformation program—moving into the health science field—that it lacks a track record and has been struggling with the restructuring of loss-making Kyowa Hakko. While increased business complexity might have led to a diversification discount on its valuation multiples, we believe that the unsatisfactory performance of the businesses is to blame. We anticipate its restructuring efforts, particularly for Lion and Kyowa Hakko, will lead to improved profitability into 2024. Given the market’s doubts about Kirin’s strategic pivot and management’s execution capability, making Kyowa Hakko profitable again, in 2024, is critical to restoring the market’s confidence. We maintain our forecasts and fair value estimate of JPY 2,600. We view shares, trading at a 23% discount to our intrinsic value, as attractive. We acknowledge that investors’ interest in the stock may not return until it shows signs of improvement in health science growth and execution, but see limited downside risk at the current price level. Our forecasts have factored in moderate growth in the health science business.

Narrow-moat Kirin kicked off the year with strong core profit growth thanks to recovery of on-trade volume, price hike benefits, and yen weakness. The results are better than our expectation and above the company’s internal targets. We were impressed by the execution of price hikes and cost control that lifted profits by JPY 18 billion, greatly exceeding the cost increase of JPY 12 billion. Given that the robust growth was partly inflated by the timing of marketing investment, which will pick up from the second quarter, we have maintained our forecasts and fair value estimate of JPY 2,600. We continue to view shares as undervalued, indicating 24% upside to our intrinsic value. Our profit forecasts are a touch above the guidance of flat business profits year on year.

Narrow-moat Kirin's announcement of its plan to acquire Australia's largest nutritional supplement maker Blackmores for AUD 1.88 billion was no surprise as management has stressed that M&A will be a critical means to achieve its long-term target of JPY 500 billion in health science sales. We believe that Kirin is eyeing opportunities to leverage Blackmore's high brand awareness, distribution capabilities, and know-how around regulatory compliance in China and Southeast Asia to expedite its growth of nutritional ingredients, a key component of the health science business. The deal, priced at around 20x 2023 PitchBook consensus EBITDA, appears somewhat pricy, although Blackmores remains on the way to recover margins from the dip caused by the coronavirus pandemic. The acquisition will have an immaterial impact on our fair value estimate of JPY 2,600. Whether Blackmores will be able to restore growth momentum and margins in China, as well as expand margins of the professional channel (Bioceuticals), is critical to its profit outlook.

Narrow-moat Kirin’s fourth-quarter result was a positive surprise, beating the firm’s full-year guidance and our estimates by 10% in part due to lower-than-expected expenses. Profit guidance for 2023, flat year on year, is in line with our expectations, as persistent cost pressure will wipe out most of the profit increase. Yet, we anticipate it will return to a growth trajectory from 2024, driven by easing cost pressures, overseas expansion of pharma sales, and improved brewery profitability. The upside lies in the health science business, which management expects to increase into a meaningful size while we have factored in a marginal contribution through 2027. We have modestly raised our fair value estimate to JPY 2,600 from JPY 2,500 to reflect time value of money. We continue to view shares as undervalued.

Kirin is stepping up investment to transform itself into a wellness specialist over the long run. The secular volume decline in the domestic beer market has prompted Kirin to seek new growth avenues, of which it identifies wellness leveraging its pharmaceutical know-how and beverage resources as the third growth pillar. Meanwhile, margin expansion of the cash cow brewery business combined with overseas growth of the pharmaceutical sales will bolster mid-term profits. Kirin is pining hopes on the underpenetrated craft beer to invigorate the torpid beer consumption at home.

Narrow-moat Kirin appears on track to meet its full-year profit guidance. The positive third-quarter results, with sales up 16.8% year on year and core business profit up nearly 37%, were mainly lifted by a spike in domestic alcohol demand prior to the October price hikes and a recovery in Lion’s on-trade demand, in addition to continued strengths in the pharmaceutical (Kyowa Kirin) and U.S. beverage (Coke Northeast) businesses. As social activities continue to normalize in Japan, we think Kirin may beat its profit guidance. We have maintained our forecasts and fair value estimate of JPY 2,500. We view Kirin’s shares as modestly undervalued with 13% upside to our intrinsic value. We suggest investors look at rival Asahi which offers more attractive valuations and greater benefits from Japan’s beer tax cuts through 2026.

Kirin is stepping up investment to transform itself into a wellness specialist over the long run. The secular volume decline in the domestic beer market has prompted Kirin to seek new growth avenues, of which it identifies wellness leveraging its pharmaceutical know-how and beverage resources as the third growth pillar. Meanwhile, margin expansion of the cash cow brewery business combined with overseas growth of the pharmaceutical sales will bolster mid-term profits. Kirin is pining hopes on the underpenetrated craft beer to invigorate the torpid beer consumption at home.

Narrow-moat Kirin reported mixed second-quarter results. It reduced its guidance for its moaty brewery businesses, but the weakness was fully offset by strong pharma profits and currency tailwinds. Escalating costs continued to weigh on brewery and beverage profits, a trend that may not see reversal until the fourth quarter after domestic price increases kick in in October. We have tweaked our margin and minority-interest assumptions to reflect the pharma strength, which has an immaterial impact on our fair value estimate of JPY 2,500. After gaining more than 27% over the past four months, Kirin’s shares appear modestly undervalued with 12% upside to our intrinsic value. We suggest investors look at rival Asahi, which offers a more attractive valuation and greater benefits from Japan’s beer tax cuts through 2026.

Narrow-moat Kirin’s first-quarter weakness was no surprise given the prolonged restrictions in Japan and Australia amid the omicron surge. Sluggish domestic and Australia brewery sales were drags on profits during the quarter in which sales grew 1.8% year on year while profits fell nearly 22%. We consider the weakness temporary and expect price hike measures in multiple markets including Japan, Australia, and North America, to offset additional cost increase in 2022. We have maintained our fair value estimate of JPY 2,500 and continue to view shares undervalued with 30% upside to our fair value estimate. We believe a strengthened product portfolio, specifically for the moaty domestic brewery business, with increased offering of innovative products, will shore up margin expansion although we have factored in limited upside from the new healthcare growth.

Narrow-moat Kirin’s fourth-quarter core business profits (gross profits - SG&A) and guidance of marginal profit growth for 2022 are largely in line with our expectations. As we have recently highlighted, cost inflation (JPY 14 billion) and increased investment will cap 2022 profit growth. The announcement of withdrawal from Myanmar is no surprise, but the JPY 50 billion buyback program takes place earlier than we had anticipated. Despite a slow start, management aims at 13% CAGR in business profits, compared with our projection of 4.5% CAGR, for the three-year midterm plan ending 2024. With uncertainties surrounding Myanmar Breweries being removed, we expect the market will focus on execution of premiumization strategies for domestic brewery business, cost reduction, and Australia restructuring in addition to new business development. We have maintained our fair value estimate of JPY 2,500 and continue to view shares as undervalued, offering 26% upside to our intrinsic value.

We have reduced narrow-moat Kirin’s earnings forecasts by 2%-7% for the five-year explicit period to reflect increased costs and investment, particularly for 2021 and 2022. Yet, the adjustments, partially offset by increased time value of money, leave an immaterial impact on our fair value estimate of JPY 2,500 as some of the additional expenses are non-cash items (impairment losses). Our revised business profit and earnings forecasts for 2021 are 3% and 10% below the company’s guidance, respectively. We do not think COVID-19 and the Myanmar dispute will undermine Kirin’s moat, which is underpinned by the research and development and marketing capabilities of the brewery businesses. Yet, in a worst-case scenario that Myanmar Brewery is liquidated and cash repatriation fails, we project the event will depress our fair value estimate by about 4%-5%.

Kirin is stepping up investment to transform itself into a wellness specialist over the long run. The secular volume decline in the domestic beer market has prompted Kirin to seek new growth avenues, of which it identifies wellness leveraging its pharmaceutical know-how and beverage resources as the third growth pillar. Meanwhile, margin expansion of the cash cow brewery business combined with overseas growth of the pharmaceutical sales will bolster mid-term profits. Kirin is pining hopes on the underpenetrated craft beer to invigorate the torpid beer consumption at home.

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.

Kirin is stepping up investment to transform itself into a wellness specialist over the long run. The secular volume decline in the domestic beer market has prompted Kirin to seek new growth avenues, of which it identifies wellness leveraging its pharmaceutical know-how and beverage resources as the third growth pillar. Meanwhile, margin expansion of the cash cow brewery business combined with overseas growth of the pharmaceutical sales will bolster mid-term profits. Kirin is pining hopes on the underpenetrated craft beer to invigorate the torpid beer consumption at home.

Narrow-moat Kirin’s second-quarter profits fell short of our expectations as a sizable increase in marketing investment dragged on profits of the domestic beer and pharmaceutical businesses. The unexpected downward revision of its full-year guidance was mainly attributable to a worsening outlook in Myanmar Breweries. Despite short-term profit pressure, we deem the investment necessary to sustain long-term growth of new alcohol products/services. The new innovative products launched over past quarters have produced results, achieving sales growth and share gains. We consider the outcomes as proof of Kirin’s moat underpinned by research and development and marketing capabilities exhibited in the beer business.

Kirin is stepping up investment to transform itself into a wellness specialist over the long run. The secular volume decline in the domestic beer market has prompted Kirin to seek new growth avenues, of which it identifies wellness leveraging its pharmaceutical know-how and food/beverage resources as the third growth pillar. Meanwhile, margin expansion of the cash cow brewery business combined with overseas growth of the pharmaceutical sales will bolster mid-term profits. Kirin is pining hopes on the underpenetrated craft beer to invigorate the torpid beer consumption at home.