Kirin Earnings: Strong Profit Growth Lifted by Price Hikes, On-Trade Recovery, and Cost Control

Narrow-moat Kirin 2503 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.

First-quarter sales grew 8.1% year on year while core business profits soared nearly 30% (23.6% currency neutral). Growth was particularly notable in the moaty domestic brewery business and Coke Northeast (Coke-Cola bottler) as a result of successful price hikes. The solid performance posted by the domestic brewery business bodes well for rival Asahi, which will report on May 12. On the other hand, we were disappointed at the fact of no announcement on further price hikes on on-trade beers and beer-like products, although we understand the dilemma facing Kirin’s management. Given Kirin’s leading share in both happoshu (low-malt beer) and new genre (no-malt beer), the fear that following Asahi’s price hikes might benefit Asahi more than itself may discourage Kirin from following suit as price hikes on happoshu and new genre are likely to further accelerate the shift to beer from the cheaper alternatives when the price gap narrows between beer and beer-like drinks.