Kirin to Return to Growth Trajectory in 2024

Narrow-moat Kirin’s 2503 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 the company 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 to a meaningful size while we have factored in a marginal contribution through 2027. We have raised our fair value estimate to JPY 2,600 per share from JPY 2,500 to reflect the time value of money. We continue to view the shares as undervalued.

Kirin has no major exposure to emerging markets after divesting the Myanmar and China businesses. While these divestitures have greatly lowered geopolitical risk, a lack of presence in emerging markets suggests limited top-line growth of the brewery/beverage business. While we remain skeptical of growth prospects for the health science business, we acknowledge its potential to accelerate Kirin’s mid- to long-term top-line growth. Specifically, the sales development of the new specialty nutrition ingredients, including citicoline and human milk oligosaccharide, or HMO, will be critical to achieving the company’s target of JPY 30 billion in business profits by 2027 and establishing the health science business as its third growth pillar, after the brewery and pharma businesses. Despite the write-down of JPY 43 billion of Kyowa Hakko’s assets just four years after the JPY 128 billion acquisition (as a result of cost inflation and withdrawal of the commoditized amino acid business), there are some positive developments, including winning a beverage client in the U.S. for citicoline and obtaining safety approval for HMO in China, its largest potential market.