Kirin Holdings: Strategic Pivot Will Take Time

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KNBWY's core beverages business is facing challenges as evidenced by weak Japanese beer sales numbers.Kirin Holdings' ongoing strategic pivot involves diversification away from the beverages segment, ...

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(Yokahama, Japan)"},"translate_title":"麒麟控股：战略支点需要时间","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"ASBRF":1,"FACYF":1,"KNBWF":1,"KNBWY":1},"content_text":"KNBWY's core beverages business is facing challenges as evidenced by weak Japanese beer sales numbers.Kirin Holdings' ongoing strategic pivot involves diversification away from the beverages segment, and the company recently announced the buyout of FANCL Corporation to expand its health sciences business.I have awarded a Hold rating to Kirin Holdings, considering that it will take time for its business diversification efforts to pay off.   Sanga Park/iStock Editorial via Getty Images I assign a Hold investment rating to Kirin Holdings Company, Limited (OTCPK:KNBWY) (OTCPK:KNBWF) [2503:JP] stock. KNBWY is rated as a Hold because the company is in the midst of a strategic pivot. The company's beer product sales have been lackluster considering the company's Q1 2024 financial numbers and the recent monthly sales data. As such, the company needs to pivot away from its underperforming core beverages business (74% of 2023 revenue) and diversify its revenue mix. A recent diversification move is the purchase of Japanese cosmetics and supplements company Fancl Corporation (OTCPK:FACYF) to grow its health sciences business segment. But this will take time, as Kirin Holdings' sales contribution from the health sciences segment is projected to increase from 5% to 9% in four years' time. Kirin Holdings' shares are available for trading on the Japanese equity market and the Over-The-Counter market. The company's shares listed on the Tokyo Stock Exchange and its OTC shares boasted mean daily trading values of $40 million and $1 million (source: S&P Capital IQ), respectively, in the past three months. Readers can trade in Kirin Holdings' Japanese shares with US brokerages such as Interactive Brokers. Company Description KNBWY is a Japanese conglomerate with a presence in different business areas. As indicated in the company's integrated report, Kirin Holdings generated close to three-quarters or 74% of its FY 2023 revenue from its core beverages segment. Kirin Holdings' Key Beverage Products Like Beer At A Glance Kirin Holdings' Investor Presentation Slides The pharmaceuticals and health sciences businesses accounted for the remaining 21% and 5% of KNBWY's top line, respectively, for the latest fiscal year. A Snapshot Of KNBWY's Key Health Sciences Products Like Supplement Brand iMuse   Kirin Holdings' Investor Presentation Slides The Company's Pharmaceuticals Products In The Pipeline Targeting Illnesses Like Eczema And Asthma  Kirin Holdings' Investor Presentation Slides In terms of geographical sales mix, the company estimates that roughly half of its revenue is derived from its home market Japan, as disclosed in its investor presentation slides. Kirin Holdings derives around 35% and 15% of its top line from the North American region and the Asia Pacific region, respectively. Core Beverages Business In Japan Is Under Pressure Kirin Holdings discloses the Year-on-Year or YoY growth rates for its beverages business on a monthly basis. The company's most recently monthly numbers had negative read-throughs for its near-term financial performance. The beverages business represented almost three-quarters of KNBWY's sales, as highlighted in the preceding section. According to its monthly sales data, the sales growth for Kirin Holdings' beer products slowed from +8% YoY in April 2024 to +2% YoY for May this year. The company's beer products witnessed a -14% YoY sales contraction in the latest month or June 2024. In the first quarter of the current year, KNBWY's sales volume for beer products decreased by -2.4% YoY. This was worse than the Japanese overall beer market's -2.0% YoY sales volume decline for Q1 2024. These metrics were obtained from Kirin Holdings' first quarter results presentation slides. The Japanese beer market shrunk in Q1 2024 and this seems to be part of a longer term structural decline. According to the company's most recent annual global beer consumption study released in December 2023, Japan's worldwide ranking in beer consumption fell from 7th before the COVID-19 pandemic to 10th in 2022. Separately, an April 15, 2024 Financial Times article noted that \"Japanese beer consumption has been steadily declining for more than 20 years\" due to the local regulatory authorities' \"crackdown on heavy alcohol consumption.\" Kirin Holdings might have lost market share in the first quarter as evidenced by its volume contraction, which was more severe than the overall market. KNBWY's June 2024 beer product sales numbers indicate that things haven't gotten better in the second quarter. In a nutshell, the outlook for KNBWY's core beverages products business, especially in the area of beer products, is unfavorable. There is a need for Kirin Holdings to diversify in a more aggressively, which it is trying to do as detailed in the next section. Fancl Acquisition Is A Necessary Diversification Move In the prior month, Kirin Holdings issued an announcement revealing that it \"has decided to acquire additional shares of common stock of FANCL Corporation through a tender offer\" to \"make FANCL a wholly-owned subsidiary.\" An Overview Of Fancl Corporation KNBWY's June 14, 2024 Corporate Presentation Slides Details Of The Fancl Corporation Acquisition Deal KNBWY's June 14, 2024 Corporate Presentation Slides As highlighted above, Kirin Holdings' health sciences segment has the lowest revenue contribution (5% in 2023) of the company's three business segments. Therefore, it makes a lot of sense for KNBWY to grow its health sciences business with new inorganic growth initiatives like the recently announced Fancl Corporation M&A transaction. It is reasonable to think that Fancl Corporation can expand significantly in the future as a 100%-owned subsidiary of KNBWY. Kirin Holdings' health sciences segment previously bought over Australian supplements business Blackmores in August last year. Blackmores has a global footprint, unlike Fancl Corporation. Only a mere one-tenth of Fancl Corporation's top line is earned from overseas markets outside Japan. In contrast, Blackmores generated 44%, 28%, and 28% of its FY 2023 top line from Australia & New Zealand, China, and other international markets, respectively. As such, Kirin Holdings' health sciences business will likely exploit synergies between the two companies in the future by utilizing Blackmores' international distribution channels to expand Fancl Corporation's presence in overseas markets. Specifically, KNBWY's goal is to almost double the sales for its health sciences business segment from JPY103 billion in 2023 to JPY200 billion in 2027. This means that the health sciences segment' revenue contribution could potentially rise from 5% in 2023 to 9% in 2027 based on the company's consensus 2027 top-line estimate of JPY2,357 billion (source: S&P Capital IQ). The recent acquisition deal involving Fancl Corporation is a step in the right direction. Kirin Holdings' strategic pivot involves reducing the company's reliance on the core beverages business and growing its revenue from other segments like health sciences. Closing Thoughts A Hold rating for Kirin Holdings is fair. A Buy rating is unwarranted for KNBWY, as the company's core beverages business is expected to be hurt by weak beer sales in Japan for the short term. On the other hand, a Sell rating for the stock will be unjustified, as KNBWY is taking steps to diversify and expand its other segments like health sciences. Also, Kirin Holdings' shares are trading at a fair valuation. The PEG (Price-to-Earnings Growth) metric for KNBWY is 1.1 times. The stock's PEG ratio is calculated by dividing its consensus forward one-year P/E multiple of 12 times by its consensus FY 2023-2026 EPS CAGR forecast of 11% (source: S&P Capital IQ). A stock is typically deemed to be reasonably value if its PEG multiple is close to 1 times. Kirin Holdings' peer Asahi Group Holdings (OTCPK:ASBRF) [2502:JP] consensus forward one-year P/E ratio is also pretty close at 13 times (source: S&P Capital IQ).  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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