Kirin Holdings: More Patience Is Required

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My Hold rating for Kirin Holdings is unchanged due to the company's mixed progress relating to diversification beyond the core beverages business, with the pharmaceuticals business growing well and ...

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the stock's current valuations suggest that it is fairly valued and deserving of a Hold rating now.winhorse/iStock Unreleased via Getty Images (All ￥ values below are in JPY, unless otherwise noted.) My rating for Kirin Holdings Company, Limited's (OTCPK:KNBWY) (OTCPK:KNBWF) [2503:JP] shares stays as a Hold. Investors need to have more patience with the stock, as KNBWY's progress relating to diversification has been mixed. On one hand, the profitable pharmaceuticals business segment is growing well. On the other hand, the Kyowa Hakko Bio business that is part of the health sciences segment is still suffering from revenue contraction and operating losses. With my earlier July 21, 2024, initiation article, I highlighted the need for KNBWY to \"pivot away from its underperforming core beverages business (74% of 2023 revenue) and diversify its revenue mix.\" In this update, the spotlight is on Kirin Holdings' non-beverage businesses, namely the health sciences and pharmaceuticals segments. Investors should be aware that they can deal in the company's shares on the OTC (Over-The-Counter) market and the Tokyo Stock Exchange. The 10-day average daily trading values for Kirin Holdings' OTC shares and Japan-listed shares were $0.4 million and $35 million, respectively based on S&P Capital IQ data. US stockbrokers like Interactive Brokers offer trading services for Japan-listed stocks. The Kyowa Hakko Bio Business Under The Health Sciences Segment Is Still Struggling Kyowa Hakko Bio, which is part of Kirin Holdings' health sciences segment, is referred to as \"an international health ingredients manufacturer\" in KNBWY's media releases. An Overview Of Kyowa Hakko Bio's Key Product Offerings Kyowa Hakko Bio Website Revenue for Kyowa Hakko Bio decreased by -3% YoY to ￥25.4 billion in 1H 2024. Notably, Kyowa Hakko Bio was the only business within Kirin Holdings to have recorded a YoY top line contraction for the most recent interim period. Kyowa Hakko Bio's operating loss also widened slightly from -￥3.0 billion in 1H 2023 to -￥3.1 billion for the first half of this year. These figures were obtained from Kirin Holdings' Q2 2024 earnings presentation slides. KNBWY doesn't expect Kyowa Hakka Bio's performance to get better in 2H 2024. When Kirin Holdings released its Q2 2024 results in August, the company lowered its 2024 revenue forecast for Kyowa Hakko Bio by -16% to ￥49.0 billion, which implies a -5% top line contraction for the full year. KNBWY also revised its 2024 operating loss guidance for Kyowa Hakko Bio from -￥3.0 billion to -￥9.5 billion. As a comparison, Kyowa Hakko Bio's actual FY 2023 operating loss was narrower at -￥8.5 billion. In its second quarter earnings presentation slides, Kirin Holdings attributed the poor performance and downward guidance revision for Kyowa Hakka Bio to the \"softness in the amino acid market.\" On the company's corporate website, KNBWY had also drawn attention to Kyowa Hakka Bio's structural challenges relating to higher costs, stiffer competition, and lower demand for certain health ingredients which previously benefited from vaccine production during the pandemic. KNBWY stressed in the company's Q2 results presentation slides that it will \"implement structural reforms\" to improve the future performance of Kyowa Hakko Bio. Although Kirin Holdings didn't specify measures that it will initiate, it is reasonable to think such actions will involve product mix optimization and cost management. In summary, a loss-making business with declining revenue like Kyowa Hakko Bio won't boost Kirin Holdings' diversification efforts, unless Kyowa Hakko Bio turns around in the future. But Pharmaceuticals Segment's Growth Outlook Is Bright Unlike Kyowa Hakko Bio, Kirin Holdings' pharmaceuticals segment has done well in the latest interim period, and the growth prospects for the pharmaceuticals business are favorable. The pharmaceuticals segment saw its top line and operating income rise by +17% YoY and +14% YoY to ￥233.0 billion and ￥41.1 billion, respectively in 1H 2024. Looking forward, Kirin Holdings lifted its full-year revenue guidance for the pharmaceuticals business by +19% in August this year. This translates into an expected +11% growth in the pharmaceuticals segment's top line to ￥492.0 billion for 2024. On the flip side, KNBWY anticipates that its pharmaceuticals segment's operating profit will decline by -5% to ￥91.0 billion in full-year FY 2024. But this isn't a cause for concern. Kirin Holdings noted in its Q2 earnings presentation slides that the pharmaceuticals segment's FY 2024 operating income will be affected by one-off accounting effects relating to its M&A deal involving Orchard Therapeutics. This explains why the pharmaceuticals business' FY 2024 operating income is expected to be slightly lower as compared to that for 2023. Crysvita, described as a \"prescription medicine used to treat adults and children 6 months of age and older with X-linked hypophosphatemia\" on its website, is the star of KNBWY's pharmaceuticals business. The total revenue generated from Crysvita grew by +36% YoY to ￥91.0 billion for 1H 2024. In particular, KNBWY has made good progress in expanding Crysvita's reach in international markets outside of Japan. Specifically, Crysvita's revenue jumped by +66% YoY and +117% YoY to ￥25.4 billion and ￥1.3 billion in EMEA (Europe, Middle East, Africa) and APAC (Asia-Pacific) excluding Japan, respectively in 1H 2024. Apart from the organic growth driver in the form of Crysvita, KNBWY's pharmaceuticals business also has inorganic growth potential. At its 1H 2024 results briefing, Kirin Holdings indicated that \"there is a possibility that\" the pharmaceuticals business has \"targets in which we should invest.\" In summary, the pharmaceuticals segment is profitable, and this business has both organic and inorganic growth drivers. The pharmaceuticals business' expansion will play a key role in KNBWY's plan to diversify and reduce its reliance on the core beverages operations. Final Thoughts I will consider assigning a Buy rating to Kirin Holdings when the company has made substantial progress with its diversification. This isn't the case yet, so my Hold rating for KNBWY remains unchanged. With regard to valuations, KNBWY's operating earnings multiple is roughly on par with its operating earnings growth rate, and this supports my view that the stock is fairly valued. As per S&P Capital IQ data, the consensus next twelve months' EV/EBIT multiple and the consensus FY 2023-2026 EBIT CAGR forecast for Kirin Holdings are 13.4 times and 13.8%, respectively.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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