Beverage Sector Initiation Research Analysts INITIATION

09 December 2014 Asia Pacific/Japan Equity Research Beverage (Food (Japan)) / MARKET WEIGHT

Masashi Mori 81 3 4550 9695 [email protected] MARKET WEIGHT on sector, most positive on Asahi Initiate coverage: We initiate coverage of Japan’s beverage sector, with a NEUTRAL rating on Asahi Group Holdings (2502, TP ¥4,050) and Suntory Beverage & Food (SBF; 2587, TP ¥4,500), and an UNDERPERFORM rating on Kirin Holdings (2503, TP ¥1,400). All three stocks have risen recently, pulled up by market factors. We think further upside may be limited, based on a valuation comparison with global brewers and soft drink makers that factors in profit growth potential, ROE, and shareholder returns. Moreover, for all three companies our OP estimates for FY15 onward are lower than the I/B/E/S consensus; we therefore assign the beverage subsector a MARKET WEIGHT investment stance. The shortage in our forecasts versus consensus is smallest for Asahi at 2%, compared with 9% for Kirin and 5% for SBF. Our top pick in the Japanese beverage sector is Asahi for its favorable balance between steady profit growth and shareholders returns. Japan market: We think the competitive landscape for domestic brewers and soft drink makers will be much the same in 2015 as in 2014. While we will be closely monitoring business plans due out in Jan–Feb 2015, 2015 is the final year of the current medium term plan for all three companies and we do not expect much change in business or product strategies. Kirin should continue to lag its rivals in both the beer and soft drink markets. Asahi: We look for Asahi to post record OP gain in 2015, bolstered by a full-year contribution from recent Southeast Asia acquisitions and the effects of an exhaustive worldwide cost-cutting program. Asahi is targeting a total payout ratio of 50% or higher and seems likely to repurchase shares in 2015 for the third time in as many years. No major change is expected in the company’s stance on shareholder returns in the new medium-term plan kicking off in 2016. Asahi is in sight of its 2014 goals for unit sales in the fast-growing premium beer category; we will be interested to see if this momentum is sustained in 2015. Suntory B&F: We see prospects for double-digit CAGR in OP over the next three years. The company has stepped up selection and focus on its major brands in all world regions, and profit growth should remain stable from 2015, supported by stepped-up global cost reduction initiatives. SBF is unlikely to substantially boost shareholder returns, considering capital requirements for M&A activity and its low share liquidity. Kirin: We expect Kirin to continue experiencing tough times in 2015, owing to: (1) the absence of effective strategies for boosting sales by the beer and soft drinks business in Japan; (2) diminishing effects from sales mix improvement and price hikes in the alcoholic beverage business in Australia, which is currently performing well; and (3) slower growth in the highly competitive Brazilian market. Share price downside from our target price is limited, as the stock looks relatively undervalued compared with global brewers and soft drink makers and raises expectations of a high dividend yield; however, we see no catalysts for share price recovery. While earnings remain downbeat, we think Kirin will continue prioritizing shareholder returns.

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION® Client-Driven Solutions, Insights, and Access

09 December 2014

Key charts

Figure 1: Asahi continues to grow its share of the Figure 2: Asahi entering fast-growing premium beer domestic beer market category (%) (10k cases) YEBISU (Sapporo) 70 Asahi 2,000 The Premium Malt's (Suntory) 16% Kirin 1,800 a % of premium category in regular beer 60 Sapporo 14% 1,600 Suntory 12% 50 1,400 1,200 10% 40 37.6% 1,000 8% 30 34.8% 800 6% 600 20 4% 14.7% 400 2% 10 12.0% 200 0 0% 0 03 04 05 06 07 08 09 10 11 12 13 14E 53 58 63 68 73 78 83 88 93 98 03 08 13

Source: Company data, Credit Suisse Note: Shows premium beer sales volume as percentage of entire beer market Source: Company data and estimates, Credit Suisse

Figure 3: In the Japanese soft drink market, Suntory, Figure 4: Suntory B&F benefits most from weak yen; Asahi, and Ito En are adding to market share, while Coca- Asahi expanding in SE Asia; Kirin HD focusing on Cola and Kirin are struggling Oceania Asahi GHD Kiriin HD Suntory B&F (%) (%) 30.1 FY0 Japan 79% 53% 64% 14 31 Asahi sales Overseas 11% 30% 36% 12.8 13 12.5 mix Other (ex bev) 10% 17% 0% 28.5 29 Japan 91% 37% 47% 27.3 27.7 Itoen FY0 OP 12 Overseas 6% 29% 53% 27 mix 10.5 11.5 Other (ex bev) 4% (food) 33% (pharma) 0% 11 11.1 Oceania soft 10.6 25 Kirin Europe soft drink 10 drink (68%), Oceania alcohol 10.2 (54%), Oceania Overseas FY0 OP Oceania alcohol (79%), Oceania 9 23 soft drink (12%), breakdown (18%), China soft drink (9%), Coca ASEAN F&B 8 20.3 by country/region beer (7%), Brazil beer/soft 7.1 20.1 21 Cola (18%), US soft (rhs) ASEAN/other (11%) 7 drink (16%) 6.3 18.2 19 Suntory (7%) 6 (rhs) 17 5 17.4 17.6 Other 4 15 (rhs) 04 05 06 07 08 09 10 11 12 13 14 9M Source: Inryou Souken, Credit Suisse Source: Inryou Souken, Credit Suisse

Figure 5: Our estimates are below consensus, with gap largest for Kirin HD Price Upside/ Market Market ------FY1------FY2------FY3------Company Code Rating TP 8-Dec downside cap cap Estimates CoE CS E Cons CS E Cons CS E Cons (JPY) (JPY) (%) (JPY b) (USD m) (JPY m) (JPY m) (JPY m) (JPY m) (JPY m) (JPY m) (JPY m) Asahi Group Holdings 2502 NEUTRAL 4,050 3,850 5.2 1,862 15,334 Sales 1,783,000 1,776,000 1,766,753 1,819,000 1,795,569 1,842,000 1,821,082 OP 127,000 127,000 127,894 133,000 135,684 139,000 142,558 EPS (JPY) 148.7 199.0 154.6 168.7 178.1 178.5 194.5 Kirin Holdings 2503 UNDERPERFORM 1,400 1,563 -10.4 1,508 12,419 Sales 2,210,000 2,202,000 2,211,877 2,211,000 2,236,961 2,233,000 2,256,570 OP 120,000 118,500 125,330 122,500 134,054 130,000 138,760 EPS (JPY) 38.1 41.0 43.3 50.0 55.6 55.8 61.8 Suntory Beverage & Food 2587 NEUTRAL 4,600 4,385 4.9 1,355 11,160 Sales 1,260,000 1,265,000 1,256,392 1,306,000 1,312,005 1,332,000 1,357,231 OP 85,000 85,500 85,864 93,900 98,004 101,500 106,158 EPS (JPY) 113.3 119.7 117.2 146.9 154.1 163.4 172.3 Source: Company data, Thomson Reuters, I/B/E/S, Credit Suisse estimates

Beverage Sector Initiation 2 09 December 2014

Domestic beer and soft drink markets Structural factors likely to continue pushing Japanese consumption of beer and beer-like beverages down by 1–2% per year Japan’s beer-drinking population and per capita consumption of beer are generally in decline; as a consequence, domestic consumption of beer and beer-like beverages has been decreasing by nearly 2% per year over the past 10 years. Several factors seem to be contributing, including: (1) increasing health-consciousness, especially among the middle- aged and elderly; (2) a tendency among younger Japanese to eschew alcohol; and (3) a crackdown on drunken driving. If we delve deeper, we find that (1) the market for expensive but top-quality premium beers is growing, while (2) higher health consciousness is underpinning relatively strong demand for "healthy-type" beers advertised as low-calorie or zero sugar (such beers also attract a lower tax). In this manner, the market is becoming increasingly bifurcated. In 1H 2014, Kirin lost market share while the others posted gains. Kirin apparently has no plans to mount a full-fledged assault on the premium beer market; however, we do not believe this is directly contributing to its loss of market share. Kirin’s sole offering in the premium beer category, Ichiban Shibori Premium, is for gift sales only, and Kirin reportedly has no plans at present to sell it year-round. The company is concerned that the boom may be fading, and for now will not be using the supermarket channel to market Ichiban Shibori Premium. We think Kirin needs to find alternative means of shoring up demand for its flagship beer, Ichiban Shibori.

Figure 6: Domestic shipments of beer and beer-like Figure 7: Only Kirin lost market share in 1H 2014 beverages have fallen at annual rate of 1.7% over 10 years

(mil KL) New Genre (%) 8 70 Asahi Happoshu Kirin 7 Beer 60 Sapporo 6 Suntory 50 5 40 37.6% 4 30 34.8% 3 20 2 14.7%

1 10 12.0%

0 0 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 53 58 63 68 73 78 83 88 93 98 03 08 13

Source: Brewery Convention of Japan, Association for Considering Source: Company data, Credit Suisse estimates Low Malt Beer Tax, Credit Suisse

Beverage Sector Initiation 3 09 December 2014

Figure 8: Premium beer a growth category, with The Figure 9: Asahi Breweries steadily growing sales of Premium Malt’s from Suntory the main contributor premium beer launched in 2014, but sales weighting yet to turn upward

(10k cases) YEBISU (Sapporo) (10k cases) Dry Premium (YTD) 2,000 The Premium Malt's (Suntory) 16% 400 10% a % of premium beer (RHS) a % of premium category in regular beer 9% 1,800 14% 350 8% 1,600 300 12% 7% 1,400 250 6% 1,200 10% 200 5% 1,000 8% 150 4% 800 6% 3% 100 600 2% 4% 50 400 1% 200 2% 0 0% 0 0% 03 04 05 06 07 08 09 10 11 12 13 14E

Note: Premium beer sales volume as percentage of entire beer Note: Sales of Asahi Dry Premium as a percentage of total Super Dry market sales Source: Company data and estimates, Credit Suisse Source: Company data, Credit Suisse Premium beers continue making inroads into the broader beer market, a push that is being powered by The Premium Malt’s from Suntory Holdings. We estimate the premium beer sales weighting has grown from 3% in 2004 to 15% in 2014. Asahi Breweries made a full- fledged entry into the premium beer category in February 2014, and is reporting steady growth in sales. While daily consumption of alcohol is falling, alcohol intake on special occasions is largely unchanged and premium beers are well suited to such occasions. Asahi is now in hot pursuit of Suntory and Sapporo in this category, which could continue to post solid growth. We will take great interest in each company’s 2015 product strategy.

Figure 10: Comparison of four major brewers’ offerings in main beer categories Maker Asahi Kirin Suntory Sapporo Super Dry Ichiban Shibori Brand Super Dry Ichiban Shibori The Premium Malt's Yebisu Dry Premium Premium Contents 350ml 350ml 330ml 350ml 350ml 350ml Year of launch 2013 1987 2014 1990 2003 1890 Alcohol content 6.0% 5.0% 5.5% 5.0% 5.5% 5.0% 2013 sales 500 (2014 plan) 10627 (Gift exclusive) 3309 1767 961 (no. of 10K cases) ¥244 (330ml×11 Retail price (Tokyo CVS ) ¥256 ¥221 ¥221 ¥248 ¥256 Amazon)

Package

Source: Company data, President magazine (18 August 2014), Credit Suisse

Beverage Sector Initiation 4 09 December 2014

We expect 1% medium-term annual growth in domestic soft drinks In volume, Japan’s soft drink market has expanded at an average annual clip of 2.3% over the past 10 years. Contributing factors include: (1) higher household consumption of RTD tea-based beverages and bottled water and (2) increasing social participation by seniors, leading to greater consumption of soft drinks. Demand is comparatively stable, in stark contrast with beer and beer-like beverages, where the decline in the alcohol-drinking population is problematic. While soft drink consumption is somewhat affected by weather, we basically expect the market to continue growing at roughly 1% per year. Coca-Cola commands the top share of the market at just under 30%, but its share has been dwindling over the past decade. By contrast, Suntory B&F, Asahi, and Ito En have been adding to their market share, while Kirin's has been stagnant. A similar pattern is evident in canned coffee, a crucial segment for Japan’s soft drink manufacturers.

Figure 11: Japan’s soft drink production expanded at Figure 12: Increase in mineral water and sparkling water 2.3% per year over 10 years; cool summer in 2014 to consumption testament to Japanese consumers’ growing trigger fall of just over 1.5% health awareness (mil KL) Carbonated Carbonated drink Fruit juice Other drink 25 (-0.7%) Coffee Tea (+3.5%) 8% 18% Mineral water Sports drink Sports drink (+1.6%) 20 Other 8% Fruit juice 15 (+2.3%) Mineral 9% water 10 (+8.3%) 16%

5 Coffee (+0.7%) 14% 0 Tea (+1.0%)

27%

96 98 00 02 04 06 99 01 03 05 07 08 09 10 11 12 13 97 14F Source: Company data, Credit Suisse estimates Note: Figures in parentheses show average annual growth in production volume over past 10 years Source: Company data, Credit Suisse estimates

Figure 13: Breakdown of Japanese soft drink production Figure 14: Breakdown of Japanese canned coffee production (%) (%) (%) (%) 30.1 14 31 Asahi 11 39 Asahi 12.8 10.2 13 12.5 35.2 28.5 29 10 27.7 12 27.3 Itoen 34 27 Dydo 10.5 11.5 9 9.3 11 11.1 10.6 25 Kirin 8.0 29 10 8 10.2 Kirin 9 23 26.9 7 Coca 6.5 24 8 20.3 7.1 20.1 21 Cola (rhs) Coca 7 6 6.2 6.3 18.2 19 Suntory 6.1 Cola 6 19.7 19 (rhs) (rhs) 5 17 5 17.4 17.6 14.6 Suntory Other 4 14 (rhs) 4 15 (rhs) 04 05 06 07 08 09 10 11 12 13 04 05 06 07 08 09 10 11 12 13 14 9M Source: Inryou Souken, Credit Suisse estimates Source: Inryou Souken, Credit Suisse estimates

Beverage Sector Initiation 5 09 December 2014

Japan’s soft drink market in need of further realignment Whereas the Japanese beer market is controlled by just four brewers, the fiercely contested soft drink market has many more players. Margins also compare poorly with those on beer, partly because of differences in input costs, but also because of the widespread use of rebates, which support discounting by retailers. We note that for the three brewers other than Suntory Holdings, the beer business’ operating margin (excluding liquor tax) is higher than that of the soft drink business. Japan’s soft drink industry has undergone considerable realignment in recent years, with Asahi acquiring House Foods’ mineral water business and drink maker Calpis, and Sapporo HD incorporating Pokka as a consolidated subsidiary. We think the brewers will continue to spearhead realignment of the soft drink industry and will be closely monitoring moves by each company.

Figure 15: Profitability in alcoholic beverages and soft drinks by major Japan brewers Alcoholic beverage Alcoholic beverage Soft drink business business (ex tax) business Japanese market share OPM (%) OPM (%) OPM (%) Asahi Group HD 12.1 21.5 4.1 No. 1 in beer and related, No. 3 in beverages Kirin HD 7.1 12.0 1.0 No. 2 in beer and related, No. 5 in beverages Sapporo HD 3.6 6.2 0.9 No. 4 in beer and related, No. 9 in beverages Suntory HD 6.5 - 6.3 No. 3 in beer and related, No. 2 in beverages Ito En - - 4.4 Leaf/Drink segment's FY04/12 result Dydo Drinco - - 3.5 Beverages sales segment's FY01/14 result Coca Cola East - - 2.0 The company's FY12/13 result Coca Cola West - - 2.6 Soft drinks segment's FY12/13 result Kagome - - 3.5 The company's FY03/14 result Pokka (unlisted) - - 3.5 The company's FY03/12 result Calpis (unlisted) - - 4.8 The company's FY12/13 result Note: (1) OP before goodwill amortization for the four brewers. (2) Figures shown are 2013 results for Asahi group companies, Asahi Breweries and Asahi Soft Drinks; Kirin HD group companies Kirin Brewery and Kirin Beverage; Suntory HD’s beer & spirits business and its domestic soft drink unit Suntory B&F listing; and Sapporo HD’s domestic alcoholic beverage business and its foods and soft drinks business. (3) Sales to overseas markets included in some business segments. Source: Company data, Credit Suisse estimates

Large chain stores assuming greater presence in domestic beverage market Mass retailers are making their presence felt in the domestic beverage market, with supermarkets and discount stores accounting for a rising proportion of sales volume for beer and beer-like beverages. In the soft drink market, too, mass retailers account for an increasing percentage of sales volume, with vending machines losing ground and convenience stores holding firm. We attribute the increased sales weighting of large chain stores to the gradual trend toward upsizing in both the retail and wholesale sectors. As alluded to above, convenience stores’ share of the soft drink market has remained largely unchanged over the past decade. Across the retail sector as a whole, though, convenience stores are gradually adding to their share of sales value. We therefore believe that over the longer term, the convenience store sales channel will assume greater importance for soft drink makers as well. Private-label beverages have a smaller share of the market than in the US or Europe; however the major chain stores are beefing up their private-label offerings and we think private-label development and supply contracts will become a valuable business opportunity over time for national-brand beverage makers.

Beverage Sector Initiation 6 09 December 2014

Figure 16: Retailers’ share of beer and beer-like beverage Figure 17: Retailers’ share of soft drink sales volume: sales volume: commercial liquor outlets cede market vending machines lose ground while mass retailers gain share to supermarkets and discount stores (%) (%) 100 Commercia 100 l liquor 13 12 12 12 12 12 12 90 90 12 15 15 Other 26 28 25 25 25 23 24 24 24 21 outlet 80 80 0 General 21 21 20 20 20 21 20 21 7 0 20 20 70 11 9 8 6 6 liquor outlet 70 13 12 Convenie 27 28 60 60 nce store 24 26 25 25 Discount 25 24 31 31 33 33 50 25 24 store 50 35 36 37 38 12 38 39 12 Mass 40 11 11 10 10 40 11 11 Convenien 11 retailer 30 12 ce store 30 20 37 39 20 36 36 35 35 29 31 32 33 34 34 33 31 30 30 Vending 10 24 26 Supermark 10 26 26 et machine 0 0 04 05 06 07 08 09 10 11 12 13 04 05 06 07 08 09 10 11 12 13 Note: Categories changed in 2012 Source: Company data (Kirin HD) Source: Company data (Kirin HD)

Figure 18: Private labels’ share of sales value in major Figure 19: Japanese convenience stores' sales value and European markets (2013): Still ample room for share share of broader retail market: Market share gains gather growth by Japan’s food and beverage industry pace; likely to remain a vital sales channel for national brands and private labels

Switzerland 53% Finland 33% CVS sales total (JPY trn, LHS) 12 7.5% Spain 51% Hungary 33% CVS share of total retail sales (%, RHS) UK 45% Denmark 31% 10 7.0% Portugal 45% Sweden 31% 8 6.5% Germany 44% Czech 31% 6 6.0% Belgium 41% Holland 29% 4 Austria 39% Norway 28% 2 5.5% France 35% Italy 20% Slovakia 33% USA 18% 0 5.0% Poland 33% Japan 10%

Source: PLMA, Nikkei (for Japanese market shares), Credit Suisse Source: METI’s Current Survey of Commerce, Credit Suisse

Beverage Sector Initiation 7 09 December 2014

Overseas business trends Striving for market share growth in Asia-Oceania Major Japanese brewers stepped up overseas acquisitions and investment in the last few years, particularly in 2009–11. The trend was mainly driven by (1) the structural issue of market saturation in Japan and the need for developing growth markets in emerging countries and (2) the advantage afforded by the stronger yen in the wake of the global financial crisis. Given the likelihood of structural issues persisting in the domestic market, Japanese brewers and non-alcoholic beverage makers may for now continue to scale up business in Asia-Oceania where they can make a relatively strong showing. The Chinese market may be large but is also crowded and intensely competitive, so a concerted expansion there is unrealistic. In 2013–14, Asahi acquired small to midsize firms in Malaysia and Indonesia; meanwhile, Suntory B&F acquired GlaxoSmithKline's business of soft drink brands with some presence in Southeast Asia and Africa and completed its buyout of Beam Inc. in the US.

Figure 20: Recent overseas acquisitions by major Japanese alcoholic beverage makers Date of EBITDA around Acquisition/inv EV/EBITDA Multiple Company equity Company acquired or invested in Business overview Equity stake the time of estment value (CS estimates in part) acquisition acquisition Asahi Jun-2014 Etika Dairies Malaysia - condensed milk, milk beverages Wholly-owned subsidiary ¥33.4bn Approx. ¥2.7bn Approx. 12x* Group HD Aug-2013 PT Pepsi-Cola Indobeverages Indonesia - PepsiCo bottler Wholly-owned subsidiary ¥2.94bn N/A N/A Jan-2012 Mountain H2O Australia - exclusive water bottling and sales Wholly-owned subsidiary Undisclosed N/A N/A Nov-2011 Permanis Malaysia - No. 2 food company Wholly-owned subsidiary ¥20.2bn Approx. ¥1.7bn Approx. 13x Nov-2011 Independent Liquor New Zealand - No. 1 RTD drinks company Wholly-owned subsidiary ¥98.2bn Approx. ¥6.8bn Approx. 14x Sep-2011 P&N Beverages Australia - No. 3 beverage firm Wholly-owned subsidiary ¥14.9bn Approx. ¥1.4bn Approx. 11x Sep-2011 Charlie's Group New Zealand - No. 5 beverage company Wholly-owned subsidiary ¥8.2bn Approx. ¥330mn Approx. 25x Nov-2010 Ting Hsin Holdings China - Food and logistics major Around 6.5% ¥43.5bn N/A N/A Apr-2009 Tsingtao Beer China - No. 2 beer company Approx. 20% ¥68bn N/A N/A Apr-2009 Schweppes Australia - No. 2 beverage maker Wholly-owned subsidiary ¥77bn Approx. ¥7bn Approx. 11x

Kirin HD Oct-2012 Little World Beverages Australia - Craft beer company Wholly-owned subsidiary Approx. ¥20bn Approx. ¥1.3bn Approx. 15x Nov-2011 Schincariol Group Brazil - No. 2 beer producer Wholly-owned subsidiary Approx. ¥300bn Approx. ¥24.5bn Approx. 13x Mar-2011 Interfood Vietnam - Beverage company Approx. 57% Undisclosed Approx. ¥500mn N/A Jul-2010 Fraser & Neave Singapore - No. 1 beverage company Approx. 15% (Sold) ¥84.6bn N/A N/A Oct-2009 Lion Nathan Australia - No. 2 beer company Wholly-owned subsidiary Approx. ¥330bn N/A Approx. 12x * Feb-2009 San Miguel Philippines - No. 1 beer producer Approx. 48% Approx. ¥230bn N/A Approx. 9.4x* Dec-2007 National Foods Australia - No. 3 beverage company Wholly-owned subsidiary ¥294bn N/A Approx. 12x*

Suntory HD Apr-2014 Beam Inc. US - Leading producer of distilled spirits Wholly-owned subsidiary Approx. ¥1.7tn Approx. ¥80bn Approx. 21x Dec-2013 Lucozade・Ribena Brands (GSK) UK- Well-know soft drink brands Bussiness transfer Approx. ¥210bn Approx. ¥15.6bn Approx. 13.5x* Dec-2009 ASC Fine Wines HD China - Wine importer 70% equity stake Undisclosed N/A N/A Nov-2009 Orangina Schweppes France - Major beverage maker Wholly-owned subsidiary Over ¥300bn N/A N/A Feb-2009 Frucor New Zealand - Major beevrage maker Wholly-owned subsidiary Approx. ¥75bn N/A N/A

Sapporo HD Jan-2012 Silver Springs Citrus US - Leading PB for chilled beverages 51% equity stake Approx. ¥1.8bn N/A N/A Oct-2006 Sleeman Beer Canada - No. 3 beer company Wholly-owned subsidiary Approx. ¥30bn N/A N/A * company disclosure Source: Company data, Nikkei, Credit Suisse estimates Entering the beer market in major Southeast Asian nations is challenging due to it’s the established dominance of European and US brewers along with the major local brewers. Through a process of elimination, the focus has shifted to the less concentrated non- alcoholic beverage market. However, a step-by-step expansion of sales channels through category focus may be the only viable option in this market given that Coca-Cola, PepsiCo, Danone, and local brands already hold an established market share for their respective product categories. It is difficult to imagine a substantial profit contribution in a short period of time since the process involves selection and focus as well as coordinated development for a steady profit build-up.

Beverage Sector Initiation 8 09 December 2014

Figure 21: Beer market share for the four major Southeast Asian nations and China Beer Indonesia Malaysia Singapore Thailand Vietnam Philippines China Mkt share by top 3 (%) 93-95 90-92 71-73 93-95 78-80 98-100 50-52 Boon Rawd Heineken Carlsberg Heineken Sabeco San Miguel CRE Brewery Top 3 players Tsingtao San Miguel Heineken Carlsberg Thai Beverage Habeco SABMiller Brewery Diageo Diageo AB InBev Heineken Heineken Asia Brewery AB InBev

Soft drink Indonesia Malaysia Singapore Thailand Vietnam Philippines China Mkt share by top 3 (%) 46-48 46-48 58-60 46-48 53-55 40-42 30-32 Danone Thai Beverage Thai Beverage Coca-Cola PepsiCo Coca-Cola Coca-Cola Sinar Sosro Coca-Cola Coca-Cola Thai Beverage Tan Hiep Phat PepsiCo Tingyi Top 3 players Sapporo Boon Rawd Coca-Cola Yee Lee Corp JG Summit HD Asia Brewery Wahaha Holdings Brewery Source: Company data, Nikkan Keizai Tsushinsha, Credit Suisse Share price performance A look at Japan beverage sector’s share price performance since July 2013 (following the listing of Suntory B&F) shows Asahi and Suntory B&F outperforming the TOPIX. We believe this is largely attributable to a favorable investor view on strong profits at both firms and share buybacks by Asahi. Kirin has moved to enhance shareholder returns, but it has underperformed with earnings under pressure relative to its peers. We do not anticipate a major shift in the earnings trend from 2014 to 2015 (a detailed examination of individual businesses appears later in the report). Accordingly, relative share prices in the sector in 2015 are likely to follow 2014.

Figure 22: Japan beverage majors’ share price vs. TOPIX —Asahi, Sapporo, and Suntory B&F outperform (Index) Asahi Group HD Kirin HD 170 Suntory Bev & Food Sapporo HD Coca Cola West Coca Cola East 150 DyDo Drink Itoen

130

110

Source: Bloomberg, Credit Suisse (A comparison from July 2013 after Suntory B&F’s listing)

Beverage Sector Initiation 9 09 December 2014

Figure 23: Asahi: Steadily outperforming TOPIX on stable earnings and shareholder returns (Index) Versus TOPIX (LHS) Announces Announces share (Yen) 110 Share price (RHS) acquisition of Etika buyback (4.3%) 4,000 Dairies CoE) OP +9%、 share 105 buyback (4.3%), and a Announces FY12/14 3,500 substantial dividend increase (CoE) OP +4.7% 100 3,000 95 Announces upward revision to 1H 2,500 90 FY12/14 guidance Announces lawsuit 2,000 85 settlement, booking of compensation as extraordinary income 80 1,500 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Jun-14 Aug-14 Oct-14

Source: Bloomberg, Credit Suisse

Figure 24: Kirin: Underperforming TOPIX despite share buybacks due to continued guidance cuts (Index) Versus TOPIX (LHS) (Yen) 130 Share price (RHS) 1,900

120 Announces gains from 1,700 110 sales of F&N 1,500

100 Announces share buyback 1,300 Announces cuts to full- (5.2%) year OP guidance 90 1,100 Announces slight Annouces cuts 80 hiike to FY12/13 Announces (CoE) OP, and in full-year OP Announces slightly 900 estimates share buyback dividend increase lower FY12/14 OP (1.8%) 70 (CoE) 700 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Jun-14 Aug-14 Oct-14

Source: Bloomberg, Credit Suisse

Figure 25: SBF: Double-digit earnings growth reflected in share price, with current performance in line with TOPIX (Index) (Yen) Versus TOPIX (LHS) 150 4,400 Share price (RHS) 140 4,200 Announces FY12/13 2Q acquisition of 130 OP +26% businesses from GSK 4,000

120 Announces downward 3,800 revision to full-year FY12/13 (CoE) 110 3,600

100 3,400 Announces double-digit 90 Listed on TSE profit growth in full-year 3,200 First Section FY12/14 (CoE) 80 3,000 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14

Source: Bloomberg, Credit Suisse

Beverage Sector Initiation 10 09 December 2014

Valuation metrics A comparison of 26 major global players in the beer and beverage sector shows a correlation between stock valuation multiples and both ROE and profit growth in the medium-term (but this does not mean correlation is high). Also, stocks in this sector offer a strong defensive characteristic. We therefore think the stocks are assessed on the basis of longer-term prospects, and those that offer steady profits and sustained shareholder returns tend to win market favor. When a company has substantial sales growth driven by better and more competitive products than their rivals, a premium needs to be added to stock valuation—provided that the company generates momentum through profit growth above the industry average (conversely, a discount is attached to stocks with a notable deterioration in profits). We use EV/EBITDA as the base valuation metric for the following reasons: (1) most firms have global operations and need to be compared with overseas rivals, (2) EV/EBITDA makes it relatively easy to remove the bias caused by the accounting standards of different countries, (3) the flow-based valuation is more appropriate for companies with relatively stable earnings, and (4) EV/EBITDA is also used in consensus forecasts.

Figure 26: Medium-term profit growth rate vs. EV/EBITDA multiple (EV/EBITDA, x) 20 Monster Beverage Coca-Cola Thai Beverage 15 SABMiller Nestle PepsiCo Ambev Tsingtao Brewery UPC Danone Dr Pepper Asahi Group HD AB InBev Molson Coors 10 Coca-Cola Enterprise Arca Femsa Heineken Coca-Cola Femsa Coca-Cola Amatil Tingyi Suntory Food Bev Kirin HD Carlsberg CCU y = 0.1633x + 9.6236 R² = 0.1029 5 -5 0 5 10 15 20 25 (EBITDA growth rate, %) Note: Profit growth based on 3-year forward consensus, EV/EBITDA based on 2-year forward consensus Source: Bloomberg, Credit Suisse estimates

Figure 27: ROE vs. EV/EBITDA (EV/EBITDA, x) 20

Monster Beverage

Coca-Cola 15 SABMiller Thai Beverage Ambev Tsingtao Brewery Nestle UPC PepsiCo Molson Coors Danone AB InBev Dr Pepper Coca-Cola Enterprise Asahi Group HD Arca 10 Femsa Heineken Coca-Cola Femsa Tingyi Coca-Cola Amatil y = 15.461x + 8.3501 Carlsberg CCU R² = 0.2833 Suntory Food Bev Kirin HD 5 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% (ROE) Note: ROE and EV/EBITDA based on 2-year forward consensus estimates Source: Bloomberg, Credit Suisse

Beverage Sector Initiation 11 09 December 2014

Figure 28: Global beer and non-alcoholic beverage makers (CS forecasts) Market Div. Div. OP EBITDA OP EBITDA Company Rat- cap Stock Performance (%) PER (x) PBR (x) EV/EBITDA(x) ROE payout yield ROIC CAGR CAGR margin margin ing (USD b) 1m 3m 6m 1y FY1E FY2E FY1E FY2E FY1E FY2E FY2E FY2E FY2E FY2E FY0-3 FY0-3 FY0-3 FY0-3 Japan Beer/Bev Asahi Group HD N 14.5 10.8 15.3 25.0 36.2 16.2 18.5 2.0 1.9 11.2 10.8 10.3% 30.8% 1.4% 7.0% 5.8% 3.3% 7.3% 10.8% Kirin HD U 11.7 8.2 11.6 6.7 1.1 16.5 15.1 1.3 1.3 7.9 7.8 8.6% 79.9% 2.6% 3.8% -3.1% -1.6% 5.6% 12.3% Suntory Food Bev N 11.2 5.3 17.1 13.3 34.1 22.0 19.2 2.4 2.3 10.0 9.5 11.7% 43.6% 1.5% 6.7% 11.8% 8.3% 7.2% 13.0% US/Europe Beer AB InBev O 186.3 7.2 9.1 16.3 26.2 21.8 20.8 3.6 3.6 13.8 13.0 17.8% 65.0% 3.1% 13.2% 8.7% 8.4% 34.0% 41.0% SABMiller N 85.9 -2.3 -0.1 5.8 11.2 21.9 20.4 3.0 2.8 14.7 13.9 13.5% 44.0% 2.2% 9.3% 5.5% 5.5% 29.7% 35.4% Heineken N 44.8 6.6 6.8 24.7 27.4 20.8 18.8 3.0 2.8 12.2 11.5 14.7% 32.3% 1.7% 10.5% 6.5% 5.5% 16.5% 22.1% Carlsberg O 13.2 3.0 -3.0 -8.1 -11.2 14.5 12.9 1.1 1.1 9.5 8.9 8.2% 25.1% 1.9% 7.1% 5.6% 3.9% 15.5% 20.9% Molson Coors O 13.7 -2.9 4.3 12.3 36.3 17.4 17.4 1.6 1.5 12.3 11.5 8.8% 36.2% 2.1% 8.2% 5.4% 4.9% 26.4% 20.2% US/AU Bev Coca-Cola O 190.7 2.9 4.2 6.2 7.6 21.2 20.9 5.8 5.6 16.8 16.5 26.7% 63.3% 3.0% 13.0% 1.1% 4.9% 23.8% 28.4% PepsiCo N 146.3 1.0 6.4 11.2 17.6 21.4 20.0 6.8 7.1 12.9 12.3 35.4% 55.7% 2.8% 16.0% 3.9% 5.0% 15.5% 19.5% Monster Beverage O 17.9 -1.6 18.7 56.3 69.2 40.7 35.2 12.8 7.8 24.0 18.2 22.2% 0.0% 0.0% 56.4% 22.3% 22.1% 32.0% 33.1% Dr Pepper N 14.0 2.8 15.5 22.9 46.8 19.9 18.6 6.0 5.7 11.5 11.4 31.0% 45.7% 2.5% 17.4% 4.5% 4.9% 20.0% 23.3% Coca-Cola Amatil U 5.8 -4.1 0.0 -3.3 -23.1 18.4 18.2 4.2 4.0 9.4 9.2 22.0% 84.0% 4.6% 13.7% -5.6% -2.7% 13.2% 18.9% Europe Food/Bev Danone U 45.1 6.5 4.1 5.2 8.9 21.6 19.7 3.1 2.9 13.5 12.5 14.9% 56.3% 2.9% 10.7% 3.8% 3.8% 13.0% 16.3% Nestle N 239.0 3.1 1.2 5.1 11.2 22.1 20.2 3.7 3.7 14.4 13.3 18.3% 66.8% 3.3% 14.4% 4.5% 3.9% 15.5% 19.6% EM Beer/Bev Tingyi N 12.7 -5.2 -20.7 -19.4 -24.0 25.6 21.5 4.0 3.8 8.9 8.0 17.6% 81.1% 3.8% 16.7% 17.8% 13.7% 9.8% 14.4% Thai Beverage N 13.7 -4.6 0.7 12.5 46.9 20.8 18.6 4.2 3.7 18.2 16.8 20.1% 41.4% 2.2% 13.1% 12.3% 11.1% 15.8% 18.2% AmBev N 97.1 -2.7 1.5 -1.8 -4.4 20.9 19.0 6.1 5.9 13.2 12.0 31.1% 87.0% 4.6% 42.2% 8.3% 8.4% 43.3% 49.2% Coca-Cola Femsa N 19.1 -12.1 -14.1 -20.3 -22.0 - - - - 9.2 8.8 10.8% 41.8% 0.2% 10.6% 6.7% 7.7% 14.1% 19.5% Femsa O 32.2 -8.2 -6.8 -8.5 -4.5 - - - - 10.4 9.2 10.4% 35.0% 0.0% 9.6% 12.7% 13.5% 11.7% 16.0% Arca Continental N 9.8 -0.3 -10.4 0.3 6.8 21.6 19.5 3.2 2.9 11.4 10.4 14.7% 38.3% 2.0% 14.2% 7.5% 7.5% 17.6% 22.1% Source: Credit Suisse estimates (P/E, ROE for the three Japanese firms calculated before goodwill amortization)

Figure 29: Medium-term profit growth, margins, ROE, and valuation multiples (consensus forecasts) Next 3 yr forecasts Last 3 yr actual results EBITDA EBITDA ROE Div.payout Div. yld EV/EBITDA EBITDA EBITDA Company Ticker ROE Div.Payout 3yr CAGR margin FY2E FY2E (%) FY2E (%) FY2E (x) 3yr CAGR margin Japan Asahi Group HD 2502 JP 2.1% 11.1% 9.1% 28.6 1.3 10.9 6.1% 11.4% 8.4% 25.3% Kirin HD 2503 JP -0.9% 12.4% 4.9% 69.2 2.6 7.6 0.0% 13.5% 5.2% 146.5% Suntory Food Bev 2587 JP 9.7% 13.3% 8.0% 44.8 1.6 8.9 - 12.1% 8.3% 49.5% US/Europe beer AB InBev ABI BB 7.7% 40.5% 15.7% 61.4 3.0 11.2 7.2% 39.4% 23.4% 34.6% SABMiller SAB LN 7.4% 27.2% 14.2% 43.6 2.3 14.9 6.9% 32.7% 14.5% 44.8% Heineken HEIA NA 6.5% 23.3% 14.1% 31.8 1.7 9.5 6.6% 22.9% 17.8% 29.5% Carlsberg CARLB DC 2.8% 21.0% 7.7% 26.0 1.9 8.1 -0.3% 20.7% 8.0% 18.3% Molson Coors TAP US 11.2% 34.7% 8.9% 35.9 2.1 11.3 1.8% 29.2% 7.1% 43.4% US/AU soft drink Coca-Cola KO US 4.5% 28.4% 26.8% 63.2 3.0 16.2 7.3% 26.2% 27.2% 52.8% PepsiCo PEP US 4.6% 19.7% 34.7% 56.1 2.8 12.7 5.1% 18.4% 29.6% 51.5% Monster Beverage MNST US 22.1% 32.8% 31.4% 0.0 0.0 17.1 18.3% 27.3% 38.3% 0.0% Dr Pepper DPS US 5.3% 23.6% 32.1% 45.5 2.5 11.1 0.8% 21.6% 26.9% 46.2% Coca-Cola Enterprise CCE US 6.2% 17.3% 42.4% 36.7 2.5 10.3 4.4% 15.6% 25.3% 27.2% Coca-Cola Amatil CCL AU -2.1% 18.5% 22.1% 81.6 4.7 8.9 1.6% 20.5% 19.1% 241.8% Europe F&B Danone BN FP 4.4% 16.5% 14.1% 53.8 2.8 11.6 3.3% 17.3% 13.4% 57.8% Nestle NESN VX 6.9% 19.1% 17.9% 64.7 3.3 13.2 0.5% 18.1% 16.5% 66.5% Asia Tsingtao Brewery 168 HK 13.2% 10.7% 13.3% 30.1 1.2 13.7 -0.1% 11.9% 15.5% 27.2% CRE 291 HK 6.2% 4.3% 2.3% 45.5 1.3 4.9 9.2% 5.9% 7.8% 29.9% Tingyi 322 HK 15.2% 13.2% 16.1% 50.0 2.2 8.4 4.9% 10.9% 18.7% 46.4% UPC 220 HK 20.0% 8.9% 6.7% 22.2 0.7 11.6 21.1% 6.2% 9.3% 23.3% Thai Beverage THBEV SP 10.7% 18.1% 21.2% 51.5 2.8 15.9 9.2% 16.2% 27.6% 44.2% Latin America Ambev ABEV3 BZ 8.5% 49.3% 31.9% 93.6 5.1 12.1 14.6% 49.0% 28.6% 84.0% Femsa FEMSAUBD MM 12.6% 16.2% 10.9% 46.7 2.0 9.7 11.9% 15.4% 11.9% 37.7% Coca-Cola Femsa KOFL MM 11.4% 19.8% 11.0% 46.2 2.4 8.9 10.0% 18.1% 12.6% 33.2% Arca Continental AC* MM 9.4% 22.5% 15.0% 50.2 2.6 9.9 34.4% 19.1% 14.5% 63.5% CCU CCU CI 6.1% 20.2% 12.1% 51.0 3.1 7.8 7.4% 21.5% 19.2% 29.9% Note: Based on Bloomberg consensus estimates. EBITDA margin is the average 3-year forecast value. ROE and dividend payout ratio based on 2-year forward forecasts. EV/EBITDA multiple based on 2-year forward forecasts. Source: Bloomberg, Credit Suisse

Beverage Sector Initiation 12 09 December 2014

Figure 30: Global beer and non-alcoholic beverage sector valuations (consensus forecasts) Price MKCP ADTV Stock Performance (%) PER (x) PBR (x) EV/EBITDA (x) ROE(%) Div.yld (%) Div.payout(%) Company Ticker Cur. (08-Dec) (Mil.USD) 1m 3m 6m 1y FY1E FY2E FY1E FY2E FY1E FY2E FY1E FY2E FY1E FY2E FY1E FY2E Japan Asahi Group HD 2502 JP JPY 3,850 15,374 53.1 10.8 15.3 25.0 36.2 25.0 22.0 2.1 2.0 11.4 10.9 8.4 9.1 1.2 1.3 29.3 28.6 Kirin HD 2503 JP JPY 1,563 12,451 34.7 8.2 11.6 6.7 1.1 36.5 27.0 1.3 1.3 8.0 7.6 3.7 4.9 2.4 2.6 88.8 69.2 Suntory Food Bev 2587 JP JPY 4,385 11,189 22.6 5.3 17.1 13.3 34.3 37.5 28.0 2.4 2.3 9.9 8.9 6.3 8.0 1.3 1.6 49.6 44.8 Ave.(MKCP-weighted) 32.6 26.8 1.8 1.8 9.5 8.9 US/Europe beer AB InBev ABI BB EUR 93.33 186,333 166.2 6.1 8.1 15.1 24.9 21.7 20.3 3.4 3.2 11.9 11.2 15.6 15.7 2.7 3.0 59.0 61.4 SABMiller SAB LN GBp 3,352 86,071 140.8 -4.3 -2.2 3.6 8.9 21.1 19.1 2.9 2.7 16.6 14.9 13.9 14.2 2.1 2.3 44.1 43.6 Heineken HEIA NA EUR 62.56 44,758 58.8 5.5 5.7 23.4 26.1 20.7 18.5 2.9 2.6 10.4 9.5 13.9 14.1 1.6 1.7 32.1 31.8 Carlsberg CARLB DC DKK 520.0 13,413 31.3 2.1 -4.0 -9.0 -12.0 14.5 13.6 1.1 1.0 8.6 8.1 7.6 7.7 1.7 1.9 25.0 26.0 Molson Coors TAP US USD 74.92 14,241 117.2 -2.9 4.3 12.3 36.3 17.5 17.3 1.6 1.5 12.3 11.3 9.4 8.9 2.0 2.1 34.5 35.9 Ave.(MKCP-weighted) 20.9 19.5 3.0 2.8 12.3 11.4 US/AU soft drink Coca-Cola KO US USD 43.53 190,666 633.9 2.9 4.2 6.2 7.6 21.2 20.8 5.8 5.6 16.3 16.2 27.2 26.8 2.8 3.0 59.5 63.2 PepsiCo PEP US USD 97.76 146,308 405.3 1.0 6.4 11.2 17.6 21.3 19.9 6.6 6.9 13.3 12.7 30.9 34.7 2.6 2.8 55.0 56.1 Monster Beverage MNST US USD 106.69 17,885 129.5 -1.6 18.7 56.3 69.2 40.4 33.7 12.5 10.6 23.3 17.1 30.9 31.4 0.0 0.0 0.0 0.0 Dr Pepper DPS US USD 71.94 13,986 100.4 2.8 15.5 22.9 46.8 19.7 18.5 6.0 5.9 11.4 11.1 30.5 32.1 2.3 2.5 44.9 45.5 Coca-Cola Enterprise CCE US USD 44.20 10,685 103.8 3.5 -5.0 -3.2 3.8 15.6 14.7 6.3 6.2 10.4 10.3 40.4 42.4 2.3 2.5 35.2 36.7 Coca-Cola Amatil CCL AU AUD 9.10 5,761 25.1 -4.1 0.0 -3.3 -23.1 17.9 17.3 4.0 3.8 9.6 8.9 22.4 22.1 4.6 4.7 83.1 81.6 Ave.(MKCP-weighted) 21.0 20.4 6.2 6.2 14.5 14.0 Europe F&B Danone BN FP EUR 56.25 45,111 114.9 5.1 2.7 3.8 7.5 21.1 19.2 2.9 2.7 12.8 11.6 13.6 14.1 2.6 2.8 54.5 53.8 Nestle NESN VX CHF 72.05 239,033 325.8 2.5 0.6 4.5 10.5 21.2 19.6 3.6 3.5 14.0 13.2 16.7 17.9 3.1 3.3 66.3 64.7 Asia Tsingtao Brewery 168 HK HKD 55.50 9,403 7.8 2.7 -6.3 -8.2 -13.0 29.3 25.8 3.8 3.4 16.0 13.7 13.1 13.3 1.0 1.2 30.5 30.1 CRE 291 HK HKD 15.86 4,955 7.7 -11.4 -24.7 -25.5 -41.2 73.8 36.0 0.8 0.8 5.6 4.9 1.2 2.3 0.9 1.3 69.8 45.5 Tingyi 322 HK HKD 17.52 12,666 14.9 -5.2 -20.7 -19.4 -24.0 28.3 22.6 4.0 3.6 10.2 8.4 14.3 16.1 1.8 2.2 50.0 50.0 UPC 220 HK HKD 6.82 3,801 3.7 -5.4 -3.7 16.2 -8.2 38.8 30.2 2.1 2.0 14.3 11.6 5.4 6.7 0.6 0.7 21.4 22.2 Thai Beverage THBEV SP SGD 0.720 13,666 11.9 -4.6 0.7 12.5 46.9 20.0 18.2 4.3 3.8 17.4 15.9 21.6 21.2 2.6 2.8 52.8 51.5 Ave.(MKCP-weighted) 34.0 28.4 3.7 3.4 14.7 12.5 Latin America Ambev ABEV3 BZ BRL 16.00 97,041 78.5 -2.7 1.5 -1.8 -4.4 20.5 18.5 5.9 5.9 13.3 12.1 29.0 31.9 4.8 5.1 97.4 93.6 Femsa FEMSAUBD MM MXN 128.50 31,642 20.8 -2.2 2.8 1.8 6.1 27.0 23.2 2.7 2.5 10.9 9.7 10.0 10.9 1.0 2.0 28.2 46.7 Coca-Cola Femsa KOFL MM MXN 132.54 19,113 7.8 -6.4 -5.7 -11.2 -13.2 22.7 19.6 2.3 2.2 9.8 8.9 10.2 11.0 2.2 2.4 49.6 46.2 Arca Continental AC* MM MXN 87.22 9,777 7.8 -0.3 -10.4 0.3 6.8 21.7 19.4 3.1 2.9 11.1 9.9 14.5 15.0 1.7 2.6 37.3 50.2 CCU CCU CI CLP 6,042.1 3,648 2.0 -2.2 -8.3 -6.8 -0.9 17.1 16.4 2.1 2.0 8.3 7.8 12.3 12.1 3.0 3.1 50.8 51.0 Ave.(MKCP-weighted) 21.7 19.4 5.3 5.1 11.9 10.7 Index S&P 500 2.1 3.7 6.5 15.0 STOXX Europe 600 4.1 0.9 0.5 10.3 TOPIX 6.2 11.5 17.3 17.1 MSCI Asia ex JP 1.5 -5.5 -0.1 3.8 Shanghai Index 24.9 29.8 48.8 35.0 Note: Bloomberg median consensus forecasts Source: Bloomberg, Credit Suisse

Beverage Sector Initiation 13 09 December 2014

Figure 31: Food and beverage sector valuations in Japan (consensus forecasts) Price(JPY) MKCP ADTV Stock Performance (%) PER (x) PBR (x) EV/EBITDA (x) ROE(%) Div.yld (%) Div.payout(%) Company Ticker (08-Dec) (Mil.USD) 1m 3m 6m 1y FY1E FY2E FY1E FY2E FY1E FY2E FY1E FY2E FY1E FY2E FY1E FY2E Noodle Nissin Foods HD 2897 JP 5,790 5,603 11.7 -2.2 1.2 14.9 40.5 30.3 25.6 1.8 1.8 13.6 12.4 6.1 6.9 1.3 1.5 40.8 38.7 Toyo Suisan 2875 JP 4,090 3,736 12.4 5.1 25.5 31.5 37.5 22.3 20.0 1.8 1.7 9.1 8.0 7.9 8.3 1.2 1.3 27.2 26.9 Meat processing Nippon Meat Packers 2282 JP 2,460 4,134 24.7 1.9 13.1 22.1 49.0 18.6 18.2 1.5 1.4 8.9 8.9 7.9 7.7 1.5 1.6 28.7 28.9 Itoham Foods 2284 JP 648 1,321 2.0 14.1 27.6 45.9 45.3 24.5 20.6 1.2 1.1 13.5 11.7 4.7 5.4 1.2 1.2 30.3 25.4 Prima Meat Packers 2281 JP 272 503 1.9 7.9 -1.8 16.7 38.1 12.4 10.5 ------0.7 1.1 9.1 11.6 Seasoning Ajinomoto 2802 JP 2,352 11,516 33.8 8.7 34.3 43.1 66.9 29.9 23.4 2.2 2.1 11.6 10.5 7.2 8.8 0.9 1.2 28.0 27.9 Kikkoman 2801 JP 2,992 5,185 15.5 8.8 35.3 39.9 57.2 39.4 34.9 2.8 2.6 17.8 16.5 7.1 7.6 0.7 0.9 29.0 30.3 Kewpie 2809 JP 1,925 2,426 7.3 -0.7 8.2 24.0 36.8 21.9 19.1 1.5 1.4 6.8 6.0 6.8 7.4 1.2 1.3 26.2 24.3 House Foods 2810 JP 2,063 1,746 5.1 6.4 14.2 9.3 34.4 30.0 27.4 1.0 1.0 10.7 9.7 3.4 3.6 1.7 1.7 50.9 46.5 Kagome 2811 JP 1,808 1,484 3.7 2.3 4.0 4.0 6.3 61.9 40.8 1.6 1.6 16.4 13.3 2.6 4.0 0.9 1.5 57.4 59.8 Ariake Japan 2815 JP 2,829 765 1.5 10.9 20.1 6.3 17.3 20.9 19.4 1.6 1.5 9.0 7.6 7.8 8.0 1.8 1.9 37.4 36.3 Dairy product Yakult Honsha 2267 JP 6,390 9,260 14.5 4.8 15.6 24.3 25.5 42.3 36.3 3.6 3.3 18.9 16.6 8.4 9.1 0.4 0.4 16.5 14.8 Meiji HD 2269 JP 10,760 6,767 19.0 14.7 23.7 59.9 77.9 28.4 25.4 2.3 2.1 9.6 8.6 8.1 8.4 0.7 0.8 21.1 21.3 Megmilk Snow Brand 2270 JP 1,445 842 1.7 0.1 4.5 10.0 11.2 18.5 15.6 0.8 0.8 7.4 6.7 4.5 5.1 2.1 2.1 38.4 32.3 Morinaga Milk 2264 JP 385 790 2.2 4.9 7.2 -1.5 31.0 19.8 17.3 0.8 0.7 - - 3.9 4.3 1.8 1.8 36.1 31.4 Bakery, Confectionery Yamazaki Baking 2212 JP 1,532 2,780 6.7 9.8 12.9 27.6 44.8 31.4 30.5 1.4 1.3 5.9 5.6 4.4 4.4 1.0 1.0 32.8 31.8 Calbee 2229 JP 4,200 4,622 15.8 6.2 20.3 43.1 66.1 37.5 33.7 5.2 4.6 16.6 14.6 13.8 13.6 0.7 0.8 25.0 27.3 Ezaki Glico 2206 JP 4,440 2,539 11.8 20.7 19.7 46.2 88.9 16.6 24.7 1.8 1.7 11.7 10.0 11.0 7.1 0.7 0.7 11.2 16.7 Kameda Seika 2220 JP 3,675 676 0.7 3.2 11.9 16.3 31.1 22.3 19.0 1.9 1.8 9.1 8.0 8.6 9.2 0.8 0.8 17.0 15.0 Seafood processing Nippon Suisan 1332 JP 377 861 8.1 2.4 25.7 15.3 68.3 9.5 14.1 1.3 1.2 9.2 9.9 14.1 8.8 1.3 1.3 12.6 18.7 Nichirei 2871 JP 510 1,243 5.6 7.8 6.9 1.0 0.6 15.4 14.3 1.1 1.0 6.9 6.5 6.8 7.0 2.0 2.0 30.2 28.0 Food oil Fuji Oil 2607 JP 1,578 1,138 7.2 -9.4 -5.4 18.2 -2.2 14.7 12.7 1.0 1.0 6.2 5.7 6.8 7.5 1.7 2.1 25.2 26.5 Nisshin Seifun Group 2002 JP 1,189 2,981 7.7 4.8 8.6 9.5 23.9 24.0 23.2 1.1 1.0 8.9 8.4 4.4 4.5 1.6 1.7 39.5 39.1 Nippon Flour Mills 2001.T 528 740 0.9 -4.2 -0.9 -2.6 9.1 12.4 11.4 ------2.3 2.5 28.2 28.0 Food Average 27.5 25.3 1.8 1.7 10.6 9.7 Soft Drink Coca Cola West 2579 JP 1,699 1,555 6.6 5.7 6.9 -2.4 -23.2 38.9 24.7 0.7 0.7 4.6 4.0 1.9 2.9 2.4 2.4 93.9 59.7 Coca Cola East 2580 JP 1,887 1,895 9.3 -14.3 -22.3 -24.6 -9.2 72.2 26.4 1.1 1.0 5.4 4.3 1.5 3.9 1.7 1.7 122.4 44.8 Suntory Food Bev 2587 JP 4,385 11,162 22.5 5.3 17.1 13.3 34.3 37.5 28.0 2.4 2.3 9.9 8.9 6.3 8.0 1.3 1.6 49.6 44.8 DyDo Drink 2590 JP 5,040 688 1.4 9.0 16.8 16.8 15.6 26.3 25.5 1.0 1.0 2.0 1.8 3.9 3.8 1.2 1.2 31.3 30.4 Itoen 2593 JP 2,144 1,576 7.1 -2.4 -3.3 -11.1 -0.5 36.4 24.1 2.1 2.1 6.3 4.9 5.9 8.5 1.9 1.9 67.9 45.0 Beer Sapporo HD 2501 JP 544 1,766 7.3 13.8 24.2 26.5 19.0 - 22.7 1.4 1.4 11.0 10.1 -0.6 6.1 1.3 1.3 - 29.2 Asahi Group HD 2502 JP 3,850 15,337 53.0 10.8 15.3 25.0 36.2 25.0 22.0 2.1 2.0 11.4 10.9 8.4 9.1 1.2 1.3 29.3 28.6 Kirin HD 2503 JP 1,563 12,421 34.6 8.2 11.6 6.7 1.1 36.5 27.0 1.3 1.3 8.0 7.6 3.7 4.9 2.4 2.6 88.8 69.2 Beverage Average 25.3 23.8 1.7 1.6 8.9 8.2 Note: Bloomberg median consensus forecasts Source: Bloomberg, Credit Suisse

Beverage Sector Initiation 14 09 December 2014

Risks Input prices and the weakening yen Risks to our profit forecasts include higher-than-expected prices for inputs such as (1) malt and various starches for beer; (2) coffee beans, fruit juice, and high-fructose corn syrup for beverages; and (3) other materials such as cans and cartons. The following chart depicts the earnings structure of an average domestic beer business (our estimates). One finding is that packing materials including aluminum cans represent a relatively higher weighting among inputs and materials. Although increased aluminum prices do not necessarily lead to higher prices for beverage-use aluminum cans in Japan, we still expect some price hike pressure when contracts are reset in 2015. Aluminum prices on the LME have risen since January 2014, but data compiled by the Japan Aluminum Association points to a slight decline in the price of beverage-use aluminum cans. Also, the recent yen decline has spurred higher import prices of coffee beans, which could lead to higher COGS in 2015 and beyond.

Figure 32: Margins in domestic beer business (%, Figure 33: Breakdown of beer manufacturing cost excluding liquor tax) Sales 100 Labor costs, Variable costs Input costs (malt, hops) 12 and other costs Input costs Packing material (Aluminum cans) 21 21% (malt, hops) Other operational overheads 5 22% Contribution margin ratio 62 Fixed costs Advertisement, promotional costs 19 Depreciation cost 6 Depreciation Labor costs, logistics etc. 22 cost 9% OPM 15 Packing material Other (Aluminum operational cans) overheads 39% 9%

Source: Company data, Credit Suisse estimates CS estimates based Source: Credit Suisse assumption (2013) on company and industry data (2013)

Figure 34: Malting barley futures prices Figure 35: LME aluminium metal prices (EUR/ton) (JPY/ton) (USD/ton) (JPY/kg) EUR base JPY base USD base JPY base 380 40,000 2,900 260

35,000 2,700 240 330 2,500 220 30,000 280 2,300 200 25,000 230 2,100 180 20,000 1,900 160 180 15,000 1,700 140

130 10,000 1,500 120 May-10 May-11 May-12 May-13 May-14 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14

Source: Bloomberg (JPY prices derived from forex spot prices) Source: Bloomberg (JPY prices derived from forex spot prices)

Beverage Sector Initiation 15 09 December 2014

Figure 36: Coffee beans (NYB-ICE) prices Figure 37: Sugar (NYB-ICE) prices (Usd/lb) (JPY/lb) (Usd/lb) (JPY/lb) USD base JPY base USD base JPY base 350 260 40 30 28 300 240 35 26 220 30 250 24 200 25 200 22 180 20 20 150 160 15 18 100 16 140 10 14 50 120 5 12 0 100 0 10 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Source: Bloomberg (JPY prices derived from forex spot prices) Source: Bloomberg (JPY prices derived from forex spot prices) Liquor tax revision for beer and related products According to an article in the Sankei Shimbun on 19 November, the dissolution of the lower house on 21 November effectively suspends tax reform discussions for FY2015, and the revision of the liquor tax on beer and related products will now be taken up after the new elections on 14 December. A draft proposal had been under consideration for lowering the tax on beer and raising it on low-malt and no-malt beer to create a unified tax system in place of the current malt-based system. The future direction of these discussions is unclear. Liquor tax revision may have an impact on the brewers’ sales volume of beer and related products. Specifically Asahi, with its strong position in beer, could see more benefit than its peers. Compared with Europe and the US, where liquor is taxed based on alcohol content, a key feature of liquor tax in Japan is the sustained high tax rate on beer, which is consumed more than any other alcoholic beverage. (One possible motivation is to secure resources for the government.) Currently, liquor tax by alcohol percentage per liter (the amount consumer pays for each percentage of alcohol ingested when consuming one liter of an alcoholic beverage) is significantly higher on beer (¥44) than other alcoholic beverages (¥24 for low-malt beer and ¥16 for no-malt beer).

Figure 38: Beer tax rates in major countries Figure 39: Domestic liquor tax by alcohol content per liter (¥) (Yen) 160 Beer (5%) 44 139 140 Low-malt beer (5.5%) 24 120 103 No-malt beer (5%) 16 100 Canned chu-hai (7%) 11 80

60 Clear sake (15%) 8

40 32 Wine (12%) 7 14 20 8 Shochu (25%) 10 0 Japan UK USA France Germany Whiskey (40%) 10

Note 1: Price per 633ml, forex rates as of May 2014 Note: Amount paid for each percentage of alcohol ingested from Note 2: US data based on NY survey consuming one liter Source: Brewers Association of Japan Source: Brewers Association of Japan, Association for Considering Tax on Low Malt Beer

Beverage Sector Initiation 16

09 December 2014 Asia Pacific/Japan Equity Research Beverage (Food (Japan)) / MARKET WEIGHT

Asahi Group Holdings (2502 / 2502 JP) Rating NEUTRAL* Price (08 Dec 14, ¥) 3,850 INITIATION

Target price (¥) 4,050¹ Chg to TP (%) 5.2 Good balance between stable profit growth Market cap. (¥ bn) 1,763.05 (US$ 14.51) Enterprise value (¥ bn) 2,090.97 and shareholder returns Number of shares (mn) 457.93 Initiating coverage: We initiate coverage of Asahi Group with an NEUTRAL rating and Free float (%) 75.0 a ¥4,050 target price (potential return 5.2%). We think the stock looks attractive 52-week price range 3,850 - 2,547

*Stock ratings are relative to the coverage universe in each because: (1) we expect a 5–9% EPS CAGR over the next three years due to such analyst's or each team's respective sector. factors as cost cutting, (2) management’s policy for strengthening shareholder returns ¹Target price is for 12 months. appears sustainable, and (3) Asahi should be able to steadily leverage synergies in sales and costs at its overseas business segment. Asahi commands the lion’s share of Research Analysts Japan’s beer market and the third-largest share of the country’s soft drinks market. It Masashi Mori also continues to improve its sales mix and reduce costs. We expect Asahi to continue 81 3 4550 9695 [email protected] to achieve record OP levels for at least the immediate future. Asahi has notably balanced stable profit growth and solid shareholder returns. However, we see share- price upside of less than 10% over the next 12 months. Investment themes: Under the current medium-term plan, management has bolstered shareholder returns via share buybacks for two successive years. The company also appears to have limited itself to relatively small M&A targets. We therefore think Asahi might continue to use its substantial cash reserves to strengthen returns. Catalysts/risks: Potential near-term catalysts include a revision to Japan’s liquor tax and domestic monthly orders. We see the announcement of the new medium-term plan (2016–18) as a potential longer-term catalyst. Upside risks include the company: (1) acquiring further domestic market share and (2) increasing shareholder returns. Downside risks include: (1) a shrinking impact from cost cuts in Oceania and (2) slower growth and intensifying competition in Southeast Asia. Valuation: We base our TP on an EV/EBITDA of just under 11x applied to our FY12/15 forecast. We derive our assumed fair-price multiple from Bloomberg’s FY1 consensus forecast. We consider this multiple is reasonable as it is slightly lower than the average for major European and US brewers. Our TP yields a P/E of just under 20x on our FY12/15 adjusted EPS forecast (excluding goodwill amortization).

Share price performance Financial and valuation metrics

Year 12/13A 12/14E 12/15E 12/16E Price (LHS) Rebased Rel (RHS) Sales (¥ bn) 1,714.2 1,776.0 1,819.0 1,842.0 4000 120 Operating profit (¥ bn) 117.5 127.0 133.0 139.0 3000 110 Recurring profit (¥ bn) 123.6 132.9 139.4 145.9 2000 100 Net income (¥ bn) 61.7 92.0 78.0 82.5 1000 90 EPS (¥) 135.7 199.0 168.7 178.5 0 80 Dec-12 Apr-13 Aug-13 Dec-13 Apr-14 Aug-14 Change from previous EPS (%) n.a. IBES Consensus EPS (¥) n.a. 154.6 178.1 194.5 The price relative chart measures performance against the EPS growth (%) 10.6 46.6 -15.2 5.8 TOPIX which closed at 1447.58 on 08/12/14 P/E (x) 21.8 19.3 22.8 21.6 On 08/12/14 the spot exchange rate was ¥121.52/US$1 Dividend yield (%) 1.5 1.1 1.4 1.4 EV/EBITDA(x) 9.4 11.1 10.4 9.7 Performance Over 1M 3M 12M P/B (x) 1.7 2.0 1.9 1.8 Absolute (%) 10.8 15.3 36.2 ROE(%) 8.0 10.8 8.6 8.6 Relative (%) 4.7 3.9 19.1 Net debt/equity (%) 44.1 37.4 27.6 18.4

Source: Company data, Thomson Reuters, IFIS, Credit Suisse estimates.

09 December 2014

Share price catalysts and valuation Catalysts: We expect Asahi’s business development in 2015 to be in line with its current medium-term plan We see monthly domestic sales and quarterly earnings as potential near-term share price catalysts. Asahi commands the lion’s share of Japan’s beer market and the third-largest share of the country’s soft drinks market. Sales momentum is currently better than the market average. We expect management to announce business plans for the Asahi group in January or February 2015. However, we do not expect any major differences from the past two years as 2015 is the last year of the company’s current medium-term plan. We think Asahi will steadily boost profits by: (1) improving its sales mix and strengthening sales of premium brands, (2) advancing groupwide procurement of raw materials, and (3) optimizing capex. Looking to the longer term, the new medium-term plan for 2016–18 will likely be the next key catalyst. Under the current plan, management has bolstered shareholder returns via share buybacks for two successive years. We will be looking for moves to further boost shareholder returns. We think major M&A deals look unlikely and that Asahi will continue to limit itself to acquisitions of and investment in relatively small Southeast Asian companies. We believe that with growth slowing and competition intensifying in the global beverage market, Asahi has the wherewithal to continue posting record earnings via steps that include consolidating its business portfolio, improving its sales mix, and restructuring operations in Oceania to reduce costs. We think it also has the financial strength to continue pursuing the most appropriate capital strategies to achieve its current medium- term plan targets, which include higher ROE and EPS and stable, long-term growth.

Figure 1: Share price: Outperforming TOPIX in 2014 Figure 2: EV/EBITDA: Steady rise since start of Abenomics (Index) (Yen) Versus TOPIX (LHS) (x) 115 4,000 11 Share price (RHS) 110 3,500 10 105 +2σ 9.5 9 100 3,000 +1σ 8.5 8 95 2,500 Ave. 7.6 90 7 -1σ 6.6 2,000 85 6 -2σ 5.6 80 1,500 5 07/1 08/1 09/1 10/1 11/1 12/1 13/1 14/1

Note: TOPIX-relative share price performance Note: Comparison of 12-month forward EV/EBITDA multiples Source: Bloomberg, Credit Suisse estimates Source: Bloomberg, Credit Suisse estimates Valuation We base our TP on an EV/EBITDA of just under 11x applied to our FY12/15 forecast. Our assumed fair-price multiple is based on Bloomberg’s FY1 consensus forecast. We think our multiple is reasonable as it is slightly lower than the average for major European and US brewers. Our TP yields a P/E of just under 20x on our FY12/15 adjusted EPS forecast (excluding goodwill amortization), which amounts to a discount to the Japanese food sector average valuation (just under 26x on Bloomberg FY2 forecasts). The major European and US brewers include: AB InBev, SABMiller, Heineken, Carlsberg and Molson Coors. Figure 30 in our sector report shows valuations for these companies.

Beverage Sector Initiation 18 09 December 2014

Company outline Domestic business stable, contribution from Oceania/Southeast Asian operations gradually increasing Asahi’s core domestic alcoholic beverage business accounted for just under 80% of FY12/13 adjusted OP (excluding goodwill amortization). The soft drinks and food businesses, which derive the majority of their sales and profits in Japan, accounted for just under 10% of total OP. Asahi’s domestic weighting is the highest among the major Japanese alcoholic beverage makers. The company has large shares of the domestic beer and soft drink markets, and sales are relatively firm. Asahi’s overseas business incurred operating losses (excluding goodwill amortization) in FY12/10 resulting from a number of acquisitions. The business rebounded in FY12/11, however, contributing 2.3% of group OP. Management has subsequently pushed ahead with aggressive cost restructuring, and the profit contribution from overseas business rose to 5.5% in FY12/13. We think Asahi should be able to gradually expand profits from overseas business: (1) by continuing to leverage synergies in the Oceania business, and (2) due to the impact of acquiring Southeast Asia’s Etika Dairies Group and seeking synergies with existing operations. Asahi Group President Naoki Izumiya joined Asahi Breweries in 1972. He worked for a long time in the public relations department, becoming manager of the department in 1995. In 1998, he was appointed manager of the company’s management strategy unit. He subsequently rose through the management ranks, serving as a managing director and executive managing director of the alcoholic beverage business before being appointed president and chief operating office in 2010. He quickly displayed executive-level leadership and decision making, completing the acquisition of several overseas companies, especially beverage makers in Oceania, in 2011.

Figure 3: OP weighting by segment (pre-amortization) FY12/12 actual FY12/15 CSE

Overseas Overseas Other Operations Operations Other Food 0.4% 5.2% 8.6% 0.3% 3.0% Food 3.6% Soft Drinks 7.5%

Soft Drinks 16.0%

Alcoholic Alcoholic Beverages Beverages 83.9% 71.4%

Source: Company data, Credit Suisse estimates

Beverage Sector Initiation 19 09 December 2014

Current medium-term plan targets broadly achieved Under the current medium-term management plan (2013–15), Asahi has focused on revamping its business portfolio, building an optimal production network, and boosting capacity utilization. In its domestic soft drinks business, in September 2013 the company transferred and integrated the domestic soft drinks business and marketing division of acquisition Calpis into Asahi Soft Drinks, establishing a management structure that should be able to maximize the synergies of the merger. Meanwhile, Asahi continues to cut costs in the domestic alcoholic beverage business and Oceania operations. The current medium-term plan targets annual EPS growth of about 10% and a dividend payout ratio of around 30%. Both targets look attainable. Asahi is also within range of the plan’s final year (FY12/15) targets of 10% ROE (excluding the foreign currency translation adjustment account from capital) and the pre-goodwill adjustment-based target of 12%. Management implemented substantial share buybacks in 2013 and 2014. Even while thus enhancing shareholder returns, the company steadily reduced interest-bearing debt. We estimate the D/E ratio at end-FY12/15 will be just 33%, down from 63% in FY12/12. We think 2014 will represent a peak in capex and that Asahi's finances will put it in a position to possibly continue share buybacks barring major M&A deals.

Figure 4: Stable and sound finances facilitate M&A Figure 5: Shareholder returns: Dividend increases supplemented by share buybacks for past two years (JPY bn) (%) (JPY bn) Share buyback (LHS) (%) Dividend (LHS) Net Debt (LHS) FCF (LHS) D/E ratio (RHS) 500 120 50 Dividend payout ratio (RHS) 100 Shareholder return ratio (dividend+shr buyback) (RHS) 400 100 40 80

300 80 30 60 200 60 20 40 100 40

10 20 0 20

(100) 0 0 0

Source: Company data, Credit Suisse estimates Note: FY12/14 share buyback figure is net of CB redemptions Source: Company data, Credit Suisse estimates

Beverage Sector Initiation 20 09 December 2014

Figure 6: Company history 1889 Founding of Osaka Beer Brewing Company, precursor of Asahi Breweries 1906 Dai Nippon Breweries (DNB) established through merger of Osaka Breweries, Japan Beer Brewery, and Sapporo Beer 1949 DNB split into Asahi Breweries and Nippon Breweries by Economic Decentralization 1954 Invested in Nikka Whisky 1987 Launch of Asahi Dry 1990 Established Asahi Beer Soft Drinks (now Asahi Soft Drinks) 1997 Established joint venture in China with Tsingtao Brewery and others 1998 Established subsidiaries in North America and Europe 2001 Launch of Asahi Honnama Happoshu (low-malt beer) 2004 Established soft drinks joint venture in China with Tingyi Holdings 2004 Turned South Korea's Haitai Beverage into a consolidated subsidiary. 2005 Acquired stock of chilled beverage maker LB Co. 2007 Turned Japan's largest baby-food maker, Wakodo, into wholly-owned subsidiary 2008 Acquired stock of Amano Jitsugyo 2009 Acquired 100% equity interest in Schweppes Australia 2009 Acquired stock of Tsingtao Brewery 2010 Entered into agreement to acquire shares of P&N Beverages Australia 2010 Invested in Ting Hsin Group, China’s largest packaged food maker/distributor 2011 Shift to pure holding company structure under name of Asahi Group Holdings 2011 Acquired all issued shares of major New Zealand alcoholic beverage company, Flavoured Beverages Group Holdings 2011 Acquired all issued shares of New Zealand beverage company, Charlie’s Group 2011 Acquired mineral water and fruit juice businesses from P&N Beverages Australia 2011 Acquired all issued shares of Malaysian beverage company Permanis 2012 Launched Asahi Dry Zero 2012 Established two JVs in Indonesia with PT Indofood Sukses Makmur 2012 Acquired all the issued shares in Calpis 2013 Signed contract to establish JV for Calpis brand beverages in Thailand 2013 Agreed to acquire all issued shares of Indonesia's PT Pepsi-Cola Indobeverages 2013 Agreed to take over bottled water business of Indonesia's PT Tirta Bahagia Source: Company data

Beverage Sector Initiation 21 09 December 2014

Ex-Japan business development (mainly Oceania) Oceania, Southeast Asia, and China are key regions Oceania is the biggest overseas contributor to Asahi’s profits (OP before amortization of goodwill). However, the Oceania beverage market is mature, with little prospect of high organic growth. We therefore mainly expect profit growth from cost synergies with the companies Asahi has acquired. The earnings driver in China is expansion of contracted production of Tsingtao Brewery brand products at Beijing and Yantai plants. Asahi is gradually consolidating its production bases and expanding sales of Asahi brand beers in China. The company has a 30.4% stake in Tingyi-Asahi Beverages Holding, an equity-method joint venture formed with Tingyi Holding, one of China’s leading food manufacturers. China’s leading beer maker, Tsingtao Brewery, is also an equity-method affiliate, with Asahi holding a 20% equity stake. Asahi is probably aiming for synergies from its capital tie-ups with these two Chinese companies, but intensifying competition in the Chinese market combined with slowing market growth make it difficult to envision a growth scenario for Asahi’s Chinese business. In Southeast Asia, however, we think the company can reap the benefits of cost-reducing and sales-expanding synergies generated by consolidated subsidiaries in Malaysia and Indonesia. Asahi only recently entered the Indonesian market, and we think it probably plans for the time being to spend aggressively to open up the market for Asahi brand products.

Figure 7: Asahi Group companies in Asia/Oceania (as of August 2014) China Oceania Support growth of equity-method affiliates, Create integration synergies, business expand sales of Asahi brands restructuring Tingyi-Asahi Beverages HD 30.4% Schweppes Australia 100% Tsingtao Brewery 20% The Better Drinks 100% Beijing Beer Asahi 90% Mountain H2O 100% Yantai Beer Tsingtao Asahi 40% Independent Liquor (NZ) 100% Asahi Premium Beverages 100% Southeast Asia Network expansion in growth markets Permanis (Malaysia) 100% Etika Dairies (Malaysia) 100% Alcoholic beverage companies Asahi Indofood Beverage (Indonesia) 51% Soft drinks companies Calpis Osotspa (Thailand) 60% Equity share (subsidiaries) Equity share (equity-method affiliates) Asahi Loi Hein Co (Myanner) 51% Source: Company data, Credit Suisse Gradually realizing synergies in Oceania operations In Oceania, in April 2009 Asahi acquired Schweppes Australia, the Australian soft drinks business of the Cadbury Group, making the company a wholly owned subsidiary. Today, Schweppes is Australia’s second-largest soft drink maker after Coca-Cola. Schweppes Australia’s lineup is focused on its core carbonated beverages as well as sports drinks and juice beverages. In addition to producing its own brands, Schweppes produces and sells other companies' brands under licensing agreements. In 2011, Asahi acquired several other companies in Oceania, including Independent Liquor (New Zealand’s leading supplier of ready-to-drink cocktail beverages) and the former P&N Beverages (Australia’s third-largest supplier of soft drink beverages). The Oceania business is now being directed by a local holding company, which is promoting the creation of synergies among group companies in the region and concentration of product lineups on market-leading brands. Asahi is aiming for at least ¥6bn in cost savings in the period covered by the current medium-term plan (2013–15) by realizing synergies through the optimization of peripheral functions, consolidation of

Beverage Sector Initiation 22 09 December 2014 production and distribution bases, and joint procurement of raw materials. It is also aiming for sales synergies, including sales expansion via the complementary use of sales channels (e.g. leveraging Schweppes’ strong connections with convenience stores to promote sales of soft drink products by Charlie’s Group) and strengthening of the Oceania group’s product portfolio via concentration on leading, core brands. Meanwhile, Asahi has consolidated its group production network in Oceania into 11 plants, down from 16 immediately after the 2011 acquisitions. It plans further optimization of the regional production and distribution network.

Figure 8: Focus on cost and sales synergies with acquired companies in Oceania

Special features (strongest product categories, main sales FY11 sales FY11 EBITDA EBITDA Company Market position Purchase date channel, etc) (AUDmn) (AUDmn) margin (%)

・All categories, incl. carbonated drinks, juices, and water (mid- Schweppes Australia No.2 in Australian soft drinks market price range) 836 79 9.4 4/1/2009 ・Volume retailers, ordinary stores, commercial-use, CVS ・Juices, water (low-price range; for PBs) Asahi Beverages Australia No.3 in Australian soft drinks market 150 17 11.3 9/1/2011 ・Volume retailers ・Chilled juices, organic carbonated beverages (high price range) Charlie’s Group No.5 in New Zealand soft drinks market 29 4 13.8 9/1/2011 ・Commercial-use, CVS ・Spring water (mainly for PBs) Mountain H2O Bottler/distributor of spring water 31 - - 1/31/2012 ・Volume retailers ・RTD cocktails (Ready to Drink, low-alcohol content) Independent Liquor No.1 in New Zealand RTD market 346 83 24.0 11/1/2011 ・Ordinary stores, commercial-use Notes: (1) Asahi Beverages Australia took over the bottled water and juice businesses of the former P&N Beverages. Values are company estimates at the time of the acquisition; (2) Values are on each company's former fiscal-year basis. Forex rate used is NZD/AUD 0.76. Source: Company data, Credit Suisse Oceania beverage market: Expect growth to remain weak Oceania’s soft drinks market is characterized by low growth and intense competition. The market environment is also being complicated by the rise of private-brand (PB) drinks amid increasing oligopolization of retail channels, consumers’ growing health consciousness, and declining demand for carbonated beverages. Asahi’s relatively strong sales of private-brand water might help it offset some of the negative impact on sales in its existing brand categories. For now, continued cost-cutting efforts look likely to remain the main profit driver. Our basic expectation for the Australian beverage market is a slight increase in overall volumes, with sales of carbonated beverages likely to remain on a moderate downslope. Sales of bottled water drinks, however, have been growing by double digits, and Asahi is the leading non-PB supplier. Overall, we think the Oceania business has a relatively strong business portfolio.

Figure 9: Australian beverage market shares: Private brands on rise, especially in bottled water segment 2010 2013

Red Bull Other Red Bull Other Frucor 1% Frucor 6% 1% 2% 2% 7% TBB TBB 0% Lion 3% Lion Coca-Cola 6% 3% Heinz Coca-Cola 37% 4% 44% Heinz Private 5% Brands 9% Private Brands 17% Schweppes 28% Schweppes 25%

Source: Company data, Credit Suisse

Beverage Sector Initiation 23 09 December 2014

Figure 10: Schweppes sales breakdown by channel (2013) Figure 11: Australian consumer confidence rather firm 140 Other 10% 130 Convenience store 120 4% Professional- 110 use 11% 100 Mass-market Small-/mid- discounter 90 sized retailer 61% 14% 80

Jul-10

Jan-08 Jan-13

Jun-08 Jun-13

Oct-11

Apr-09 Apr-14

Sep-09 Feb-10 Sep-14

Dec-10

Aug-12

Nov-08 Nov-13 Mar-12 May-11 Source: Company data, Credit Suisse Source: Thomson Reuters Oceania alcoholic beverage market: cider/beer shipments offsetting RTD slump The Asahi Group is the leader in the New Zealand market for ready-to-drink (RTD) cocktail beverages with low alcoholic content, with a market share of a little over 50%. However, it is only fourth in the Australian RTD market, with a share of around 15%. The RTD market in both countries is shrinking due to the adverse impact of revisions to liquor taxes and changing consumer preferences for alcoholic beverages. In response, Asahi is focusing more on such growth categories as craft beer, imported premium beer, and cider. The company is the second-largest supplier of cider in Australia's cider market, where sales are growing by double digits. Asahi is also among the top three suppliers of ciders and craft beers in New Zealand.

Figure 12: Australia RTD market shares (2013) Figure 13: New Zealand RTD market shares (2013)

Other Other 7% 12% Beam Campari 10% Diageo 4% 32%

Asahi Independent Premium Liquor Beverage 51% 14% Lion 32% Brown- Forman Beam 15% 23%

Source: Company data (volume basis) Source: Company data (volume basis)

Beverage Sector Initiation 24 09 December 2014

Figure 14: Australia business: Alcoholic beverage sales breakdown – cider sales expanding, steady growth in imported beer sales 2013 2014 1H

Spirits Spirits 2% 1% Export Export 9% 10% OEM&Other RTD OEM&Other RTD 10% 41% 17% 43%

Beer 16% Beer 17% Cider Cider 12% 22%

Source: Company data, Credit Suisse

Figure 15: New Zealand business: Alcoholic beverage sales breakdown – craft beers on the rise 2013 2014 1H

Cider Cider OEM 2% OEM 3% 5% 4% Spirits Spirits 7% 7% RTD RTD 37% 42% Export Export 14% 13%

Beer 31% Beer 35%

Source: Company data, Credit Suisse

Beverage Sector Initiation 25 09 December 2014

Earnings forecasts

Figure 16: Earnings forecast summary Sales Operating profit Recurring profit Net profit EPS ¥mn YoY (%) ¥mn YoY (%) ¥mn YoY (%) ¥mn YoY (%) ¥ YoY (%) Consolidated 13/12 Actual 1,714,237 8.6 117,467 8.3 123,610 7.7 61,749 8.0 135.7 10.6 14/12 CS E 1,776,000 3.6 127,000 8.1 132,900 7.5 92,000 49.0 199.0 46.6 CoE 1,783,000 4.0 127,000 8.1 131,500 6.4 69,000 11.7 148.7 9.5 IBES E 1,766,753 3.1 127,894 8.9 133,462 8.0 71,615 16.0 154.6 13.9 15/12 CS E 1,819,000 2.4 133,000 4.7 139,400 4.9 78,000 -15.2 168.7 -15.2 IBES E 1,795,569 1.6 135,684 6.1 143,620 7.6 80,199 12.0 178.1 15.2 16/12 CS E 1,842,000 1.3 139,000 4.5 145,900 4.7 82,500 5.8 178.5 5.8 IBES E 1,821,082 1.4 142,558 5.1 151,657 5.6 86,339 7.7 194.5 9.2 Source: Company data, I/B/E/S, Credit Suisse estimates Domestic businesses: Cost cuts likely to offset rising material prices The figures below show our forecasts for sales volumes and our analysis of profit-affecting factors at Asahi Breweries and Asahi Soft Drinks. Our FY12/14 OP forecasts are in line with guidance. Unseasonable summer weather caused shipments of beer-type beverages to fall below budget, but we still expect OP broadly in line with guidance due to: (1) firm sales of western liquors and spirits, (2) mix improvement due to premium-beer category growth, and (3) the positive impact of cost cuts and a lighter fixed-cost burden. We expect Asahi to offset the adverse impact of higher prices for key materials such as coffee beans and malt from FY12/15 by continuing to reduce fixed costs, and to boost the efficiency of promotional spending by focusing on core brands. We think Asahi will maintain its strategy of focusing on sales of long-selling brands and strengthening premium categories in both its alcoholic beverage and soft drinks businesses. Overseas business: Expect return to profit in FY12/15 even including amortization For FY12/14, we expect Asahi’s overseas business segment to post another operating loss after deducting goodwill and other amortization expenses. However, we expect the segment to move back into profit in FY12/15. We expect profits at the Oceania business to gradually improve due to cost-saving synergies, including more efficient materials procurement and consolidation of the production and distribution network. Growing sales of bottled waters and non-cola carbonated beverages should offset ongoing sluggish sales of cola beverages. Bringing PET bottle production in-house should also help boost profits. We expect continued shrinkage in the RTD market in both Australia and New Zealand, but Asahi should be able to offset the adverse impact of this via firm sales of cider and by continuing its cost-cutting efforts. In Indonesia, we expect Asahi to continue to spend aggressively on promotions to raise brand recognition, and for the weak rupiah to raise costs. We consequently expect the local business to break even for the first time only in FY12/16. We expect business in China to remain firm, with increased contracted production volumes and further consolidation of production bases. Business in Malaysia should see steady sales growth from Permanis, supplemented by profit contributions from FY12/15 from Etika Dairies, which was consolidated in July 2014. Our forecasts for the two main overseas equity- method affiliates are based on the Bloomberg consensus forecasts for those companies.

Beverage Sector Initiation 26 09 December 2014

Figure 17: Asahi Breweries: Earnings forecasts (¥mn) FY12/08 FY12/09 FY12/10 FY12/11 FY12/12 FY12/13 FY12/14E FY12/15E FY12/16E Sales Volume (10,000 cases) Beer 12,901 12,115 11,608 11,078 11,096 10,888 10,801 10,855 10,887 Happoshu 2,902 2,511 1,863 1,648 1,545 1,557 1,580 1,565 1,533 New Genre 2,347 3,069 3,644 3,886 3,675 3,875 3,875 3,887 3,887 Beer Beverages Total 18,150 17,694 17,115 16,612 16,316 16,320 16,256 16,306 16,307

Volume (YoY, %) Beer -4.2 -6.1 -4.2 -4.6 0.2 -1.9 -0.8 0.5 0.3 Happoshu -13.7 -13.5 -25.8 -11.5 -6.3 0.8 1.5 -1.0 -2.0 New Genre 23.0 30.8 18.7 6.6 -5.4 5.4 0.0 0.3 0.0 Beer Beverages Total -3.1 -2.5 -3.3 -2.9 -1.8 0.0 -0.4 0.3 0.0 Amount (¥mn) Beer 685,700 646,500 620,400 593,200 595,200 585,800 583,742 586,660 588,420 Happoshu 110,300 96,200 71,500 63,300 59,600 60,200 61,634 61,018 59,797 New Genre 77,500 101,600 120,600 128,600 121,600 128,300 128,372 128,757 128,757 Beer Beverages Total 873,500 844,300 812,500 785,100 776,400 774,300 773,747 776,435 776,974 Shochu 52,700 50,300 48,300 40,300 32,700 31,600 31,300 31,500 31,500 Low-alcohol Drinks 31,400 30,600 31,200 28,200 28,800 27,400 28,000 28,300 28,500 Western liquor 27,500 26,000 30,400 30,800 29,800 37,800 40,700 40,300 40,300 Wine 14,800 12,400 11,500 10,600 11,500 12,000 13,500 13,700 13,700 Other Alcoholic Beverages 3,200 3,900 7,000 4,800 21,100 22,400 25,500 26,500 27,500 Total Alcoholic Beverages 129,600 123,200 128,400 114,700 123,900 131,200 139,000 140,300 141,500 Other 16,400 18,000 22,400 19,700 20,000 22,300 22,300 22,300 22,300 Sales total 1,019,600 985,500 963,300 919,600 920,800 927,800 935,000 939,000 941,000 (YoY, %) -1.1 -3.3 -2.3 -4.5 0.1 0.8 0.8 0.4 0.2 (Alcohol Tax） 473,100 451,000 432,700 413,200 406,400 403,700 405,700 407,000 408,000 Operating Profit （Main factors influencing OP） Change in beer beverage volume 7,100 -5,200 -8,500 -8,300 -4,000 -500 -1,202 896 160 Change in Alcohol Business overall sales -2,000 -1,900 1,900 -4,900 6,020 3,100 3,900 650 600 Change in manufacturing and distribution costs -9,900 500 7,500 2,400 0 -2,400 -200 -1,500 0 Change in packaging composition 700 300 400 1,100 1,100 1,000 1,700 1,000 500 Change in advertising and promotion expenses 15,600 -100 100 8,700 1,400 -4,100 -5,000 -500 -1,500 Change in other costs and expenses -300 -6,200 4,800 15,500 7,700 3,900 3,000 2,500 2,500 (Change in labor costs) -600 -2,700 1,400 1,200 -500 -1,600 1,000 1,000 1,000 (Change in depreciation expenses) -1,300 -5,200 1,500 3,300 4,700 2,500 1,800 1,500 1,500 (Other) 1,600 1,700 1,900 11,000 3,500 3,000 200 0 0 OP 91,100 78,500 84,700 99,300 111,500 112,500 114,700 117,700 120,000 (YoY, %) 14.0 -13.8 7.9 17.2 12.3 0.9 2.0 2.6 2.0 Operating Profit Margin (%) 8.9 8.0 8.8 10.8 12.1 12.1 12.3 12.5 12.8 OPM excluding Alcohol Tax (%) 16.7 14.7 16.0 19.6 21.7 21.5 21.7 22.1 22.5 Source: Company data, Credit Suisse estimates

Beverage Sector Initiation 27 09 December 2014

Figure 18: Asahi Soft Drinks: Earnings forecasts (¥mn) FY12/08 FY12/09 FY12/10 FY12/11 FY12/12 FY12/13 FY12/14E FY12/15E FY12/16E Sales Volume (10,000 cases) Carbonated Beverages 3,606 4,124 4,323 4,338 4,870 5,424 5,489 5,599 5,683 Fruit Drinks 1,120 1,113 1,172 1,339 1,617 1,617 1,593 1,593 1,593 Coffee 3,590 3,690 3,566 3,858 4,042 3,977 4,045 4,097 4,150 Tea-based Drinks 3,473 3,117 3,561 3,597 4,123 3,755 3,793 3,868 3,946 Health and Functional Beverages 796 698 832 823 862 905 914 923 932 Mineral Water 679 633 1,125 1,996 2,185 2,307 2,330 2,447 2,520 Other Beverages 116 104 105 177 250 216 238 238 238 Calpis - - - - 1,113 2,339 4,919 5,066 5,218 Goods purchased 1,149 1,195 1,217 1,156 232 311 330 336 343 Total 14,529 14,674 15,901 17,284 19,294 20,851 23,649 24,167 24,623 Volume (YoY, %) Carbonated Beverages 5.5 14.4 4.8 0.3 12.3 11.4 1.2 2.0 1.5 Fruit Drinks -21.1 -0.6 5.3 14.2 20.8 0.0 -1.5 0.0 0.0 Coffee 25.9 2.8 -3.4 8.2 4.8 -1.6 1.7 1.3 1.3 Tea-based Drinks 0.3 -10.3 14.2 1.0 14.6 -8.9 1.0 2.0 2.0 Health and Functional Beverages -26.8 -12.3 19.2 -1.1 4.7 5.0 1.0 1.0 1.0 Mineral Water 11.7 -6.8 77.7 77.4 9.5 5.6 1.0 5.0 3.0 Other Beverages -12.8 -10.3 1.0 68.6 41.2 -13.6 10.0 0.0 0.0 Calpis - - - - - 110.2 110.3 3.0 3.0 Goods purchased 899.1 4.0 1.8 -5.0 -79.9 34.1 6.0 2.0 2.0 Total 9.8 1.0 8.4 8.7 11.6 8.1 13.4 2.2 1.9 Amount（¥mn） Carbonated Beverages 64,600 73,900 77,000 77,100 79,900 89,700 90,749 92,564 93,953 Fruit Drinks 19,600 18,800 19,400 22,800 23,800 23,000 22,655 22,655 22,655 Coffee 77,900 79,700 76,900 82,800 85,700 83,800 85,118 86,224 87,345 Tea-based Drinks 56,000 50,100 58,300 57,700 65,000 57,900 58,492 59,661 60,855 Health and Functional Beverages 14,500 12,400 14,700 14,900 16,100 17,000 17,138 17,310 17,483 Mineral Water 11,300 10,500 15,200 23,900 24,900 26,200 26,314 27,629 28,458 Other Beverages 5,400 4,200 5,100 6,200 7,300 7,200 7,280 7,280 7,280 Other Beverages - - - - 21,000 48,000 110,076 113,378 116,779 Goods purchased 24,200 24,800 24,900 25,600 9,900 12,800 12,826 13,082 13,344 Sales total 274,400 273,600 291,600 310,900 333,600 365,700 431,000 440,000 448,000 (YoY, %) 11.4 -0.3 6.6 6.6 7.3 9.6 17.9 2.1 1.8 Operating Profit (Main factors influencing OP) Change in sales volume 16,200 1,700 3,400 4,700 7,400 7,100 1,800 2,900 2,700 Change is product and packaging content -1,900 300 -700 600 -2,700 300 700 400 200 Variable cost decrease 2,700 3,300 5,000 3,300 1,000 3,600 2,800 2,000 2,000 Variable cost increase -3,000 -1,900 -900 -2,400 -1,700 -300 -400 -1,800 -700 Change in advertising and promotion expenses -6,500 -1,800 -4,600 -2,700 -6,600 -2,800 -1,300 -2,000 -2,000 Change in other costs and expenses -9,100 -1,400 700 -200 -2,000 -1,700 100 0 0 Effect of consolidated Calpis - - - - - 0 3,600 - - OP 7,000 7,200 10,100 13,400 8,800 15,000 22,300 23,800 26,000 (YoY, %) -18.6 2.9 40.3 32.7 -34.3 70.5 48.7 6.7 9.2 OPM (%) 2.6 2.6 3.5 4.3 2.6 4.1 5.2 5.4 5.8 Source: Company data, Credit Suisse estimates

Beverage Sector Initiation 28 09 December 2014

Figure 19: Asahi Group Holdings: Sales by segment FY12/10 FY12/11 FY12/12 FY12/13 FY12/14E FY12/15E FY12/16E Forex Rate JPY/USD 87.8 79.8 79.8 97.7 105.0 109.0 109.0 JPY/AUD 80.6 82.4 82.7 94.4 95.0 97.0 97.0 JPY/CNY 13.0 12.4 12.7 15.9 16.5 17.8 17.8 JPY/MYR - - 25.9 31.0 32.0 33.5 33.5 JPY/100IDR - - - 0.95 0.89 0.92 0.92 Sales (¥mn) Alcoholic Beverages Business 989,227 942,423 944,017 948,555 955,500 959,500 961,500 Asahi Beer 963,300 919,600 920,800 927,800 935,000 939,000 941,000 Others, Business Use 26,000 22,800 23,200 20,700 20,500 20,500 20,500 Soft Drinks Business 312,227 329,815 375,449 466,247 479,000 489,000 497,500 Asahi Soft Drinks 291,600 310,900 333,600 365,700 431,000 440,000 448,000 Calpis - - 26,500 90,000 27,500 29,000 30,000 LB 23,700 21,300 20,400 22,300 23,000 23,000 23,000 Other, Internal Elimination -3,000 -2,400 -5,100 -11,800 -2,500 -3,000 -3,500 Food Business 97,321 100,064 103,498 108,156 111,500 112,500 113,500 Asahi Food & Healthcare 47,100 48,900 51,300 55,000 57,500 58,000 59,000 Wakodo 36,600 37,100 36,400 36,800 36,500 37,000 37,000 Amano Jitsugyo 16,700 17,800 19,700 20,300 21,500 22,000 22,500 Other, Internal Elimination -3,100 -3,700 -3,900 -3,900 -4,000 -4,500 -5,000 Overseas Operations 97,682 94,236 157,954 192,894 232,000 261,000 274,000 Oceania Total 65,600 80,900 129,700 152,700 162,000 169,000 172,000 Oceania Soft Drinks - - 90,100 102,400 105,000 109,000 111,000 Oceania Alcoholic Beverages - - 39,700 50,200 57,000 60,000 61,000 China Total 11,200 11,600 11,000 14,800 18,000 21,000 23,000 Permanis - - 15,500 22,100 24,000 27,000 29,000 Others, Business Use 1,800 1,700 1,700 3,400 28,000 44,000 50,000 Haitai Beverage 0 ------Other Business 67,855 70,559 74,455 81,597 83,000 84,000 84,500 Adjustment(Total company, eliminations) -74,854 -74,365 -76,298 -83,215 -85,000 -87,000 -89,000 Total 1,489,460 1,462,736 1,579,076 1,714,237 1,776,000 1,819,000 1,842,000 Sales（YoY,%） Alcoholic Beverages Business - -4.7 0.2 0.5 0.7 0.4 0.2 Soft Drinks Business - 5.6 13.8 24.2 2.7 2.1 1.7 Food Business - 2.8 3.4 4.5 3.1 0.9 0.9 Overseas Operations - -3.5 67.6 22.1 20.3 12.5 5.0 Other Business - 4.0 5.5 9.6 1.7 1.2 0.6 Total - -1.8 8.0 8.6 3.6 2.4 1.3 Sales breakdown（%） Alcoholic Beverages Business 63.2 61.3 57.0 52.8 51.3 50.3 49.8 Soft Drinks Business 20.0 21.5 22.7 25.9 25.7 25.7 25.8 Food Business 6.2 6.5 6.3 6.0 6.0 5.9 5.9 Overseas Operations 6.2 6.1 9.5 10.7 12.5 13.7 14.2 Other Business 4.3 4.6 4.5 4.5 4.5 4.4 4.4 Source: Company data, Credit Suisse estimates

Beverage Sector Initiation 29 09 December 2014

Figure 20: Asahi Group Holdings: OP by segment (¥mn) FY12/10 FY12/11 FY12/12 FY12/13 FY12/14E FY12/15E FY12/16E Operating Profit (¥mn)） Alcoholic Beverages Business 87,200 101,100 113,300 113,800 116,700 119,000 121,300 Asahi Beer 84,700 99,300 111,500 112,500 114,700 117,700 120,000 Others, Business Use 2,500 1,800 1,800 1,300 2,000 1,300 1,300 Soft Drinks Business 11,100 14,200 10,200 20,700 25,000 26,700 29,000 Asahi Soft Drinks 10,100 13,400 8,800 15,000 22,300 23,800 26,000 Calpis - - 1,000 5,300 2,200 2,400 2,500 LB 900 700 200 400 500 500 500 Others, Business Use 100 100 200 0 0 0 0 Food Business 4,600 4,300 4,000 5,200 5,800 6,000 6,400 Asahi Food & Healthcare 2,100 2,000 2,300 2,900 3,300 3,400 3,600 Wakodo 2,100 1,700 1,000 1,700 1,600 1,700 1,800 Amano Jitsugyo 500 600 700 500 900 900 1,000 Others, Business Use 0 0 0 100 0 0 0 Overseas Operations -1,200 2,800 7,000 8,200 12,000 14,400 15,900 Oceania Total 0 3,900 6,900 7,100 9,200 9,900 10,500 Oceania Soft Drinks - - 4,200 5,600 6,900 7,400 7,700 Oceania Alcoholic Beverages - - 2,600 1,500 2,300 2,500 2,800 China Total -1,900 -1,000 -100 600 1,400 1,700 1,900 Permanis - - 600 1,100 1,100 1,200 1,300 Others, Business Use -300 -100 -400 -600 300 1,600 2,200 Haitai Beverage -2,800 ------Other Business 1,145 759 606 622 500 500 500 Adjustment(Total company, eliminations) 168 -7,228 -12,650 -12,709 -15,000 -15,400 -15,900 Goodwill and other depreciation costs -7,700 -8,900 -14,000 -18,400 -18,000 -18,200 -18,200 Alcoholic Beverages Business ------Soft Drinks Business -2,800 -2,800 -2,800 -5,200 -5,100 -5,100 -5,100 Food Business -1,000 -300 -300 -400 -400 -400 -400 Overseas Operations -3,900 -5,800 -10,900 -12,900 -12,500 -12,700 -12,700 Other Business ------Total 95,349 107,190 108,437 117,467 127,000 133,000 139,000 OP before G/W amortization (YoY,%) Alcoholic Beverages Business - 15.9 12.1 0.4 2.5 2.0 1.9 Soft Drinks Business - 27.9 -28.2 102.9 20.8 6.8 8.6 Food Business - -6.5 -7.0 30.0 11.5 3.4 6.7 Overseas Operations - - 150.0 17.1 46.3 20.0 10.4 Other Business - -33.7 -20.2 2.6 -19.6 0.0 0.0 Total - 12.4 1.2 8.3 8.1 4.7 4.5 OPM before G/W amortization (%) Alcoholic Beverages Business 8.8 10.7 12.0 12.0 12.2 12.4 12.6 Soft Drinks Business 3.8 4.6 3.1 5.7 5.8 6.1 6.5 Food Business 4.7 4.3 3.9 4.8 5.2 5.3 5.6 Overseas Operations -1.2 3.0 4.4 4.3 5.2 5.5 5.8 Other Business 1.7 1.1 0.8 0.8 0.6 0.6 0.6 Total 6.9 7.9 7.8 7.9 8.2 8.3 8.5 OPM after G/W amortization (%) Alcoholic Beverages Business 8.8 10.7 12.0 12.0 12.2 12.4 12.6 Soft Drinks Business 2.8 3.7 2.2 4.2 4.6 4.9 5.3 Food Business 3.7 4.0 3.6 4.4 4.8 5.0 5.3 Overseas Operations -5.2 -3.2 -2.5 -2.4 -0.2 0.7 1.2 Other Business 1.7 1.1 0.8 0.8 0.6 0.6 0.6 Total 6.4 7.3 6.9 6.9 7.2 7.3 7.5 OP breakdown–before G/W amortization (%) Alcoholic Beverages Business 84.8 82.0 83.9 76.6 72.9 71.4 70.1 Soft Drinks Business 10.8 11.5 7.6 13.9 15.6 16.0 16.8 Food Business 4.5 3.5 3.0 3.5 3.6 3.6 3.7 Overseas Operations -1.2 2.3 5.2 5.5 7.5 8.6 9.2 Other Business 1.1 0.6 0.4 0.4 0.3 0.3 0.3 Source: Company data, Credit Suisse estimates

Beverage Sector Initiation 30 09 December 2014

Figure 21: Asahi Group Holdings: Consolidated balance sheet and changes in net assets (¥mn) FY12/07 FY12/08 FY12/09 FY12/10 FY12/11 FY12/12 FY12/13 FY12/14E FY12/15E FY12/16E (Assets) Cash,cash equivalents & securities 11,680 13,074 19,583 11,534 16,893 34,573 42,200 43,852 49,840 58,308 Account receivable 278,239 265,048 274,558 274,379 279,596 317,008 317,106 328,480 330,609 333,711 Inventories 90,436 97,038 97,442 95,358 102,629 113,518 118,302 120,086 122,080 122,614 Other 37,433 43,227 44,127 45,464 61,351 69,001 60,397 73,332 73,332 73,332 Allowance for doubtful accounts -6,576 -6,044 -7,665 -5,685 -3,326 -4,914 -3,117 -4,542 -4,542 -4,542 Total current assets 411,212 412,344 428,047 421,052 457,145 529,189 534,890 561,209 571,319 583,424 Tangible fixed assets 622,719 606,791 599,108 557,100 536,236 583,398 584,219 599,719 597,719 595,719 Depreciable PP&E 438,511 415,498 408,289 367,814 354,825 370,014 358,673 - - - Land 180,760 185,201 184,433 182,569 176,054 205,553 206,110 - - - Construction in progress 3,447 6,090 6,382 6,714 5,354 7,828 19,436 - - - Intangible fixed assets 81,023 76,371 140,741 121,812 234,288 299,137 290,025 272,025 254,025 236,025 Goodwill 65,326 60,675 100,314 84,172 184,407 203,764 196,203 184,203 172,203 160,203 Other 15,697 15,696 40,427 37,640 49,880 95,373 93,822 87,822 81,822 75,822 Investments & other assets 209,438 203,551 265,755 305,392 302,237 320,461 382,419 393,557 393,557 393,557 Investment securities 104,067 142,731 206,364 235,685 236,099 266,248 331,427 342,567 342,567 342,567 Other 112,525 67,465 63,723 75,607 71,790 57,621 56,637 56,637 56,637 56,637 Allowances -7,154 -6,645 -4,332 -5,900 -5,655 -3,409 -5,647 -5,647 -5,647 -5,647 Total fixed assets 913,180 886,714 1,005,605 984,305 1,072,762 1,202,998 1,256,665 1,265,301 1,245,301 1,225,301 Total assets 1,324,392 1,299,058 1,433,652 1,405,358 1,529,907 1,732,187 1,791,555 1,826,510 1,816,620 1,808,725 (Liabilities) Account payable 100,420 99,674 100,998 102,948 104,527 117,774 118,650 122,471 123,480 124,530 Short-term debt 202,981 122,556 186,220 98,259 189,679 242,696 221,333 198,503 142,304 84,050 Other 293,395 293,831 286,562 298,667 307,960 319,598 326,098 326,098 326,098 326,098 Total current liabilities 596,796 516,061 573,780 499,874 602,166 680,068 666,081 647,072 591,882 534,678 Long-term debt 129,477 179,703 205,655 213,163 200,412 213,536 182,387 173,268 164,604 156,374 Other 68,336 68,666 76,514 79,650 83,530 111,703 115,606 115,606 115,606 115,606 Total fixed liabilities 197,813 248,369 282,169 292,813 283,942 325,239 297,993 288,874 280,210 271,980 Total liabilities 794,610 764,430 855,949 792,688 886,108 1,005,308 964,074 935,946 872,092 806,658 (Net assets) Capital stock 182,531 182,531 182,531 182,531 182,531 182,531 182,531 182,531 182,531 182,531 Capital surplus 151,260 151,147 151,048 150,910 150,788 150,641 152,537 143,368 143,368 143,368 Retained earnings 178,079 214,189 252,146 295,228 338,809 383,177 428,661 500,322 554,286 611,826 Treasury stock -14,675 -29,579 -29,283 -28,721 -28,295 -27,763 -40,032 -58,233 -58,233 -58,233 Total shareholders' equity 497,195 518,288 556,442 599,948 643,833 688,586 723,698 767,988 821,952 879,492 Valuation and translation adjustments 17,471 3,305 17,029 12,243 -2,100 35,232 95,595 109,614 109,614 109,614 Total equity capital 514,667 521,595 573,472 612,193 641,733 723,818 819,293 877,602 931,566 989,106 Minority interests 15,115 13,033 4,229 478 2,065 3,060 8,186 12,961 12,961 12,961 Total net assets 529,782 534,627 577,702 612,670 643,798 726,879 827,481 890,563 944,527 1,002,067 Total liabilities & net assets 1,324,392 1,299,058 1,433,652 1,405,358 1,529,907 1,732,187 1,791,555 1,826,510 1,816,620 1,808,725

FY12/07 FY12/08 FY12/09 FY12/10 FY12/11 FY12/12 FY12/13 FY12/14E FY12/15E FY12/16E (Changes in net assets) Beginning balance 509,774 529,782 534,627 577,702 612,670 643,798 726,879 827,481 890,563 944,527 Capital stock 0 0 0 0 0 0 0 0 0 0 Capital surplus 756 -113 -99 -138 -122 -147 1,896 -9,169 0 0 Net profits 44,798 45,014 47,644 53,080 55,093 57,183 61,749 92,000 78,000 82,500 Dividends from surplus -9,428 -8,904 -9,529 -9,999 -11,641 -12,808 -16,264 -20,338 -24,036 -24,961 Treasury stock 2,271 -14,904 296 562 426 532 -12,269 -18,201 0 0 Valuation and translation adjustments -817 -14,166 13,724 -4,786 -14,343 37,332 60,363 14,019 0 0 Minority interests -17,952 -2,082 -8,804 -3,751 1,587 995 5,126 4,775 0 0 Other 380 0 -157 0 128 -6 1 -3 0 0 Final balance 529,782 534,627 577,702 612,670 643,798 726,879 827,481 890,563 944,527 1,002,067 Source: Company data, Credit Suisse estimates

Beverage Sector Initiation 31 09 December 2014

Figure 22: Asahi Group Holdings: Consolidated profit and loss and cash flow statements (¥mn) FY12/07 FY12/08 FY12/09 FY12/10 FY12/11 FY12/12 FY12/13 FY12/14E FY12/15E FY12/16E Sales revenue (incl. alcohol tax) 1,464,072 1,462,747 1,472,468 1,489,460 1,462,736 1,579,076 1,714,237 1,776,000 1,819,000 1,842,000 Sales revenue (excl. alcohol tax) 967,800 988,200 1,020,200 1,055,600 1,048,400 1,157,100 1,290,900 1,370,300 1,412,000 1,434,000 CGS 961,181 953,486 958,444 943,323 907,243 974,702 1,032,854 1,073,000 1,100,000 1,113,000 Gross profit 502,891 509,261 514,024 546,137 555,493 604,374 681,383 703,000 719,000 729,000 SG&A 415,935 414,741 431,247 450,787 448,302 495,937 563,916 576,000 586,000 590,000 OP 86,956 94,520 82,777 95,349 107,190 108,437 117,467 127,000 133,000 139,000 Interest and dividend income 2,048 1,797 2,754 1,703 1,469 1,737 1,989 2,000 2,000 2,000 Interest expense 5,021 5,193 4,628 4,328 3,668 4,043 3,595 3,600 3,600 3,600 Equity in earnings of affiliates 9,011 9,105 8,512 9,846 5,479 10,616 8,822 8,500 9,000 9,500 Other -2,777 -3,755 1,131 -1,428 437 -1,929 -1,073 -1,000 -1,000 -1,000 RP 90,217 96,474 90,546 101,142 110,909 114,821 123,612 132,900 139,400 145,900 Extraordinary gains 2,432 2,915 19,558 36,067 10,387 9,356 4,344 28,000 0 0 Etrtraordinary losses 10,908 16,452 22,027 44,744 30,874 24,338 17,485 13,000 10,000 10,000 Pretax profit 81,741 82,938 88,077 92,464 90,422 99,840 110,470 147,900 129,400 135,900 Income taxes 36,770 41,122 41,470 40,921 34,886 42,307 48,626 55,900 51,400 53,400 Minority interests 173 -3,198 -1,037 -1,536 441 349 95 0 0 0 NP 44,798 45,014 47,644 53,080 55,093 57,183 61,749 92,000 78,000 82,500 Tax rate 45.0% 49.6% 47.1% 44.3% 38.6% 42.4% 44.0% 37.8% 39.7% 39.3% Capital expenditure 44,500 36,100 32,600 27,800 30,700 41,200 48,500 60,500 43,000 43,000 Depreciation expense 45,300 47,400 55,900 54,600 50,700 48,600 47,800 45,000 45,000 45,000 Goodwill & other intangible amortization 2,400 4,000 7,000 7,700 8,900 14,000 18,400 18,000 18,200 18,200 EBITDA 134,656 145,920 145,677 157,649 166,790 171,037 183,667 190,000 196,200 202,200 Profitability (%) Before goodwill amortization OPM (incl. alcohol tax) 6.1 6.7 6.1 6.9 7.9 7.8 7.9 8.2 8.3 8.5 OPM (excl. alcohol tax) 9.2 10.0 8.8 9.8 11.1 10.6 10.5 10.6 10.7 11.0 After goodwill amortization OPM (incl. alcohol tax) 5.9 6.5 5.6 6.4 7.3 6.9 6.9 7.2 7.3 7.5 OPM (excl. alcohol tax) 9.0 9.6 8.1 9.0 10.2 9.4 9.1 9.3 9.4 9.7 EBITDA margin (incl. alcohol tax) 9.2 10.0 9.9 10.6 11.4 10.8 10.7 10.7 10.8 11.0 EBITDA margin (excl. alcohol tax) 13.9 14.8 14.3 14.9 15.9 14.8 14.2 13.9 13.9 14.1 YoY (%) Sales revenue (incl. alcohol tax) 1.2 -0.1 0.7 1.2 -1.8 8.0 8.6 3.6 2.4 1.3 Gross profit 1.3 1.3 0.9 6.2 1.7 8.8 12.7 3.2 2.3 1.4 OP -2.0 8.7 -12.4 15.2 12.4 1.2 8.3 8.1 4.7 4.5 EBITDA -2.1 8.4 -0.2 8.2 5.8 2.5 7.4 3.4 3.3 3.1 RP 0.1 6.9 -6.1 11.7 9.7 3.5 7.7 7.5 4.9 4.7 Pretax profit 0.7 1.5 6.2 5.0 -2.2 10.4 10.6 33.9 -12.5 5.0 NP 0.1 0.5 5.8 11.4 3.8 3.8 8.0 49.0 -15.2 5.8

FY12/07 FY12/08 FY12/09 FY12/10 FY12/11 FY12/12 FY12/13 FY12/14E FY12/15E FY12/16E (Operating activities) NP 44,798 45,014 47,644 53,080 55,093 57,183 61,749 92,000 78,000 82,500 Depreciation(+) 45,300 47,400 55,900 54,600 50,700 48,600 47,800 45,000 45,000 45,000 Goodwill amortization(+) 2,400 4,000 7,000 7,700 8,900 14,000 18,400 18,000 18,200 18,200 Account receivable(-) -99 13,191 -9,510 179 -5,217 -37,412 -98 -11,374 -2,128 -3,103 Inventories(-) 1,908 -6,602 -404 2,084 -7,271 -10,889 -4,784 -1,784 -1,994 -534 Account payable(+) -5,911 -746 1,324 1,950 1,579 13,247 876 3,821 1,008 1,051 Minority interests(+) 173 -3,198 -1,037 -1,536 441 349 95 0 0 0 Other -9,985 16,140 13,953 17,397 9,767 34,830 42,036 0 0 0 Operating cashflow 69,573 106,094 106,358 125,608 108,513 109,292 157,252 137,162 129,086 133,614 (Investing activities) Capital expenditures(-) -41,404 -40,716 -58,537 -30,145 -26,594 -40,340 -48,960 -60,500 -43,200 -43,200 Purchases of marketable securities(-) -28,649 -8,559 -82,837 -50,264 -8,352 -4,741 -12,549 0 0 0 Purchases of shares of subsidiaries(-) -52,091 -6,194 -75,405 -2,920 -142,142 -88,270 -2,991 0 0 0 Other 4,316 -2,766 36,142 41,539 5,854 -968 -1,204 0 0 0 Investing cashflow -117,828 -58,235 -180,637 -41,790 -171,234 -134,319 -65,704 -60,500 -43,200 -43,200 (Financing activities) Debt (+) 42,356 -30,199 89,616 -80,453 78,669 66,141 -52,512 -31,949 -64,862 -66,485 Dividends (-) -9,428 -8,904 -9,529 -9,999 -11,641 -12,808 -16,264 -20,338 -24,036 -24,961 Other 3,199 -7,262 -1,542 -376 62 -10,331 -16,162 -22,000 0 0 Financing cashflow 36,127 -46,365 78,545 -90,828 67,090 43,002 -84,938 -74,287 -88,899 -91,446 (Cash & cash equivalents) Increases -12,128 1,494 4,266 -7,010 4,369 17,975 6,610 2,375 -3,012 -1,032 Beginning balance 21,194 11,680 13,074 19,583 11,534 16,893 34,573 42,200 43,852 49,840 Final balance 9,066 13,174 17,340 12,573 15,903 34,868 41,183 44,575 40,840 48,808 Adjustments 2,614 -100 2,243 -1,039 990 -295 1,017 -723 9,000 9,500 Source: Company data, Credit Suisse estimates

Beverage Sector Initiation 32 09 December 2014

Figure 23: Asahi Group Holdings: Financial indicators FY12/07 FY12/08 FY12/09 FY12/10 FY12/11 FY12/12 FY12/13 FY12/14E FY12/15E FY12/16E (Safety) Current ratio (%) 68.9 79.9 74.6 84.2 75.9 77.8 80.3 86.7 96.5 109.1 Quick ratio (%) 48.6 53.9 51.3 57.2 49.2 51.7 53.9 57.5 64.3 73.3 Adjusted quick ratio (%) 5.8 10.7 10.5 11.7 8.9 14.2 19.1 22.1 35.0 69.4 Fixed ratio (%) 177.4 170.0 175.4 160.8 167.2 166.2 153.4 144.2 133.7 123.9 Interest-bearing debt (¥mn) 332,458 302,259 391,875 311,422 390,091 456,232 403,720 371,771 306,909 240,424 Average debt interest rate (%) 1.6 1.6 1.3 1.2 1.0 1.0 0.8 0.9 1.1 1.3 Dependence on debt (%) 25.1 23.3 27.3 22.2 25.5 26.3 22.5 20.4 16.9 13.3 Net debt (¥mn) 320,778 289,185 372,292 299,888 373,198 421,659 361,520 327,919 257,069 182,115 Equity capital ratio (%) 38.9 40.2 40.0 43.6 41.9 41.8 45.7 48.0 51.3 54.7 D/E ratio (%) 64.6 57.9 68.3 50.9 60.8 63.0 49.3 42.4 32.9 24.3 Long-term debt ratio (%) 38.9 59.5 52.5 68.4 51.4 46.8 45.2 46.6 53.6 65.0 Working capital (¥mn) -185,584 -103,717 -145,733 -78,822 -145,021 -150,879 -131,191 -85,864 -20,563 48,746 Net interest expense (¥mn) -2,973 -3,396 -1,874 -2,625 -2,199 -2,306 -1,606 -1,600 -1,600 -1,600 Cash plus marketable securities (¥mn) 11,680 13,074 19,583 11,534 16,893 34,573 42,200 43,852 49,840 58,308 Interest coverage ratio (x) 17.73 18.55 18.48 22.42 29.62 27.25 33.23 35.83 37.50 39.17 Financial leverage (x) 2.57 2.49 2.50 2.30 2.38 2.39 2.19 2.08 1.95 1.83 A/R to A/P ratio (%) 277.1 265.9 271.8 266.5 267.5 269.2 267.3 268.2 267.7 268.0 Dividend on equity (%) 1.9 1.7 1.7 1.7 1.9 1.9 2.1 2.4 2.7 2.6 (Profitability) ROE (%) 9.0 8.7 8.7 9.0 8.8 8.4 8.2 10.8 8.6 8.6 ROE (%) - Before goodwill amortization 9.8 9.8 10.3 10.9 10.8 10.4 10.6 13.0 10.6 10.5 ROA (%) 6.7 7.2 6.1 6.7 7.3 6.6 6.7 7.0 7.3 7.7 ROA (%) - Before goodwill amortization 6.8 7.5 6.6 7.3 7.9 7.5 7.7 8.0 8.3 8.7 Inventory turnover ratio (x) 16.0 15.6 15.1 15.5 14.8 14.6 14.8 14.9 15.0 15.1 A/R turnover ratio (x) 5.3 5.4 5.5 5.4 5.3 5.3 5.4 5.5 5.5 5.5 A/P turnover ratio (x) 14.2 14.6 14.7 14.6 14.1 14.2 14.5 14.7 14.8 14.9 Inventory turnover days (days) 22.8 23.4 24.1 23.6 24.7 25.0 24.7 24.5 24.3 24.2 A/R turnover days (days) 69.4 67.8 66.9 67.3 69.1 69.0 67.5 66.3 66.1 65.8 A/P turnover days (days) 25.8 25.0 24.9 25.0 25.9 25.7 25.2 24.8 24.7 24.6 Sales per employee (¥mn) 94.8 91.5 87.5 87.5 87.4 91.0 95.3 98.7 101.0 102.3 OP per employee (¥mn) 5.6 5.9 4.9 5.6 6.4 6.2 6.5 7.1 7.4 7.7 (Per share data) EPS (¥) 94.9 96.3 102.5 114.1 118.4 122.7 135.7 199.0 168.7 178.5 EPS (¥) - Before goodwill amortization 103.3 108.0 121.1 138.6 144.9 152.8 176.2 238.0 208.1 217.9 BPS (¥) 1089.3 1122.1 1233.2 1315.5 1378.2 1553.3 1772.5 1898.6 2015.4 2139.8 Sales per share (¥) 3102.8 3129.7 3167.5 3201.8 3142.3 3389.6 3768.0 3842.2 3935.2 3985.0 Operating cashflow per share (¥) 147.4 227.0 228.8 270.0 233.1 234.6 345.7 296.7 279.3 289.1 DPS (¥) 19.0 20.0 21.0 23.0 25.0 28.0 43.0 44.0 52.0 54.0 Dividend ratio (%) 20.0 20.8 20.5 20.2 21.1 22.8 31.7 22.1 30.8 30.3 (Growth) EPS growth (%) 1.0 1.4 6.4 11.3 3.7 3.7 10.6 46.6 -15.2 5.8 BPS growth (%) 7.6 3.0 9.9 6.7 4.8 12.7 14.1 7.1 6.1 6.2 Total assets growth (%) 2.8 -1.9 10.4 -2.0 8.9 13.2 3.4 2.0 -0.5 -0.4 Sustainable growth rate (%) 7.2 6.9 6.9 7.1 6.9 6.5 5.6 8.4 6.0 6.0 (Investment profitability) Capital invested (¥ mn) 712,480 769,964 855,641 905,006 925,675 1,049,057 1,117,286 1,166,476 1,211,777 1,261,086 NOPAT (¥ mn) 51,270 50,353 48,905 57,844 69,469 67,495 70,100 83,664 84,992 89,542 ROIC (%) 7.2 6.5 5.7 6.4 7.5 6.4 6.3 7.2 7.0 7.1 WACC (%) 2.6 2.7 2.5 2.7 2.5 2.4 2.5 2.6 2.8 3.0 EVA (¥ mn) 32,922 29,817 27,751 33,815 46,239 42,067 41,916 52,856 50,690 51,257 EVA spread (%) 4.6 3.9 3.2 3.7 5.0 4.0 3.8 4.5 4.2 4.1 (Cashflow) FCF (¥mn) -48,255 47,859 -74,279 83,818 -62,721 -25,027 91,548 76,662 85,886 90,414 Operating C/F margin (%) 4.8 7.3 7.2 8.4 7.4 6.9 9.2 7.7 7.1 7.3 Operating C/F to current liabilities rate (%) 11.7 20.6 18.5 25.1 18.0 16.1 23.6 21.2 21.8 25.0 Operating C/F to debt rate (%) 20.9 35.1 27.1 40.3 27.8 24.0 39.0 36.9 42.1 55.6 Operating C/F to Investment C/F rate (%) 59.0 182.2 58.9 300.6 63.4 81.4 239.3 226.7 298.8 309.3 (Other) Employees numbers 15,599 16,357 17,316 16,712 16,759 17,956 18,001 18,001 18,001 18,001 Consolidated subsidiaries numbers 51 50 55 51 79 84 85 85 85 85 Equity method affiliates numbers 29 30 34 41 60 100 113 113 113 113 Average shares outstanding (mn) 471.9 467.4 464.9 465.2 465.5 465.9 454.9 462.2 462.2 462.2 End-of-period shares outstanding (mn) 472.5 464.8 465.0 465.4 465.6 466.0 462.2 462.2 462.2 462.2 Source: Company data, Credit Suisse estimates

Beverage Sector Initiation 33 09 December 2014 HOLT analysis

According to our HOLT analysis (a DCF model that assumes a long-term mean reversion), Asahi’s current share price indicates 21% potential downside (based on analyst forecasts for FY14–16 and mean revision thereafter).

Figure 24: HOLT analysis

Source: Company data, Credit Suisse estimates, HOLT estimates

Beverage Sector Initiation 34

09 December 2014 Asia Pacific/Japan Equity Research Beverage (Food (Japan)) / MARKET WEIGHT

Suntory Beverage & Food (2587) Rating NEUTRAL* Price (08 Dec 14, ¥) 4,385 INITIATION

Target price (¥) 4,600¹ Chg to TP (%) 4.9 Stable earnings supported by sustained cost- Market cap. (¥ bn) 1,354.96 (US$ 11.15) Enterprise value (¥ bn) 1,585.96 cutting effects Number of shares (mn) 309.00 Free float (%) 35.0 Initiating coverage: We initiate coverage of Suntory Beverage & Food (SBF) 52-week price range 4,385 - 3,215 with a NEUTRAL rating and a ¥4,600 target price (potential return 4.9%). SBF,

*Stock ratings are relative to the coverage universe in each which has the second-largest domestic soft drinks market share, appears analyst's or each team's respective sector. committed to building a strong business base. We see little risk of a slowdown in ¹Target price is for 12 months. sales momentum other than due to weather and other unavoidable externals.

Research Analysts SBF’s international operations mainly consist of: (1) European business, where it is boosting margins by focusing on brands with high market shares, and Masashi Mori 81 3 4550 9695 (2) Southeast Asian business, where we see substantial growth potential, [email protected] especially in Vietnam. Amid intense competition in the global soft drinks market, Suntory is relatively strong in its focus regions, but we see little potential upside over our TP. Investment theme: We see prospects for a double-digit CAGR in OP over the next three years. The company has stepped up mainstay brand consolidation in all regions. It is also strengthening global cost-cutting efforts, and we expect sustained stable profit growth. However, the company is unlikely to boost shareholder returns substantially. Catalysts/risks: Potential catalysts include: (1) maximization of sales and cost synergies within the group, and (2) a shift to a more proactive M&A strategy. Upside risks: (1) a substantial increase in domestic market share, and (2) substantial declines in commodity prices such as coffee beans. Downside risks: (1) a dip in consumer sentiment in Europe, and (2) slower growth and stiffer competition in the Southeast Asian market. Valuation: We base our ¥4,600 TP on an EV/EBITDA of roughly 9.5x applied to our FY12/15 estimates. The multiple reflects the FY1 Bloomberg consensus. We regard our TP as fair-value as it implies a FY12/15E P/E of nearly 20x (before goodwill amortization), which is close to Asahi Group Holdings' (2502) multiple and the average for European and US soft drink makers.

Share price performance Financial and valuation metrics

Year 12/13A 12/14E 12/15E 12/16E Price (LHS) Rebased Rel (RHS) Sales (¥ bn) 1,121.4 1,265.0 1,306.0 1,332.0 6000 120 Operating profit (¥ bn) 72.7 85.5 93.9 101.5 5000 110 Recurring profit (¥ bn) 67.3 81.5 89.9 97.5 4000 100 Net income (¥ bn) 31.2 37.0 45.4 50.5 3000 90 EPS (¥) 118.8 119.7 146.9 163.4 2000 80 Jul-13 Nov-13 Mar-14 Jul-14 Nov-14 Change from previous EPS (%) n.a. IBES Consensus EPS (¥) n.a. 117.2 154.1 172.3 The price relative chart measures performance against the EPS growth (%) 9.7 0.8 22.7 11.2 TOPIX which closed at 1447.58 on 08/12/14 P/E (x) 28.2 36.6 29.8 26.8 On 08/12/14 the spot exchange rate was ¥121.52/US$1 Dividend yield (%) 1.7 1.4 1.5 1.6 EV/EBITDA(x) 9.3 9.9 9.1 8.5 Performance Over 1M 3M 12M P/B (x) 1.9 2.4 2.3 2.1 Absolute (%) 5.3 18.7 34.1 ROE(%) 8.3 6.5 7.7 8.2 Relative (%) -0.9 7.3 17.0 Net debt/equity (%) 45.9 40.1 32.3 23.2

Source: Company data, Thomson Reuters, IFIS, Credit Suisse estimates.

09 December 2014

Share price catalysts and valuation Share price catalysts: Maximizing global sales and cost synergies are longer-term objectives Near-term potential catalysts for SBF’s share price include monthly sales in the domestic beverage market and quarterly earnings. SBF is strong in marketing, with the second- largest domestic soft drinks market share after Coca Cola. We see little risk of a slowdown in the company’s sales momentum other than due to unavoidable externals such as the weather. While its near-term performance remains susceptible to sales trends, SBF's earnings look stable relative to the rest of the sector, supported by stepped-up global cost reduction initiatives. The main catalyst from a longer-term perspective is maximization of sales and cost synergies with the company’s string of acquisitions. We think SBF has paused its M&A strategy for now and is looking to strengthen the individual businesses it has acquired. We expect the company to aim for synergies including optimization of its global production base and cross sales. The company is currently striving to boost sales in Southeast Asia, but its longer-term objectives probably include full-fledged entry into the Middle East and African markets. After reinforcing its global business base, we think SBF will likely resume its proactive M&A strategy. In terms of shareholder returns, we think the company’s financial position allows for a steady increase in dividends. We see little likelihood of a share buyback, however, given SBF’s shareholder composition.

Figure 1: Current performance in line with TOPIX Figure 2: Valuation multiple has risen since listing in July 2013 (Index) (Yen) (x) 150 4,400 Versus TOPIX (LHS) 9.3 140 Share price (RHS) 4,200 9.1 +2σ 9.1 8.9 130 4,000 +1σ 8.8 8.7 120 3,800 8.5 Ave. 8.4 8.3 110 3,600 8.1 -1σ 8.0 100 3,400 7.9

90 3,200 7.7 -2σ 7.6 7.5 80 3,000 7.3 13/7 14/7

Note: TOPIX-relative share price performance Note: EV/EBITDA based on forecasts for full 12-month period Source: Bloomberg, Credit Suisse estimates Source: Bloomberg, Credit Suisse estimates Valuation Our ¥4,600 TP is based on EV/EBITDA of roughly 9.5x applied to our FY12/15 estimates. The multiple reflects the FY1 Bloomberg consensus. We regard our TP as fair-value as it implies a FY12/15E P/E of nearly 20x (before goodwill amortization), which is close to Asahi GHD’s multiple and the average of European and US soft drink makers. The European and US soft drink makers include: Coca-Cola, PepsiCo, Monster Beverage, Dr Pepper, Coca-Cola Enterprise, Coca-Cola Amatil, Danone, and Nestle. Figure 30 in our sector report shows valuations for these companies.

Beverage Sector Initiation 36 09 December 2014

Company overview Developing business mainly in Japan, Europe, and Asia-Oceania SBF is the core of Suntory Group’s beverage and food business. It is developing business operations in four regions: Japan, Europe, Asia-Oceania, and the Americas. The company’s Japanese operations are centered on its soft drinks business, where it not only ranks No.2 behind Coca Cola in terms of market share but also offers a wide range of products. SBF is currently strengthening its core brands. The company has some of the best-known Japanese brands in each product category, including BOSS (canned coffee), Suntory Tennensui (mineral water), and Iyemon (tea). Moreover, the company also has a strong presence in health-oriented products, with offerings such as coffee, tea, and cola in the Food for Specified Health Uses category. In Europe, Orangina Schweppes Group (acquired in 2009) handles manufacturing and sales of non-alcoholic beverages, with carbonated drinks and fruit juices comprising its core products. SBF is steadily expanding its business portfolio, acquiring leading UK brands Lucozade and Ribena in 2013. The company is also widely involved in manufacturing and sales of health foods and non- alcoholic beverages in Asia, where SBF Asia and its affiliated subsidiaries constitute the core of its operations. In Oceania, Frucor Group (acquired in 2009) operates the company’s non-alcoholic beverage business. In the US, SBF is involved in the bottling business for PepsiCo, mainly in North Carolina.

Figure 3: OP weighting by region: Aims to boost earnings also in industrialized countries by cutting costs and strengthening key brands FY12/12 actual FY12/15 CSE

Americas Americas 8.6% 7.7% Asia Asia 8.0% 9.1% Japan Oceania Oceania 45.6% 4.9% 6.5% Japan 43.8%

Europe Europe 31.3% 34.5%

Source: Company data, Credit Suisse estimates Financial position, shareholder returns: steady increase in dividends looks possible SBF was listed on TSE-1 in July 2013. In its medium-term plan (2013–15), the company set itself a sales growth target of at least 5% (CAGR) versus 2012 and an EBITDA growth target in excess of 5–9% (CAGR). We think the company will likely attain these targets in FY12/15, probably also benefiting from a weaker yen. The three key business strategies in the current medium-term plan are: (1) strengthen core brands and generate new demand in Japan, (2) beef up the company’s overseas business base and deploy brands across borders, and (3) pursue an aggressive M&A strategy. We think SBF has paused its M&A strategy for now and is looking to strengthen the individual businesses it has acquired. We expect the company to aim for synergies including optimization of its global production base and cross sales. The company is currently striving to boost sales in Southeast Asia, but its longer-term objectives probably include full-fledged entry into the Middle East and African markets. We forecast over ¥170bn of cash inflow for the next three years. In the absence of major M&A activity, we expect the cash inflow to be mainly used for repayment of interest-bearing debt. Capex

Beverage Sector Initiation 37 09 December 2014 appears to have peaked for now. We see little likelihood of a share buyback given SBF’s shareholder composition, but the company should be able to steadily increase DPS (its basic dividend yield target is at least 30% of NP before amortization of goodwill) Suntory Holdings the largest shareholder; management structure allows swift decision-making Mr. Nobuhiro Torii is the Representative Director and President of SBF. Prior to joining Suntory Group, Mr. Torii was with the Industrial Bank of Japan from 1991 to 1997. He joined Suntory in 1997 and was appointed a director at Suntory Holdings (unlisted) in 2007. He was appointed the Executive Director of Suntory Holdings in 2009 and Managing Executive Officer of Suntory Holdings in 2011. He was subsequently appointed Representative Director and President of SBF. He is also a director of Suntory Holdings. Suntory Holdings is also the largest shareholder of SBF, with a stake of nearly 60%, which enables swift and decisive management at the latter. We regard as positive for SBF the close interaction of Mr. Torii with the management of Suntory Holdings, which successfully completed major acquisitions in the recent years. We also note that former Lawson president Takeshi Niinami was appointed president and representative director of Suntory Holdings in October 2014. Beverage and food is Suntory Holdings’ core business Suntory Holdings, an unlisted company, comprises: (1) beverage and food, (2) beer and spirits, and (3) “other” (wine, health food, restaurant, etc.) businesses. The core beverage and food business brings in slightly more than 55% of the company’s total OP (excluding goodwill amortization), and SBF is the key company within this business. SBF also made royalty payments totaling around ¥18bn in FY12/13 for use of Suntory Holdings’ domestic brands. Royalty rates are set at some 3% of sales, which appears slightly lower than standard. Both SBF and Suntory Holdings have to agree on the rate.

Figure 4: Suntory Holdings: Business divisions and main subsidiaries

Suntory Holdings

Food & Non-alcoholic Alcoholic beverages Other business beverages division (beer & spirits) division division

Suntory Suntory Suntory Suntory Beam Suntory Suntory Beverage & Wine Beer Liquors Suntory Wellness (China)HD Food International

Source: Company data, Credit Suisse

Beverage Sector Initiation 38 09 December 2014

Figure 5: Suntory Holdings expands its profit with Beam Figure 6: Suntory Holdings: OP breakdown acquisition (bn JPY) Other 180 8% 17.4% OP OPM(rhs) 160 7%

140 6% 120 5% 100 4% Food&Non- 80 alcoholic Alcoholic 3% beverages 60 beverages 56.1% 40 2% 26.6% 20 1% 0 0% FY12/09 FY12/10 FY12/11 FY12/12 FY12/13 FY12/14E Source: Company data and estimates Source: Company data (Jan-Sep 2014)

Figure 7: SBF: Major overseas subsidiaries

Suntory Beverage & Food

Europe UK USA Oceania Orangina Lucozade Pepsi Bottling Schw eppes Ribena Suntory Frucor Ventures (100%, Nov09) (100%, Jan14) (100%, Feb09) (65%, Jul99)

Singapore Indonesia Suntory PepsiCo Thailand Vietnam Cerebos Pacific Suntory Garuda TIPCO F&B Beverage Beverage (100%, Apr90) (50%, Sep07) (51%, Oct11) (51%, Apr13)

Note: Information in parentheses indicates SBF’s investment and when the company was made a subsidiary Source: Company data, Credit Suisse

Figure 8: Company history 1899 Torii Shoten store established 1921 Kotobukiya founded 1932 Start of non-alcoholic beverage sales by Kotobukiya 1963 Company name changed from Kotobukiya to Suntory 1980 Acquisition of US company, start of bottling business in the US 1990 Cerebos Group becomes a subsidiary 1999 Pepsi Bottling Ventures LLC (JV with PepsiCo) set up via investment by Suntory Suntory Foods established to run Suntory's beverage and food business Frucor Group becomes a subsidiary 2009 Holding company established via share transfer Change of business name from Suntory to Suntory Liquors Orangina Schweppes Group becomes a Suntory HD subsidiary Transfer of beverage subsidiary from Suntory HD to Suntory Foods 2011 Company name changed from Suntory Foods to Suntory Beverage & Food Agreement on establishment of JV with Garuda Food Group of Indonesia 2012 Contract concluded to acquire stake in PepsiCo's Vietnam beverage business Suntory Beverage & Food listed on the 1st Section of the Tokyo Stock Exchange 2013 Lucozade Ribena Suntory established Source: Company data

Beverage Sector Initiation 39 09 December 2014

With over 50% of profit coming from overseas, SBF benefits the most from a weak yen among Japanese beverage makers under our coverage

Figure 9: OP forex sensitivity matrix (¥mn) If current rates continue to prevail in 2015, we see just under ¥3bn upside to our FY12/15 OP forecast (including boost from yen weakness vs. GBP) CSE Current level

FX JPY/USD sensitivity 99.0 101.0 103.0 105.0 107.0 109.0 111.0 113.0 115.0 117.0 119.0 121.0 123.0 134.0 -2,340 -2,040 -1,740 -1,440 -1,140 -840 -540 -240 60 360 660 960 1,260 136.0 -2,060 -1,760 -1,460 -1,160 -860 -560 -260 40 340 640 940 1,240 1,540 138.0 -1,780 -1,480 -1,180 -880 -580 -280 20 320 620 920 1,220 1,520 1,820 CSE 140.0 -1,500 -1,200 -900 -600 -300 0 300 600 900 1,200 1,500 1,800 2,100 142.0 -1,220 -920 -620 -320 -20 280 580 880 1,180 1,480 1,780 2,080 2,380 144.0 -940 -640 -340 -40 260 560 860 1,160 1,460 1,760 2,060 2,360 2,660 146.0 -660 -360 -60 240 540 840 1,140 1,440 1,740 2,040 2,340 2,640 2,940

Current 148.0 -380 -80 220 520 820 1,120 1,420 1,720 2,020 2,320 2,620 2,920 3,220 JPY/EUR 150.0 -100 200 500 800 1,100 1,400 1,700 2,000 2,300 2,600 2,900 3,200 3,500 152.0 180 480 780 1,080 1,380 1,680 1,980 2,280 2,580 2,880 3,180 3,480 3,780 154.0 460 760 1,060 1,360 1,660 1,960 2,260 2,560 2,860 3,160 3,460 3,760 4,060 156.0 740 1,040 1,340 1,640 1,940 2,240 2,540 2,840 3,140 3,440 3,740 4,040 4,340 158.0 1,020 1,320 1,620 1,920 2,220 2,520 2,820 3,120 3,420 3,720 4,020 4,320 4,620 Source: Credit Suisse

Beverage Sector Initiation 40 09 December 2014

Figure 10: Representative brands by region: Strong brands by category in developed markets; stepped-up promotional activities in Asia France, Iberian Peninsula: Schweppes and Orangina are Japan: Wide-ranging product categories; strengthening of FOSHU products representative brands

UK, Ireland: Lucozade and Ribena have high market shares

Oceania: V is the top brand in the energy drinks market

Asia: Roll-out of BRAND’s series health food; sale of green tea in Indonesia and Vietnam

Source: Company data, Credit Suisse

Beverage Sector Initiation 41 09 December 2014

Overseas business (Europe, Southeast Asia) Brand strength a plus as weighting of private-brand sales rises in Europe In Europe, the company intends to focus on: (1) strengthening core brands, (2) lowering manufacturing and logistics costs (leveraging cost-cutting expertise in Japan), and (3) realizing synergistic benefits (stepping up promotional spending in emerging markets). SBF’s core brands include carbonated drinks Schweppes and fruit juice Orangina, which have high market shares in France and the Iberian Peninsula, and energy/sports drink Lucozade, which has the lion’s share of the UK market, and fruit juice Ribena, which also has a relatively high share in that market. In the longer term, we look for growth in Africa and Southeast Asia, where the company already has sales channels. We think cost cutting will continue drive profits in the near-term given the substantial weighting of Europe, where major top-line growth looks unlikely. Compared with other regions, private brands (PB) have strong presence in Europe. In the UK, where fewer players increasingly dominate the retail market, the top four retailers account for nearly 80% of the market. The overall PB ratio in the UK (45%) is higher than that in the US (18%), and retailers’ PB lines also cover a wide variety of products, from low-price items to organic products. In Japan, the emergence of private brands hit national brands (NB), which already had smaller sales, and we think this is even more the case in Europe. From this standpoint, SBF has a relatively strong portfolio, with relatively high market shares in each product category across nations. We therefore regard the company’s strategy of focusing on its strong brands and areas as reasonable. For these reasons we think European business performance may hinge on macroeconomic trends, but we see no reason for excessive concern in this regard.

Figure 11: PB market share ranking in Europe by value Figure 12: UK retail market sales share: Increasingly (2013) dominated by a few firms Switzerland 53% Finland 33%

Spain 51% Hungary 33% Others UK 45% Denmark 31% 23% Tesco Portugal 45% Sweden 31% 30% Germany 44% Czech 31% Belgium 41% Holland 29% Morrisons Austria 39% Norway 28% 12% France 35% Italy 20% Asda Slovakia 33% USA 18% Sainsbury's 18% 17% Poland 33% Japan 10%

Source: PLMA, Nikkei (for Japan share), Credit Suisse Source: Kantar Worldpanel (2013) Business conditions in SE Asia vary by country, but we expect synergistic benefits in the region SBF’s Southeast Asian operations consist of three main businesses: Cerebros, Suntory Garuda Beverage, and Suntory PepsiCo Vietnam. Cerebros is involved in health food and processed food businesses, particularly in Southeast Asia and Oceania, and generates the highest profits. It is mainly involved in manufacturing and sales of BRAND’s Essence of Chicken health food and Asian House Gourmet condiments. BRAND’s series has a strong presence in Thailand and Taiwan, and is currently being promoted throughout Southeast Asia. However, as the product is not priced in a range that is easily affordable for low- and medium-income segments, we expect top-line growth to remain modest for now. Greater health awareness and growth in the number of mid-level income earners might drive full-fledged growth in the long-term, but we think it is too soon to factor this in.

Beverage Sector Initiation 42 09 December 2014

Indonesia’s Suntory Garuda Beverage (JV with Garuda Food Group, a local food and beverage behemoth) is engaged in soft drinks business. The Indonesian beverage market consists of two main categories: water and tea. Danone is the largest player in the water category, while Sinar Sosro has by far the largest market share in tea. SBF’s market presence is still small, but the company is looking to develop sales by leveraging Garuda Food Group’s strong network of traditional sales channels. Garuda Food Group has strengths in beverages sold in cups, but consumer preference has shifted toward plastic bottles in recent years. This may prove to be something of a negative. Moreover, we expect the JV to be in the red for the next few years due to upfront investment costs. Vietnam’s Suntory PepsiCo Vietnam handles PepsiCo’s products as well as products in the tea category. The company’s sales are rising by double digits, supported by strong sales channels (both traditional and modern trade) and a popular product lineup. With the company benefitting from a virtuous cycle with volume effects driving higher gross profits, we anticipate steady earnings growth for now. The company is also strengthening its growing tea category. The company is aiming for sales and cost synergies in its Southeast Asian business in the longer-term. SBF’s medium-term plan (2013–15) aims to strengthen the group’s core brands and business base with “natural” and “healthy” as keywords. The company is also aiming to roll out brands that go beyond the concept of national boundaries and group companies. It also aims to generate synergies from horizontal deployment of beverage production technology nurtured in Japan. We think the company will likely realize such benefits in the medium-term in Southeast Asia, where there is substantial income growth and trade-up potential.

Figure 13: Expanding sales channels in Southeast Asia by Figure 14: Tea is a growth category, but competition is installing chiller units in traditional channels intense as modern channels are crowded with products

Source: Credit Suisse (photo taken in Indonesia) Source: Credit Suisse (photo taken in Indonesia)

Beverage Sector Initiation 43 09 December 2014

Figure 15: Steady rise in consumer confidence in Indonesia Figure 16: Rebound in consumer confidence in Europe 130 0

-5 120

-10 110 -15 100 -20

90 -25

80 -30

70 -35

Jul-10

Jan-08 Jan-13

Jun-08 Jun-13

Oct-11

Apr-09 Apr-14

Sep-09 Feb-10 Sep-14

Dec-10

Jul-10

Aug-12

Nov-13 Nov-08

Mar-12

May-11

Jan-08 Jan-13

Jun-08 Jun-13

Oct-11

Apr-09 Apr-14

Sep-09 Feb-10 Sep-14

Dec-10

Aug-12

Nov-08 Nov-13 Mar-12 May-11 Source: Thomson Reuters Source: Thomson Reuters

Beverage Sector Initiation 44 09 December 2014

Earnings forecasts

Figure 17: Earnings forecast summary Sales Operating profit Recurring profit Net profit EPS ¥mn YoY (%) ¥mn YoY (%) ¥mn YoY (%) ¥mn YoY (%) ¥ YoY (%) Consolidated 13/12 Actual 1,121,361 13.0 72,715 24.4 67,257 24.5 31,196 33.4 118.8 9.7 14/12 CS E 1,265,000 12.8 85,500 17.6 81,500 21.2 37,000 18.6 119.7 0.8 CoE 1,260,000 12.4 85,000 16.9 81,000 20.4 35,000 12.2 113.3 -4.6 IBES E 1,256,392 12.0 85,864 18.1 80,269 19.3 35,873 15.0 117.2 -1.4 15/12 CS E 1,306,000 3.2 93,900 9.8 89,900 10.3 45,400 22.7 146.9 22.7 IBES E 1,312,005 4.4 98,004 14.1 94,341 17.5 47,089 31.3 154.1 31.5 16/12 CS E 1,332,000 2.0 101,500 8.1 97,500 8.5 50,500 11.2 163.4 11.2 IBES E 1,357,231 3.4 106,158 8.3 102,582 8.7 52,467 11.4 172.3 11.9 Source: Company data, I/B/E/S, Credit Suisse estimates Domestic business: Market average beat likely to continue for now The figures below show sales volume outlook and an analysis of factors impacting earnings. We expect FY12/14 profits to slightly outpace guidance. We think volume growth in major product categories such as coffee will also likely to finish slightly ahead of guidance. We expect sales to grow at around 1.5–2% YoY in FY12/15 and subsequent years, and look for sustained OP growth of around 9%. The company will likely offset the impact of higher commodity prices (coffee beans and other inputs) via routine cost cutting. We expect higher volumes to offset increased outlay stemming from ramped up promotional activities, particularly for major brands. Accordingly, we see a profit growth rate of around 5–9% as attainable. International business: Realization of global synergies some way off; strengthening existing business comes first We expect FY12/14 sales and profits in line with guidance. Our FY12/15–16 forecasts are based on the following assumptions. Organic sales growth of around 0.5–1.0% at Orangina Schweppes. Although volumes in Europe remain weak due to the region’s macroeconomic weakness, we expect the uptrend in sales prices to continue, supported by strengthening of key brands and a renewed focus on key areas. Organic sales growth of around 1.5% at Lucozade Ribena Suntory, supported by: (1) expected firm consumption over a sustained period in the UK, (2) the likelihood of the group directly handling sales in Africa and Asia from 2015. However, leveraging full-fledged synergies between the two European firms (in a variety of areas including sales and logistics) will probably take time. While we think FY12/15 earnings will be especially hit by higher input prices, we nevertheless expect profits from SBF’s Europe business to grow by around 5% over the medium-term, driven by cost cutting and the weaker yen. Our assumptions for medium-term organic sales growth at key Asian businesses are as follows: Cerebros Pacific (mainly Thailand, Taiwan, and Oceania) +0.5% YoY, Suntory Garuda Beverage (Indonesia) +8.0%, and Suntory PepsiCo Vietnam +15%. Cerebros’ key products benefit from relatively high unit prices, but its sales are unlikely to rise in tandem with the region’s economic growth. On the other hand, we expect product mix improvement to gradually lift margins. In Indonesia, competition is severe in all the product categories in which the company is involved. Since the business will probably require promotional outlay and other forward investments in the near-term, we expect losses to continue over the next few years. Vietnam, in addition to being a growth market, is also a market where PepsiCo products have traditionally been strong. We regard Vietnam as the most promising country in terms of prospective sales and profit growth. With Vietnam business driving earnings and benefits from a weaker yen, we expect profit growth of around 5–9% in Asia in FY12/15 and subsequent years.

Beverage Sector Initiation 45 09 December 2014

Longer-term profit growth will likely be limited in the US, as it is a mature market. However, with the business steadily cutting costs, we think it should be able to maintain current profit levels. Energy drinks are the forte of the company’s Oceania business, but we see limited potential for growth given the intense completion in the regional beverage market and strong presence of private brands in retail. We understand growth in the energy drink category has slowed in recent years. The company is considering strengthening other categories, but currently lacks products capable of driving future growth. However, we expect profit growth of around 1–5%, supported by cost cuts and other measures.

Beverage Sector Initiation 46 09 December 2014

Figure 18: Sales and OP by region FY12/11 FY12/12 FY12/13 FY12/14E FY12/15E FY12/16E Sales (JPYm) Japan 668,580 688,796 716,852 726,000 741,000 753,000 Europe 130,879 123,661 154,931 257,000 264,000 267,000 Oceania 31,769 33,342 40,962 45,000 46,000 47,000 Asia 62,124 78,842 132,658 158,000 174,000 184,000 Americas - 67,516 75,957 79,000 81,000 81,000 Total 893,353 992,160 1,121,361 1,265,000 1,306,000 1,332,000 Sales (y-y,%) Japan - 3.0 4.1 1.3 2.1 1.6 Europe - -5.5 25.3 65.9 2.7 1.1 Oceania - 5.0 22.9 9.9 2.2 2.2 Asia - 26.9 68.3 19.1 10.1 5.7 Americas - - 12.5 4.0 2.5 0.0 Total - 11.1 13.0 12.8 3.2 2.0 OP (JPY m) Japan 39,551 35,604 45,395 47,400 52,100 56,200 Europe 26,908 24,450 27,242 39,000 41,000 43,000 Oceania 5,059 5,077 6,216 5,500 5,800 6,100 Asia 7,390 6,229 9,201 9,500 10,800 11,800 Americas - 6,750 7,870 8,600 9,200 9,400 Adjustment -19,121 -19,665 -23,211 -24,500 -25,000 -25,000 Total 59,789 58,446 72,715 85,500 93,900 101,500 OP (y-y,%) Japan - -10.0 27.5 4.4 9.9 7.9 Europe - -9.1 11.4 43.2 5.1 4.9 Oceania - 0.4 22.4 -11.5 5.5 5.2 Asia - -15.7 47.7 3.2 13.7 9.3 Americas - - 16.6 9.3 7.0 2.2 Total - -2.2 24.4 17.6 9.8 8.1 OPM (%) Japan 5.9 5.2 6.3 6.5 7.0 7.5 Europe 20.6 19.8 17.6 15.2 15.5 16.1 Oceania 15.9 15.2 15.2 12.2 12.6 13.0 Asia 11.9 7.9 6.9 6.0 6.2 6.4 Americas - 10.0 10.4 10.9 11.4 11.6 Total 6.7 5.9 6.5 6.8 7.2 7.6 OP breakdown (%) Japan 50.1 45.6 47.3 43.1 43.8 44.4 Europe 34.1 31.3 28.4 35.5 34.5 34.0 Oceania 6.4 6.5 6.5 5.0 4.9 4.8 Asia 9.4 8.0 9.6 8.6 9.1 9.3 Americas - 8.6 8.2 7.8 7.7 7.4 FX JPY/USD 79.8 79.8 97.7 105.0 109.0 109.0 JPY/EUR 111.1 102.6 129.8 139.0 140.0 140.0 JPY/GBP - - 152.8 171.0 177.0 177.0 JPY/SGD 63.3 63.8 78.1 83.0 85.0 85.0 JPY/NZD 63.1 64.7 80.1 87.7 89.0 89.0 JPY/AUD 82.3 82.6 94.4 95.0 95.0 95.0 JPY/100IDR - 0.86 0.95 0.89 0.92 0.92 Source: Company data, Credit Suisse estimates

Beverage Sector Initiation 47 09 December 2014

Figure 19: Domestic business: Volume assumptions and analysis of factors impacting profits FY12/12 FY12/13 FY12/14E FY12/15E FY12/16E Sales Volume (mil. cases) Coffee 81.7 83.0 87.2 89.8 92.0 Sugar-free tea 93.1 100.5 100.0 104.0 107.1 Bottled water 65.7 74.6 78.3 81.1 82.7 Cola-type beverages 29.0 30.4 30.6 31.5 31.8 Carbonated beverages (non-cola) 43.5 46.6 46.6 47.5 48.5 Juice beverages 23.1 20.3 17.9 17.0 16.4 Functional drink 20.7 23.9 23.9 23.9 23.9 Tea-based beverages 12.0 10.3 9.1 8.6 8.4 Others 23.2 25.2 22.9 21.8 21.1 Total 392.0 414.8 416.4 425.1 431.9 Volume (YoY, %) Coffee 6.0 1.6 5.0 3.0 2.5 Sugar-free tea -2.0 7.9 -0.5 4.0 3.0 Bottled water 1.0 13.5 5.0 3.5 2.0 Cola-type beverages -3.0 4.8 0.5 3.0 1.0 Carbonated beverages (non-cola) 28.0 7.1 0.0 2.0 2.0 Juice beverages -2.0 -12.1 -12.0 -5.0 -3.5 Functional drink 5.0 15.5 -5.0 1.0 0.0 Tea-based beverages -10.0 -14.2 -12.0 -5.0 -2.0 Others 2.0 8.6 -9.0 -5.0 -3.0 Total 3.0 5.8 0.4 2.1 1.6 Sales total 688,796 716,852 726,000 741,000 753,000 (YoY, %) 3.0 4.1 1.3 2.1 1.6 Operating Profit （Main factors influencing OP） Change in volume - 11,700 800 4,500 3,500 Change in product mix - -1,300 6,000 4,000 3,000 Change in cost of sales - 10,900 3,000 1,500 2,300 Change in promotion/advertisement expense - -6,800 -6,000 -4,000 -4,000 Other - -4,700 -1,800 -1,300 -700 YoY change in income - 9,800 2,000 4,700 4,100 OP 35,604 45,395 47,400 52,100 56,200 (YoY, %) -10.0 27.5 4.4 9.9 7.9 Operating Profit Margin (%) 5.2 6.3 6.5 7.0 7.5 Source: Company data, Credit Suisse estimates

Beverage Sector Initiation 48 09 December 2014

Figure 20: Consolidated balance sheet and change in net assets (¥mn) FY12/11 FY12/12 FY12/13 FY12/14E FY12/15E FY12/16E (Assets) Cash,cash equivalents & securities 21,474 26,069 45,869 102,542 104,183 108,448 Account receivable 109,194 114,470 126,116 135,702 135,152 138,123 Inventories 44,206 44,754 67,654 63,403 67,653 66,832 Other 37,881 33,987 44,000 52,012 52,012 52,012 Allowance for doubtful accounts -424 -389 -320 -386 -386 -386 Total current assets 212,334 218,895 283,321 353,273 358,613 365,030 Tangible fixed assets 215,052 235,338 312,820 331,820 345,820 359,820 Depreciable PP&E 173,501 192,265 262,481 - - - Land 34,460 35,927 40,032 - - - Construction in progress 7,088 7,144 10,305 - - - Intangible fixed assets 346,659 360,135 622,649 598,148 573,148 548,148 Goodwill 337,329 349,929 400,050 375,550 350,550 325,550 Other 9,330 10,205 222,598 222,598 222,598 222,598 Investments & other assets 28,829 30,080 37,909 39,081 39,081 39,081 Investment securities 14,734 15,781 17,820 18,579 18,579 18,579 Other 14,806 15,095 20,930 20,930 20,930 20,930 Allowances -712 -797 -842 -428 -428 -428 Total fixed assets 590,540 625,554 973,380 969,049 958,049 947,049 Total assets 802,876 844,450 1,256,701 1,322,322 1,316,662 1,312,079 (Liabilities) Account payable 106,095 108,128 114,490 125,567 123,919 127,226 Short-term debt 282,243 311,214 172,772 60,009 52,226 33,465 Other 119,356 117,844 159,374 159,374 159,374 159,374 Total current liabilities 507,694 537,186 446,636 344,950 335,519 320,065 Long-term debt 47,869 30,483 129,346 273,532 246,178 221,561 Other 65,423 72,505 87,750 87,750 87,750 87,750 Total fixed liabilities 113,292 102,988 217,096 361,282 333,928 309,311 Total liabilities 620,986 640,174 663,733 706,231 669,447 629,376 (Net assets) Capital stock 30,000 30,000 168,384 168,384 168,384 168,384 Capital surplus 75,041 54,395 192,701 192,701 192,701 192,701 Retained earnings 109,749 122,609 141,077 159,537 185,161 214,649 Treasury stock 0 0 0 0 0 0 Total shareholders' equity 214,790 207,004 502,163 520,622 546,246 575,734 Valuation and translation adjustments -49,663 -16,656 56,037 55,702 55,702 55,702 Total equity capital 165,127 190,348 558,200 576,324 601,948 631,436 Share warrant 50 0 0 0 0 0 Minority interests 16,711 13,927 34,767 39,767 45,267 51,267 Total net assets 181,890 204,275 592,968 616,091 647,215 682,703 Total liabilities & net assets 802,876 844,450 1,256,701 1,322,322 1,316,662 1,312,079

FY12/11 FY12/12 FY12/13 FY12/14E FY12/15E FY12/16E (Changes in net assets) Beginning balance 70,161 181,890 204,275 592,968 616,091 647,215 Capital stock 18,000 0 138,384 0 0 0 Capital surplus 72,041 -20,646 138,306 0 0 0 Net profits 29,497 23,385 31,196 37,000 45,400 50,500 Dividends from surplus -8,973 -13,467 -15,755 -18,540 -19,776 -21,012 Treasury stock 0 0 0 0 0 0 Valuation and translation adjustments -49,482 33,007 72,693 -335 0 0 Minority interests 16,711 -2,784 20,840 5,000 5,500 6,000 Other 33,935 2,890 3,029 -2 0 0 Final balance 181,890 204,275 592,968 616,091 647,215 682,703 Source: Company data, Credit Suisse estimates

Beverage Sector Initiation 49 09 December 2014

Figure 21: Consolidated profit and loss and cash flow statements (¥mn) FY12/11 FY12/12 FY12/13 FY12/14E FY12/15E FY12/16E Sales revenue 893,353 992,160 1,121,361 1,265,000 1,306,000 1,332,000 CGS 378,012 443,656 502,730 578,000 599,000 609,000 Gross profit 515,341 548,504 618,630 687,000 707,000 723,000 SG&A 455,552 490,057 545,915 601,500 613,100 621,500 OP 59,789 58,446 72,715 85,500 93,900 101,500 Interest and dividend income 531 450 486 500 500 500 Interest expense 5,257 5,218 4,762 4,500 4,500 4,500 Other 465 356 -1,182 0 0 0 RP 55,529 54,033 67,257 81,500 89,900 97,500 Extraordinary gains 2,640 4,245 3,919 0 0 0 Etrtraordinary losses 8,670 4,418 8,726 9,000 3,000 3,000 Pretax profit 49,498 53,860 62,450 72,500 86,900 94,500 Income taxes 18,021 27,038 26,072 30,500 36,000 38,000 Minority interests 1,980 3,436 5,181 5,000 5,500 6,000 NP 29,497 23,385 31,196 37,000 45,400 50,500 Tax rate 36.4% 50.2% 41.7% 42.1% 41.4% 40.2% Depreciation expense 30,063 36,569 43,718 51,000 51,000 51,000 Goodwilll amortization 19,121 19,665 23,211 24,500 25,000 25,000 Capital expenditure - 50,800 62,600 70,000 65,000 65,000 EBITDA 108,973 114,680 139,644 161,000 169,900 177,500 Profitability (%) OPM before goodwill amortization 8.8 7.9 8.6 8.7 9.1 9.5 OPM after goodwill amortization 6.7 5.9 6.5 6.8 7.2 7.6 EBITDA margin 12.2 11.6 12.5 12.7 13.0 13.3 YoY (%) Sales revenue - 11.1 13.0 12.8 3.2 2.0 Gross profit - 6.4 12.8 11.1 2.9 2.3 OP - -2.2 24.4 17.6 9.8 8.1 EBITDA - 5.2 21.8 15.3 5.5 4.5 RP - -2.7 24.5 21.2 10.3 8.5 Pretax profit - 8.8 15.9 16.1 19.9 8.7 NP - -20.7 33.4 18.6 22.7 11.2

FY12/11 FY12/12 FY12/13 FY12/14E FY12/15E FY12/16E (Operating activities) NP 29,497 23,385 31,196 37,000 45,400 50,500 Depreciation(+) 49,184 56,234 66,929 75,500 76,000 76,000 Account receivable(-) 2,630 -283 -11,646 -9,586 550 -2,971 Inventories(-) -3,244 2,599 -22,900 4,251 -4,249 820 Account payable(+) -3,956 -1,751 6,362 11,077 -1,648 3,308 Minority interests(+) 1,980 3,436 5,181 5,000 5,500 6,000 Other 5,255 2,210 38,959 0 0 0 Operating cashflow 81,346 85,830 114,081 123,242 121,553 133,656 (Investing activities) Capital expenditures(-) -36,133 -51,631 -121,200 -70,000 -65,000 -65,000 Other 14,546 -24,243 -169,413 0 0 0 Investing cashflow -21,587 -75,874 -290,613 -70,000 -65,000 -65,000 (Financing activities) Debt (+) -34,861 -1,902 -39,579 31,422 -35,136 -43,379 Dividends (-) -8,973 -13,467 -15,755 -18,540 -19,776 -21,012 Other 1,457 120 245,743 0 0 0 Financing cashflow -42,377 -15,249 190,409 12,882 -54,912 -64,391 (Cash & cash equivalents) Increases 17,382 -5,293 13,877 66,124 1,641 4,265 Beginning balance 8 21,474 26,069 45,869 102,542 104,183 Final balance 17,390 16,181 39,946 111,993 104,183 108,448 Adjustments 4,084 9,888 5,923 -9,451 0 0 Source: Company data, Credit Suisse estimates

Beverage Sector Initiation 50 09 December 2014

Figure 22: Financial indicators FY12/11 FY12/12 FY12/13 FY12/14E FY12/15E FY12/16E (Safety) Current ratio (%) 41.8 40.7 63.4 102.4 106.9 114.0 Quick ratio (%) 25.7 26.2 38.5 69.1 71.3 77.0 Adjusted quick ratio (%) 7.6 8.4 26.5 170.9 199.5 324.1 Fixed ratio (%) 357.6 328.6 174.4 168.1 159.2 150.0 Interest-bearing debt (¥mn) 330,112 341,697 302,118 333,540 298,405 255,025 Average debt interest rate (%) 3.2 1.6 1.5 1.4 1.4 1.6 Dependence on debt (%) 41.1 40.5 24.0 25.2 22.7 19.4 Net debt (¥mn) 308,638 315,628 256,249 230,998 194,222 146,577 Equity capital ratio (%) 20.6 22.5 44.4 43.6 45.7 48.1 D/E ratio (%) 199.9 179.5 54.1 57.9 49.6 40.4 Long-term debt ratio (%) 14.5 8.9 42.8 82.0 82.5 86.9 Working capital (¥mn) -295,360 -318,291 -163,315 8,324 23,094 44,965 Net interest expense (¥mn) -4,726 -4,768 -4,276 -4,000 -4,000 -4,000 Cash plus marketable securities (¥mn) 21,474 26,069 45,869 102,542 104,183 108,448 Interest coverage ratio (x) 11.47 11.29 15.37 19.11 20.98 22.67 Financial leverage (x) 4.86 4.44 2.25 2.29 2.19 2.08 A/R to A/P ratio (%) 102.9 105.9 110.2 108.1 109.1 108.6 Dividend on equity (%) 7.6 7.6 4.2 3.3 3.4 3.4 (Profitability) ROE (%) - 13.2 8.3 6.5 7.7 8.2 ROA (%) - 7.1 6.9 6.6 7.1 7.7 Inventory turnover ratio (x) - 22.3 20.0 19.3 19.9 19.8 A/R turnover ratio (x) - 8.9 9.3 9.7 9.6 9.7 A/P turnover ratio (x) - 9.3 10.1 10.5 10.5 10.6 Inventory turnover days (days) - 16.4 18.3 18.9 18.3 18.4 A/R turnover days (days) - 41.1 39.2 37.8 37.8 37.4 A/P turnover days (days) - 39.4 36.2 34.6 34.9 34.4 Sales per employee (¥mn) - 66.9 68.6 71.2 73.5 75.0 OP per employee (¥mn) - 3.9 4.5 4.8 5.3 5.7 (Per share data) EPS (¥) 136.6 108.3 118.8 119.7 146.9 163.4 EPS (¥) - Before goodwill amortization 225.1 199.3 207.2 199.0 227.8 244.3 BPS (¥) 764 881 1,806 1,865 1,948 2,043 Sales per share (¥) 4,136 4,593 4,270 4,094 4,227 4,311 Operating cashflow per share (¥) 376.6 397.4 434.4 398.8 393.4 432.5 DPS (¥) 48.7 59.8 58.0 60.0 64.0 68.0 Dividend ratio (%) - Before goodwill amortization 21.6 30.0 28.0 30.1 28.1 27.8 (Growth) EPS growth (%) - -20.7 9.7 0.8 22.7 11.2 BPS growth (%) - 15.3 105.0 3.2 4.4 4.9 Total assets growth (%) - 5.2 48.8 5.2 -0.4 -0.3 Sustainable growth rate (%) - 9.2 6.0 4.6 5.5 5.9 (Investment profitability) Capital invested (¥ mn) 278,419 293,336 775,296 937,606 935,876 940,747 NOPAT (¥ mn) 38,318 29,283 41,669 49,531 55,000 60,685 ROIC (%) 13.8 10.0 5.4 5.3 5.9 6.5 WACC (%) 2.5 2.5 2.5 2.7 2.7 2.7 EVA (¥ mn) 31,245 21,832 21,909 24,603 29,971 34,841 EVA spread (%) 11.2 7.4 2.8 2.6 3.2 3.7 (Cashflow) FCF (¥mn) 59,759 9,956 -176,532 53,242 56,553 68,656 Operating C/F margin (%) 9.1 8.7 10.2 9.7 9.3 10.0 Operating C/F to current liabilities rate (%) 71.8 83.3 52.5 34.1 36.4 43.2 Operating C/F to debt rate (%) 24.6 25.1 37.8 36.9 40.7 52.4 Operating C/F to Investment C/F rate (%) 376.8 113.1 39.3 176.1 187.0 205.6 (Other) Employees numbers 14,726 14,916 17,758 17,758 17,758 17,758 Consolidated subsidiaries numbers 74 76 82 82 82 82 Equity method affiliates numbers 6 6 8 8 8 8 Average shares outstanding (mn) 216.0 216.0 262.6 309.0 309.0 309.0 End-of-period shares outstanding (mn) 216.0 216.0 309.0 309.0 309.0 309.0 Source: Company data, Credit Suisse estimates

Beverage Sector Initiation 51 09 December 2014

HOLT analysis Our HOLT analysis (DCF model premised on long-term mean reversion) suggests 41% potential downside for the share price (analyst estimates for FY14–16, mean reversion from FY17).

Figure 23: HOLT analysis

Source: Company data, Credit Suisse estimates, HOLT estimates

Beverage Sector Initiation 52

09 December 2014 Asia Pacific/Japan Equity Research Beverage (Food (Japan)) / MARKET WEIGHT

Kirin Holdings (2503 / 2503 JP) Rating UNDERPERFORM* Price (08 Dec 14, ¥) 1,562 INITIATION

Target price (¥) 1,400¹ Chg to TP (%) -10.4 E xpect tough times to continue in 2015 Market cap. (¥ bn) 1,425.86 (US$ 11.73) Enterprise value (¥ bn) 2,173.77 Initiate coverage: We initiate coverage of Kirin Holdings with an Number of shares (mn) 912.55 UNDERPERFORM rating and ¥1,400 target price (potential return −10.4%). We Free float (%) 80.0 expect Kirin to continue experiencing tough times in 2015, owing to: (1) absence 52-week price range 1,574 - 1,293 of effective strategies to boost sales at the beer and soft drinks business in *Stock ratings are relative to the coverage universe in each Japan; (2) diminishing returns from sales mix improvement and price hikes at the analyst's or each team's respective sector. ¹Target price is for 12 months. alcoholic beverage business in Australia, currently performing well; (3) diminishing returns from cost savings at the soft drink business in Australia; Research Analysts (4) slower growth in the Brazilian market, where competition continues to Masashi Mori intensify; and (5) sluggish performance by the pharmaceuticals and biochemicals 81 3 4550 9695 segment. We believe downside is limited, as the stock looks undervalued [email protected] compared with global brewers and soft drink makers and has a high dividend yield. However, we rate the stock UNDERPERFORM as our FY12/15 forecasts are some 10% below the I/B/E/S consensus OP and NP estimates and we see Kirin as a less appealing option within the Japanese beverage subsector. Investment themes: As 2015 is the final year of Kirin's current medium-term plan, we consider it unlikely to announce radical restructuring measures. Although the next medium-term plan (2016–18) may dictate otherwise, at this stage we see little likelihood in the next three years of OP beating the previous record set in FY12/12. While earnings remain downbeat, we think Kirin will continue prioritizing returns to shareholders. Catalysts/risks: In the near term, we are focusing on monthly sales in Japan. From a longer term perspective, our focus is on the next medium-term business plan (2016 through 2018). Upside risks: (1) a rebound in domestic market share, (2) renewed market expansion in Oceania and Brazil, and (3) improved shareholder returns. Valuation: We derive our ¥1,400 TP by applying the average EV/EBITDA of the past seven years (roughly 7.4x) to our FY12/15 estimates. We think our multiple is reasonable as it hovers near the low since the launch of Abenomics shook up the Japanese stock market.

Share price performance Financial and valuation metrics

Year 12/13A 12/14E 12/15E 12/16E Price (LHS) Rebased Rel (RHS) Sales (¥ bn) 2,254.6 2,202.0 2,211.0 2,233.0 2000 140 Operating profit (¥ bn) 142.8 118.5 122.5 130.0 120 Recurring profit (¥ bn) 132.1 106.5 110.9 119.1 1500 100 Net income (¥ bn) 85.7 37.5 45.7 51.0 EPS (¥) 90.8 41.0 50.0 55.8 1000 80 Dec-12 Apr-13 Aug-13 Dec-13 Apr-14 Aug-14 Change from previous EPS (%) n.a. IBES Consensus EPS (¥) n.a. 43.3 55.6 61.8 The price relative chart measures performance against the EPS growth (%) 55.3 -54.8 22.1 11.6 TOPIX which closed at 1447.58 on 08/12/14 P/E (x) 16.7 38.1 31.2 28.0 On 08/12/14 the spot exchange rate was ¥121.52/US$1 Dividend yield (%) 2.4 2.4 2.6 2.7 EV/EBITDA(x) 7.1 8.2 7.8 7.4 Performance Over 1M 3M 12M P/B (x) 1.3 1.3 1.3 1.3 Absolute (%) 8.2 10.5 1.1 ROE(%) 8.5 3.5 4.2 4.6 Relative (%) 2.1 -0.8 -16.1 Net debt/equity (%) 63.0 68.3 63.0 55.7

Source: Company data, Thomson Reuters, IFIS, Credit Suisse estimates. DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION® Client-Driven Solutions, Insights, and Access

09 December 2014

Share price catalysts, risks and valuations Share price catalysts: slim likelihood of major strategy change in 2015, the final year of the medium-term plan In the near term, domestic monthly sales and quarterly earnings represent the main catalysts for the share price. Kirin is Japan’s second-largest brewer, but continues to lose market share. In the soft drink industry, it is ranked fifth and is struggling to expand its presence. Signs of marked improvement on both counts would likely alter our view on earnings and the share price. At this stage, such signs are absent. We expect Kirin to reaffirm its group business strategy in Jan–Feb 2015, but anticipate little change from the past two years, as 2015 marks the final year of its current medium-term plan. From a longer-term perspective, our focus lies on Kirin's next medium-term plan, for 2016–18. Kirin aims to enhance shareholder returns under the current plan, but we see divergent possibilities for the new plan: will there be further improvement in shareholder returns or will the company return to a focus on M&A activity? In most of its active markets, Kirin is experiencing a loss of growth momentum compounded by heightened competition. In such circumstances, earnings growth is best achieved via cost-cutting, not sales expansion. In our view, though, Kirin lags rivals in efforts to achieve cost synergies within the group, and we would like to see the new medium-term plan outline strategies for group-level cost cutting.

Figure 1: Kirin continues to underperform TOPIX Figure 2: EV/EBITDA close to historical average (Index) (Yen) (x) 120 Versus TOPIX (LHS) 2,000 12 115 Share price (RHS) 1,900 11 110 1,800 105 1,700 10 +2σ 9.8

100 1,600 9 +1σ 8.6 95 1,500 8 90 1,400 7 Ave. 7.4 85 1,300 -1σ 6.3 80 1,200 6 75 1,100 5 -2σ 5.1 70 1,000 4 07/1 08/1 09/1 10/1 11/1 12/1 13/1 14/1

Note: Shows TOPIX-relative share price performance Note: Comparison of 12-month forward EV/EBITDA multiples Source: Bloomberg, Credit Suisse estimates Source: Bloomberg, Credit Suisse estimates

Valuation We derive our ¥1,400 TP by applying the average EV/EBITDA for the past seven years (roughly 7.4x) to our FY12/15 estimates. Outside of the alcoholic beverages business in Australia, the company is losing ground to rivals and we see little likelihood that 2015 onward will bring significant improvement in this operating environment. We consider it appropriate therefore to use a multiple providing downside support for the share price. Our fair-value EV/EBITDA of around 7.4x is roughly level with the low since the launch of Abenomics shook up the Japanese stock market. Our TP implies an FY2 dividend yield of roughly 3%, exceeding the 2% or so simple average yield for global beer and soft drink makers (based on Bloomberg consensus forecasts for FY2).

Beverage Sector Initiation 54 09 December 2014

Company overview Three main segments; await recovery at Japan integrated beverages segment Kirin’s business portfolio in essence comprises three segments: (1) the Japan integrated beverages segment (beer, wine, soft drinks, etc.); (2) the overseas integrated beverages segment (alcoholic beverage and soft drink sales in Oceania, Brazil, and Southeast Asia); and (3) the pharmaceuticals and biochemical segment (primarily, Kyowa Hakko Kirin). The overseas business consists for the most part of companies acquired and then added to the consolidated reporting structure. Among Kirin’s foreign equity-affiliates, the main ones are San Miguel Brewery (the largest beer producer in the Philippines), along with a soft drink joint venture in China, and a pharmaceuticals joint venture. In FY12/12, when Kirin posted record-high OP, the Japan integrated beverages segment generated 36% of this figure (before goodwill amortization). Since then Kirin has lost ground in Japan to rival manufacturers of alcoholic beverages and soft drinks, and we anticipate little near-term improvement. This leads us to expect the Japan integrated beverages segment to generate less than 30% of companywide OP in FY12/15. Aided by the weakening yen, the remaining two segments should manage to grow profits in FY12/15, albeit slightly. Senji Miyake serves as President and CEO of Kirin Holdings. He joined Kirin Brewery in 1970 and was appointed Executive Vice President of the Heineken Japan joint venture in 1993. In 1998, Miyake was named Sales Manager of Kirin Brewery’s Sales & Marketing Division and then appointed Managing Executive Officer and President of the Beer, Wine and Spirits Division in 2006. Following the move to a pure holding company structure in 2007, Miyake became President of Kirin Brewery. He was later appointed Executive Vice President of Kirin Holdings, and assumed his current position of President and CEO in 2010. Given his wealth of experience in domestic sales, we look to Miyake to steer the Japan integrated beverages segment toward recovery.

Figure 3: Segment breakdown of OP before goodwill amortization FY12/12 actual FY12/15 CSE

Other Other Japan 2.2% Japan 1.8% Integrated Integrated Beverages Beverages 36.0% Pharmas and 27.7% Pharmas and Biochemicals Biochemicals 31.1% 32.5%

Overseas Overseas Integrated Integrated Beverages Beverages 29.3% 39.3%

Source: Company data, Credit Suisse estimates Financial strategy and shareholder returns: goals in current medium-term plan look achievable Under its 2013–15 medium-term business plan, Kirin targets a consolidated dividend payout ratio of 30% (against EPS normalized to remove extraordinary gains/losses and other non-operating items). Earlier in 2014, the company repurchased nearly ¥20bn in its own shares. Kirin expects free cash flow over ¥400bn in its plan and we think it could even come close to ¥420bn. While making solid progress in enhancing shareholder returns, Kirin is also making steady inroads on paying down its debt. We forecast a D/E ratio of 72% for FY12/15, down from 102% in FY12/12. However, Kirin will likely miss some other targets: (1) mid-single-digit CAGR for normalized EBITDA (high single-digits for EPS) and

Beverage Sector Initiation 55 09 December 2014

(2) OP of ¥170bn or higher in 2015. We expect EBITDA to decrease at roughly 3% per year. We believe capex, driven mostly by overseas operations, especially those in Australia and Brazil, will peak in 2014 and decrease thereafter. While Kirin still has the option of expanding its business through acquisitions, at this juncture we doubt that there are any suitable candidates mid-sized or larger, particularly in Southeast Asia. Kirin will likely prioritize moves to stabilize earnings at its soft drink business in Oceania and its Brazilian operation. We see little reason therefore to be concerned about financial risk arising from a major acquisition. Thus under the new medium-term plan, we think Kirin will focus on shareholder returns and debt repayment. In our view, the company needs to find an appropriate balance for allocating cash flow between capex, laying foundations for growth (via capital and business tie-ups, for example), and bolstering shareholder returns.

Figure 4: D/E ratio declining from steady progress on debt Figure 5: Two straight years of dividend hikes and share buybacks (JPY bn) (%) (JPY bn) Share buyback (LHS) (%) Dividend (LHS) Net Debt (LHS) FCF (LHS) D/E ratio (RHS) 1,200 140 100 Dividend payout ratio (RHS) 400 Shareholder return ratio (dividend+shr buyback) (RHS) 1,000 120 350 80 800 300 100 600 250 80 60 400 200 60 200 40 150 40 0 100 20 (200) 20 50 (400) 0 0 0

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Overseas business contributes some 30% of profits; main regions Australia, Brazil

Figure 6: OP forex sensitivity matrix (¥mn) If current yen rates vs. AUD and BRL prevail in 2015, we see just over ¥1bn upside to our FY12/15 OP estimate, but if further yen depreciation vs. USD raises domestic business costs, overall weak-yen benefits are likely limited CSE Current level FX JPY/AUD sensitivity 92.0 93.0 94.0 95.0 96.0 97.0 98.0 99.0 100.0 101.0 102.0 103.0 104.0 42.0 -1,780 -1,520 -1,260 -1,000 -740 -480 -220 40 300 560 820 1,080 1,340 42.5 -1,700 -1,440 -1,180 -920 -660 -400 -140 120 380 640 900 1,160 1,420 43.0 -1,620 -1,360 -1,100 -840 -580 -320 -60 200 460 720 980 1,240 1,500 43.5 -1,540 -1,280 -1,020 -760 -500 -240 20 280 540 800 1,060 1,320 1,580 44.0 -1,460 -1,200 -940 -680 -420 -160 100 360 620 880 1,140 1,400 1,660 44.5 -1,380 -1,120 -860 -600 -340 -80 180 440 700 960 1,220 1,480 1,740 CSE 45.0 -1,300 -1,040 -780 -520 -260 0 260 520 780 1,040 1,300 1,560 1,820

45.5 -1,220 -960 -700 -440 -180 80 340 600 860 1,120 1,380 1,640 1,900 JPY/BRL 46.0 -1,140 -880 -620 -360 -100 160 420 680 940 1,200 1,460 1,720 1,980 Current 46.5 -1,060 -800 -540 -280 -20 240 500 760 1,020 1,280 1,540 1,800 2,060 47.0 -980 -720 -460 -200 60 320 580 840 1,100 1,360 1,620 1,880 2,140 47.5 -900 -640 -380 -120 140 400 660 920 1,180 1,440 1,700 1,960 2,220 48.0 -820 -560 -300 -40 220 480 740 1,000 1,260 1,520 1,780 2,040 2,300 Source: Credit Suisse estimates

Beverage Sector Initiation 56 09 December 2014

Figure 7: Company history 1885 Japan Brewery Co., Ltd. (the forerunner of Kirin Brewery Co., Ltd.) established 1907 Kirin Brewery established 1976 Koiwai Dairy Products Co., Ltd. established 1983 US subsidiary established 1996 Shanghai subsidiary established 1998 Stake acquired in Lion Nathan Limited (the forerunner of Lion Nathan Pty Limited) of New Zealand 2002 Stake acquired in San Miguel Corp. of the Philippines 2005 Thai subsidiary established 2006 Indonesian subsidiary established 2006 Kirin Beverage Co., Ltd. made into a wholly owned subsidiary 2006 Mercian Corporation made into consolidated subsidiary 2007 Kirin Brewery Co., Ltd. changes name to Kirin Holdings Co., Ltd. and becomes holding company of Kirin Group 2007 Stake acquired in Kyowa Hakko Kogyo Co., Ltd. 2007 National Foods (the forerunner of Lion-Dairy & Drinks Pty Ltd) made into a wholly owned subsidiary 2008 Kyowa Hakko Kogyo Co., Ltd. and Kirin Pharma Co., Ltd. merged to establish Kyowa Hakko Kirin Co., Ltd. 2009 Stake acquired in San Miguel Brewery of the Philippines 2009 Lion Nathan National Foods Pty Ltd (the forerunner of Lion Pty Ltd) of Australia makes Lion Nathan Limited of Australia its wholly owned subsidiary, and oversees Oceania business operations of Lion Nathan Limited and National 2010 Stake acquired in Fraser and Neave (Singapore; later sold) 2010 Mercian made into a wholly owned subsidiary 2011 Interfood Shareholding Company (Vietnam) made into a wholly owned subsidiary 2011 China Resources Kirin Beverages (Greater China) Company Ltd. established as a joint venture between Kirin and China Resources Enterprise, Limited 2011 Schincariol Participações e Representações S.A. (now Brasil Kirin Participações e Representações S.A.) made into a wholly owned subsidiary 2013 Kirin Company established; new structure started as a domestic integrated beverages business Source: Company data

Beverage Sector Initiation 57 09 December 2014

Overseas business performance (Oceania, Brazil) Australia’s beer market notable for falling consumption, increasing domination by two companies Kirin’s business in Oceania is handled by Lion, Australia’s leading beer supplier at 50% share of shipment volume. Beer consumption is falling both per capita and overall. This trend has been attributed to consumers’ changing tastes—with wine and cider consumption on the rise—and to rising concern about health issues. In our view, though, the decline in beer consumption will remain limited to 1–2% per year owing to: (1) a gradually increasing population and (2) rising numbers of foreign visitors. On the other hand, diversifying consumer tastes have led to a surge in popularity for craft beers, whose price puts them into the premium category. This is no passing fad, but rather a growing phenomenon. This shift to premium beers is delivering an improved product mix even while the beer market is likely to continue contracting in volume. In value, we expect the market to keep expanding, albeit at a slow rate. The on-premise channel is likely to assume more importance than ever (this includes restaurants, bars, nightclubs, and hotels, where travelers also contribute to consumption). The Australian beer market is effectively a duopoly. Lion is expanding its portfolio of imported premium beers, such as Corona, and craft beers, and thus its decline in sales volume should remain milder than that for the market as a whole.

Figure 8: Australia’s beer market share (by volume, 2013) Figure 9: Breakdown of alcoholic beverage sales in Australia (by value) Other RTD 8% Cider 8% 7%

Beer 40% Foster's Spirits (SABMiller) 20% 42% Pubs & bars Liquor (On- Lion Wine stores premis (Kirin HD) 25% 52% es) 50% 48%

Source: Company data, Credit Suisse Source: Australian Bureau of Statistics (ABS), Credit Suisse

Figure 10: Australia's population rising at a CAGR of 1.2% Figure 11: Visitors to Australia on the rise

(mil ppl) (K ppl) Short-term visitors arriving (LHS) (%) 25 900 12-month MA YoY (RHS) 10 800 8 20 700 6 600 4 15 500 2 400 0 10 300 200 -2 5 100 -4 0 -6

Jul-2014 Jul-2009

2000 2001 2010 2002 2003 2004 2005 2006 2007 2008 2009 2011 2012 2013

Oct-2010 Apr-2008 Apr-2013

Jan-2007 Jun-2007 Jan-2012 Jun-2012

Mar-2011

Feb-2009 Feb-2014

Nov-2007 Dec-2009 Nov-2012

Sep-2008 Aug-2011 Sep-2013

May-2010

2015e 2016e 2017e 2018e 2019e 2014e Source: IMF estimates Source: ABS, Credit Suisse

Beverage Sector Initiation 58 09 December 2014

Figure 12: Australia’s alcoholic beverage consumption largely unchanged, with beer and RTD sales declining while cider sales increase Beer Wine

(mnl) Beer consumption volume (pure alcohol, LHS) (l) (mn l) Wine consumption volume (pure alcohol, LHS) (l) 90 5.5 Per capita consumption (RHS) 80 Per capita consumption (RHS) 4.0 3.9 80 70 3.8 70 5.0 60 3.7 60 4.5 50 3.6 50 3.5 40 40 3.4 4.0 30 30 3.3 20 3.2 20 3.5 3.1 10 10 3.0 0 3.0 0 2.9 01 02 03 04 05 06 07 08 09 10 11 12 13 01 02 03 04 05 06 07 08 09 10 11 12 13

Spirits RTD

(mn l) Spirits consumption volume (pure alcohol, LHS) (l) (mn l) RTD consumption volume (pure alcohol, LHS) (l) Per capita consumption (RHS) 30 Per capita consumption (RHS) 1.4 20 1.2 18 1.1 25 1.0 16 1.3 0.9 14 20 0.8 12 0.7 15 1.2 10 0.6 8 0.5 10 0.4 6 1.1 0.3 4 5 0.2 2 0.1 0 1.0 0 0.0 03 04 05 06 07 08 09 10 11 12 13 03 04 05 06 07 08 09 10 11 12 13 Cider Total (pure alcohol base)

Cider Spirits&RTDs (mn l) Cider consumption volume (pure alcohol, LHS) (l) (mn l) Wine Beer 4 Per capita consumption (RHS) 0.2 200 YoY 7% 180 6% 3 160 5% 140 4% 120 2 0.1 3% 100 2% 80 1% 1 60 40 0% 20 -1% 0 0.0 05 06 07 08 09 10 11 12 13 0 -2% 01 02 03 04 05 06 07 08 09 10 11 12 13

Note: Financial year ends in June (e.g. FY13 indicates a period between May 2012 to June 2013) Source: ABS, Credit Suisse

Beverage Sector Initiation 59 09 December 2014

Oceania beverage business: company needs reduced sales exposure to white milk Lion’s beverage business consists mainly of milk and milk-based drinks together with other dairy products. White milk alone accounts for an estimated 50% of the business. As a major Australian milk producer, Lion has been facing several recent challenges, which include: (1) increasing sales of private-label white milk by Coles and Woolworths (Australia's two largest supermarket chains) eating into the share held by national brands, (2) intensifying competition to secure supply contracts for private labels, and (3) certain raw material suppliers building integrated production structures extending to downstream processing, eroding the cost competitiveness of national brands. At the major supermarkets, it appears that private label sales already exceed those of national brands. We believe private-label dairy products will continue to gain market share, owing to consumers' increasing preference for low-priced goods. To counter this, Lion likely needs to overhaul a business portfolio that remains heavily tilted toward milk and milk-based beverages, where competition is toughest. To reduce its exposure to the increasingly commoditized white milk segment, the company has said it will expand its offerings of high value added (e.g., health-oriented) products. It has apparently stepped up efforts to strengthen categories where differentiation is possible, including yogurt and specialty cheese, but no significant change is evident yet. To exacerbate matters, Lion appears to have lost its contract to supply a major retailer’s private-brand white milk in 2015. This could result in a steep decline in sales. The company has little further scope to reduce costs after already taking steps to consolidate manufacturing. However, there is a strong likelihood of farmgate milk prices dropping in FY12/15. Toward end-September, New Zealand's largest milk supplier, Fonterra, reduced its forecast farmgate milk price for the 2014–15 season (June to May). As reasons, the company cited strong global milk production, the impact of Russia’s import ban on dairy products, and slowing growth in China. Around the same time, Australian milk giant Murray Goulburn said it was maintaining its price forecast, despite having the same concerns about Russia and China. Although milk producers should benefit somewhat in 2015 from lower raw material costs, longer term we think it imperative that Lion build a business portfolio that is less reliant on white milk.

Figure 13: Beverage segment portfolio (breakdown by Figure 14: For regular milk, private label products are half FY12/13 sales value) the price of national brands (AU$) Cheese 4 14% National Brand 3.5 Private Brand 3

Yogurt 2.5 16% White milk 2 50% 1.5

Fruit juice 1 10% 0.5 Flavored milk 0 Fresh White Fresh Flavoured UHT White 10%

Source: Company data, Dairy Australia, Credit Suisse estimates Source: IRI-Aztec (2013), Credit Suisse

Beverage Sector Initiation 60 09 December 2014

Figure 15: Australia's average farmgate milk price likely to Figure 16: Fonterra (New Zealand): Farmgate milk prices fall from 2015, reducing input costs for dairy companies and dividends

(NZ$) (AUD cents/litre) Dividend 55 10.0 9.0 Farmgate Milk Price 50 8.0 45 7.0 40 6.0 35 5.0 30 4.0 25 3.0

20 2.0 1.0 0.0 08/09 09/10 10/11 11/12 12/13 13/14 14/15e

Note: FY13/14 indicates a period between Jul 2013 to Jun 2014 Note 1: FY14/15 indicates a period between Jun 2014 to May 2015 Source: Dairy Australia, Credit Suisse (Fonterra estimates) Note 2: Farmgate milk prices are per kilogram of milk solids; dividends are per-share (farmers receive shares in proportion to their milk supply). Source: ALIC, Credit Suisse Profits from Brazilian operation squeezed by lackluster macro growth Brazil is the world’s third-largest consumer of beer, after China and the US. Ambev from the Anheuser-Busch InBev group dominates the market, with a roughly 70% share. Schincariol, renamed Brasil Kirin after becoming a wholly owned subsidiary in 2H FY12/11, is second, accounting for 15% of the market. Brasil Kirin is an integrated beverage manufacturer, with the country’s third-largest soft drink business, commanding a market 5% share. Consumer sentiment has been weak for some time and shows little sign of recovering in 2015 or beyond. We expect competition to intensify in FY12/15 onward, and see little further scope for cost reductions. Any price increase will be contingent on the timing of a planned tax increase, but no date has been set. According to a 25 November article on brewersguardian.com, SABMiller has partnered with Grupo Petropolis, with a view to re-entering the Brazilian market in 2015. If the article is correct, it seems likely that the competitive landscape will grow even tighter over the longer term.

Beverage Sector Initiation 61 09 December 2014

Figure 17: Brazil’s beer market share (by shipment Figure 18: Brazil’s beer production has exhibited slower volume, 2013) growth since the FIFA World Cup

Other (mn liter) Beer production (LHS) (%) Heineken 1% 1,600 6-month MA YoY (RHS) 16 7% 14 Petropolis 1,400 12 9% 1,200 10 1,000 8 6 Brasil Kirin 800 14% 4 600 2

400 0 -2 200 AB InBev -4 69% 0 -6

Source: Company data, SICOBE, Credit Suisse Source: SICOBE

Figure 19: Competition with larger rivals likely to intensify in the North, where Kirin is comparatively strong; share stagnant in the South Production Share of 14 YTD # of Kirin's Brasil Kirin M/S (mn L) production (YoY) factories North 369 3% 10.6% c30% (#2 M/S) 5 Northeast 3,144 23% 1.7% c40% (#2 M/S) 2 Midwest 1,216 9% 2.6% AmBev #1 M/S, 1 Southeast 7,323 54% 1.0% Petropolis #2 M/S, 2 South 1,417 11% 9.5% Kirin c1-3% 3 Total 13,470 100% 2.4% 13 Note: Shows beer production and share of production for each region (as of Oct 2014) Source: SICOBE, company data, Credit Suisse

Figure 20: Slide in confidence of Brazilian consumers Figure 21: Minimal yen depreciation against Brazilian real 130 (JPY/BRL) 55 125 53 51 120 49 115 47 45 110 43

105 41 39 100 37

95 35

Jul-10

Jan-08 Jan-13

Jun-08 Jun-13

Oct-11

Apr-09 Apr-14

Sep-09 Feb-10 Sep-14

Dec-10

Aug-12 Nov-13

Nov-08 Mar-12 May-11 Source: Thomson Reuters Source: Bloomberg

Beverage Sector Initiation 62 09 December 2014

Earnings forecasts

Figure 22: Earnings forecast summary Sales Operating profit Recurring profit Net profit EPS ¥mn YoY (%) ¥mn YoY (%) ¥mn YoY (%) ¥mn YoY (%) ¥ YoY (%) Consolidated 13/12 Actual 2,254,585 3.1 142,818 -6.7 132,134 -4.6 85,656 52.4 90.8 55.3 14/12 CS E 2,202,000 -2.3 118,500 -17.0 106,500 -19.4 37,500 -56.2 41.0 -54.8 CoE 2,210,000 -2.0 120,000 -16.0 102,000 -22.8 35,000 -59.1 38.1 -58.0 IBES E 2,211,877 -1.9 125,330 -12.2 114,015 -13.7 40,424 -52.8 43.3 -52.3 15/12 CS E 2,211,000 0.4 122,500 3.4 110,900 4.1 45,700 21.9 50.0 22.1 IBES E 2,236,961 1.1 134,054 7.0 125,002 9.6 50,459 24.8 55.6 28.4 16/12 CS E 2,233,000 1.0 130,000 6.1 119,100 7.4 51,000 11.6 55.8 11.6 IBES E 2,256,570 0.9 138,760 3.5 131,293 5.0 55,840 10.7 61.8 11.1 Source: Company data, I/B/E/S, Credit Suisse estimates Japan integrated beverages: product strategy doing little to offset relatively poor performance in beer business In Figures 23–24, we outline our sales volume projections for Kirin Brewery and Kirin Beverage and forecasts for major OP factors. We expect profit to fall slightly short of guidance in FY12/14, largely because Kirin Beverage lags rivals in coffee and green tea beverages. We think the downtrend in Kirin Brewery's profits will continue in FY12/15 onward. In the beer business in particular, the fall in sales volume is outstripping the market average, and we think efforts to lower its depreciation burden and curtail other fixed costs will not go far enough to offset the decline in marginal profit from alcoholic beverages. We see room for upside versus our forecasts if the company's signature brand, Ichiban Shibori, stages a full-strength recovery in sales. Kirin introduced a gift-sales-only Ichiban Shibori Premium this summer, but apparently has no present plans to sell it year-round. Profitability at Kirin Beverage should improve by just under ¥1bn YoY in FY12/15, provided there is no repeat of the unseasonably cool weather that hurt beer sales in the summer of 2014. However, we think it will be FY12/16 before Kirin Beverage returns to the black, as we expect a drag from high costs for ingredients and other raw materials (partially due to a weak yen). The business has a substantial presence in the black tea category, where we believe marginal profits are also high. This will likely evolve into the mainstay of Kirin's operations; however, in other segments the company faces heightened competition and its position lacks staying power. We believe an earlier-than-forecast return to profit hinges on resurgent sales of high-margin coffee beverages. Overseas integrated beverage business: expect OP growth for 2015–16, but Brazil a concern For FY12/14, we think both sales and OP will be in line with guidance. The Brazilian operation has underperformed because of economic stagnation and increased competition. This should be offset, though, by brisk sales of alcoholic beverages in Australia. Our forecasts for FY12/15 onward are based on the following assumptions. For Lion’s alcoholic beverages business we assume YoY growth of +3.0% in price/mix and −1.5% in volume (FY12/14: +4.5% and −1.0%, respectively). With the Oceania market now contracting, we think Lion will continue seeking to offset declining sales volume with improvement in the product mix by increasing sales in growth categories such as imported premium beers and craft beers. On a local currency basis, we see sales rising around 1.5% YoY while profit remains flat. Although this seems conservative, with competition increasing we think Lion will incur higher SG&A costs as it ramps up marketing in a bid to broaden its customer base. (This would generate an unfavorable comparison with FY12/14, during which Lion has sought to rein in marketing spend.)

Beverage Sector Initiation 63 09 December 2014

At Lion’s beverages business, we see sales on a local currency basis falling 6% YoY in FY12/14 and 15% YoY in FY12/15, then staying flat in FY12/16, against a backdrop of stiffer competition and the loss of some private label milk supply contracts. We forecast a double-digit fall in sales for FY12/15, again from the loss of some major private-label milk supply contracts. However, we think OP on a local currency basis will be up around 2% YoY, owing to: (1) a smaller weighting for low-margin private-label white milk products, (2) expanded offerings of high-value-added products such as yogurt and cheese, and (3) lower farmgate milk prices. In FY12/16, we see OP increasing 9% YoY despite the low likelihood of further benefit from consolidation of manufacturing, as Lion should see benefits from a focus on high-margin SKUs and more effective utilization of cheaper inputs. For Brasil Kirin, we forecast a 7.0% YoY increase in FY12/14 of sales on a local currency basis (+12.8% for price/mix, −5.7% for volume), followed by gains of 4.7% for FY12/15 (+7.0%, −2.3%) and 6.5% for FY12/16 (+7.0%, −0.5%). Weaker economic growth and stiffer competition should result in a continued decline in sales volume of both beer and soft drinks. Profit growth will likely remain in the mid-single digits, with decreased volume countered by mix improvement, price increases, and across-the-board cost savings from procurement through sales. Forecast lackluster earnings for pharmaceuticals and biochemical segment, mixed outlook for equity affiliates As our outlook for the pharmaceuticals and biochemicals segment is based on the earnings forecast compiled by our pharmaceuticals analyst, Fumiyoshi Sakai, for Kyowa Hakko Kirin, we will omit details here. The 5 November report on Kyowa also forecasts a stall in earnings owing to a lackluster performance by the core domestic pharmaceutical operation. Our view on Kirin's main equity affiliates is as follows. For Philippines-based San Miguel, which markets alcoholic beverages and soft drinks mainly in Southeast Asia, we forecast healthy margins and stable profit growth underpinned by a strong home-market presence. For China Resources Kirin Beverages, a joint venture with China Resources Enterprise (a leading consumer goods company with core activities including alcoholic and non-alcoholic beverages), we forecast a return to profits in FY12/14 as we expect stronger sales to outweigh ¥2.3bn in goodwill amortization. From 2015 onward China’s soft drink market should become increasingly competitive. Nonetheless, we expect progressive improvement in profitability as the joint venture draws on each partner's strengths, namely, China Resources Enterprise's extensive sales and distribution network and Kirin Holdings’ product development capabilities. Fujifilm Kyowa Kirin Biologics, a joint venture in biosimilar development between Kyowa Hakko Kirin and Fujifilm Holdings, is likely to continue generating equity-method losses of several billion yen for the time being, owing to heavy upfront investment in R&D.

Beverage Sector Initiation 64 09 December 2014

Figure 23: Kirin Brewery’s earnings forecasts FY12/09 FY12/10 FY12/11 FY12/12 FY12/13 FY12/14E FY12/15E FY12/16E Sales Volume（1,000 KL） Beer 799 751 714 699 672 645 629 616 Happoshu 726 661 595 560 522 501 489 476 New Genre 714 740 719 714 714 628 609 591 Beer Beverages Total 2,239 2,152 2,030 1,975 1,909 1,775 1,727 1,684 Volume (YoY, %) Beer -7.8 -6.0 -4.9 -2.1 -3.9 -4.0 -2.5 -2.0 Happoshu -10.5 -9.0 -10.0 -5.9 -6.8 -4.0 -2.5 -2.5 New Genre 17.8 3.6 -2.8 -0.7 0.0 -12.0 -3.0 -3.0 Beer Beverages Total -2.0 -3.9 -5.7 -2.7 -3.3 -7.0 -2.7 -2.5 Amount (¥mn) Beer 329,800 310,800 296,300 290,400 279,600 268,400 261,700 256,500 Happoshu 221,700 201,600 181,700 171,000 159,200 152,800 149,000 145,300 New Genre 187,400 194,300 188,900 187,200 187,600 165,100 160,100 155,300 Beer Beverages Total 738,900 706,700 667,100 648,800 626,500 586,500 571,100 557,300 RTD (Low Alcohol Drinks) 54,100 55,100 53,400 56,900 62,700 72,100 77,200 84,100 Shochu, Foreign Alcohol, Other 52,200 63,900 54,800 46,600 39,800 32,200 30,600 29,100 Kirin Brewery Sales 853,700 826,000 775,200 752,400 729,100 691,000 679,000 670,000 (YoY, %) -1.7 -3.2 -6.2 -2.9 -3.1 -5.2 -1.7 -1.3 (Alcohol Tax） 491,700 490,100 459,100 445,800 430,400 407,700 400,600 395,300 Operating Profit （Main factors influencing OP） Change in marginal profit 5,000 -5,500 -18,900 -8,600 -7,700 -13,458 -4,816 -3,264 Beer volume -8,000 -6,000 -5,163 -2,000 -3,430 -3,691 -2,214 -1,780 Happoshu volume -8,400 -6,700 -6,800 -3,700 -4,100 -2,229 -1,337 -1,304 New Genre volume 11,800 2,900 -2,300 -700 100 -9,230 -2,031 -2,042 RTD volume 0 0 -600 1,300 1,700 3,292 1,767 2,361 Other 9,600 4,299 -4,037 -3,500 -1,970 -1,600 -1,000 -500 Change in raw materials costs 700 4,100 600 500 -1,500 600 -500 0 Change in cost of sales 3,000 3,500 5,500 -2,400 -900 -1,900 -1,000 -1,000 Change in other expenses -7,300 7,900 9,300 1,800 4,100 5,500 4,500 4,000 YoY change in income 1,400 10,000 -3,500 -8,700 -6,000 -9,300 -1,800 -300 Kirin Brewery Operating Profit 59,900 69,900 66,600 57,800 51,800 42,500 40,700 40,400 (YoY, %) 2.4 16.7 -4.7 -13.2 -10.4 -18.0 -4.2 -0.7 Operating Profit Margin (%) 7.0 8.5 8.6 7.7 7.1 6.2 6.0 6.0 OPM excluding Alcohol Tax (%) 12.2 14.3 14.5 13.0 12.0 10.4 10.2 10.2 Source: Company data, Credit Suisse estimates

Beverage Sector Initiation 65 09 December 2014

Figure 24: Kirin Beverage’s earnings forecasts FY12/09 FY12/10 FY12/11 FY12/12 FY12/13 FY12/14E FY12/15E FY12/16E Sales Volume (10,000 cases) Japanese Tea 2,475 2,217 2,066 1,996 2,088 1,921 1,979 2,018 Oolong Tea 342 300 283 283 268 241 246 248 Black Tea 3,798 4,439 4,636 4,638 4,726 4,688 4,735 4,782 Coffee Drinks 3,692 3,336 3,148 3,028 2,983 2,864 2,864 2,835 Fruit and Vegetable Drinks 2,312 2,142 1,891 2,327 2,536 2,409 2,433 2,458 Carbonated Soft Drinks 821 982 749 1,491 1,656 1,623 1,639 1,655 Water 3,364 2,847 3,314 3,458 3,417 3,349 3,449 3,518 Other 1,502 1,298 1,202 1,734 2,482 2,730 2,785 2,841 Domestic Soft Drink Total 18,306 17,561 17,289 18,955 20,156 19,825 20,130 20,356 Overseas Soft Drink Total 706 695 473 - - - - - Total 19,012 18,256 17,762 18,955 20,156 19,825 20,130 20,356 Volume (YoY, %) Japanese Tea -15.0 -10.4 -6.8 -3.4 4.6 -8.0 3.0 2.0 Oolong Tea 4.0 -12.3 -5.7 0.0 -5.3 -10.0 2.0 1.0 Black Tea 0.9 16.9 4.4 0.0 1.9 -0.8 1.0 1.0 Coffee Drinks 4.9 -9.6 -5.6 -3.8 -1.5 -4.0 0.0 -1.0 Fruit and Vegetable Drinks -6.9 -7.4 -11.7 23.1 9.0 -5.0 1.0 1.0 Carbonated Soft Drinks -11.3 19.6 -23.7 99.1 11.1 -2.0 1.0 1.0 Water -14.7 -15.4 16.4 4.3 -1.2 -2.0 3.0 2.0 Other -13.2 -13.6 -7.4 44.3 43.1 10.0 2.0 2.0 Domestic Soft Drink Total -6.6 -4.1 -1.5 9.6 6.3 -1.6 1.5 1.1 Overseas Soft Drink Total -12.8 -1.6 -31.9 - - - - - Total -6.9 -4.0 -2.7 6.7 6.3 -1.6 1.5 1.1 Sales total 371,600 350,000 317,000 336,800 353,500 348,000 353,000 357,000 (YoY, %) -8.0 -5.8 -9.4 6.2 5.0 -1.6 1.4 1.1 Operating Profit （Main factors influencing OP） Change in volume -15,700 -8,300 -3,000 16,100 12,700 -2,677 2,053 1,533 Change in raw materials costs 2,000 1,400 -800 100 2,600 -300 -1,500 0 Change in cost of sales 13,900 10,400 3,200 -16,600 -14,100 1,000 500 500 Change in packaging -3,100 -1,900 -3,500 -800 -3,500 -1,700 -500 500 Change in other costs and expenses 0 700 4,100 2,500 100 -1,523 347 167 YoY change in income -2,900 2,300 0 1,300 -2,200 -5,200 900 2,700 OP (before G/W amortization) 2,300 4,600 4,600 5,800 3,700 -1,600 -700 2,000 (YoY, %) -55.8 100.0 0.0 26.1 -36.2 - - - Operating Profit Margin (%) 0.6 1.3 1.5 1.7 1.0 -0.5 -0.2 0.6 Source: Company data, Credit Suisse estimates

Beverage Sector Initiation 66 09 December 2014

Figure 25: Sales and OP by segment (new segment) FY12/12 FY12/13 FY12/14E FY12/15E FY12/16E Forex Rate JPY/AUD 81.6 92.0 94.0 97.0 97.0 JPY/BRL 41.1 45.2 45.0 45.0 45.0 Sales (¥mn) Japan Integrated Beverages 1,190,000 1,180,100 1,148,000 1,142,000 1,138,000 Kirin Brewery 752,400 729,100 691,000 679,000 670,000 Kirin Beverage 336,800 353,500 348,000 353,000 357,000 Mercian 69,700 67,000 69,000 70,000 70,000 Other and elimination 30,900 30,400 40,000 40,000 41,000 Overseas Integrated Beverages 577,000 685,200 707,000 711,000 730,000 Lion Alcohol Beverages 189,800 244,900 259,000 271,000 275,000 Lion Soft Drinks 206,800 223,400 215,000 195,000 195,000 Brazil Kirin 148,800 178,300 190,000 199,000 212,000 Other and elimination 31,500 38,400 43,000 46,000 48,000 Pharmaceuticals and Biochemicals 322,900 331,300 323,000 334,000 341,000 Pharmaceuticals 258,000 259,500 249,000 256,000 261,000 Biochemicals 75,100 81,000 83,000 88,000 90,000 Other and elimination -10,100 -9,200 -9,000 -10,000 -10,000 Other 96,100 57,700 24,000 24,000 24,000 Total 2,186,100 2,254,500 2,202,000 2,211,000 2,233,000 Sales (YoY, %) Japan Integrated Beverages - -0.8 -2.7 -0.5 -0.4 Overseas Integrated Beverages - 18.8 3.2 0.6 2.7 Pharmaceuticals and Biochemicals - 2.6 -2.5 3.4 2.1 Other - -40.0 -58.4 0.0 0.0 Total - 3.1 -2.3 0.4 1.0 FY12/12 FY12/13 FY12/14E FY12/15E FY12/16E Operating Profit (¥mn) Japan Integrated Beverages 68,900 62,100 48,100 47,200 49,700 Kirin Brewery 57,800 51,800 42,500 40,700 40,400 Kirin Beverage 3,900 1,700 -3,500 -2,600 100 OP before G/W amortization 5,800 3,700 -1,600 -700 2,000 Goodwill Amortization -1,900 -1,900 -1,900 -1,900 -1,900 Mercian 2,100 300 500 500 600 Other 4,900 8,100 8,600 8,600 8,600 Overseas Integrated Beverages 27,610 30,600 29,800 33,400 35,100 Lion 20,600 28,700 27,600 30,500 31,000 Lion Alcohol Beverages 50,000 66,300 69,800 72,500 72,700 Lion Soft Drinks 7,400 7,300 2,900 3,100 3,400 Lion Corporate Expenses -7,900 -10,200 -10,000 -10,000 -10,000 Goodwill Amortization -25,200 -30,300 -31,000 -31,000 -31,000 Brand Amortization -3,800 -4,200 -4,100 -4,100 -4,100 Brazil Kirin 5,200 300 500 1,000 1,900 OP before G/W amortization 13,000 8,800 8,900 9,400 10,300 Goodwill Amortization -4,800 -5,300 -5,300 -5,300 -5,300 Brand Amortization -2,800 -3,100 -3,100 -3,100 -3,100 Other 1,700 1,500 1,700 1,900 2,200 Pharmaceuticals and Biochemicals 55,500 54,300 45,000 46,500 50,000 Pharmaceuticals 50,300 46,100 34,000 35,000 38,200 Biochemicals 2,100 5,600 8,000 8,500 8,800 Goodwill Amortization Elimination 9,100 8,700 9,200 9,200 9,200 Goodwill Amortization -6,200 -6,200 -6,200 -6,200 -6,200 Other 3,700 3,700 3,100 3,300 3,400 Total Corporate Expenses and Eliminations -2,800 -8,000 -7,500 -7,900 -8,200 Total 153,000 142,800 118,500 122,500 130,000 OP (YoY, %) Japan Integrated Beverages - -9.9 -22.5 -1.9 5.3 Overseas Integrated Beverages - 10.8 -2.6 12.1 5.1 Pharmaceuticals and Biochemicals - -2.2 -17.1 3.3 7.5 Other - 0.0 -16.2 6.5 3.0 Total - -6.7 -17.0 3.4 6.1 OPM before G/W amortization (%) Japan Integrated Beverages 6.0 5.5 4.4 4.4 4.6 Overseas Integrated Beverages 10.1 9.8 9.5 9.9 9.9 Pharmaceuticals and Biochemicals 20.0 19.0 16.8 16.7 17.4 Other 4.5 6.9 12.9 13.8 14.2 Total 9.0 8.5 7.6 7.7 8.0 OP breakdown before G/W amortization (%) Japan Integrated Beverages 36.0 32.5 28.9 27.7 27.9 Overseas Integrated Beverages 29.3 33.7 38.3 39.3 38.6 Pharmaceuticals and Biochemicals 32.5 31.7 31.0 31.1 31.7 Other 2.2 2.0 1.8 1.8 1.8 Source: Company data, Credit Suisse estimates

Beverage Sector Initiation 67 09 December 2014

Figure 26: Consolidated balance sheet and change in net assets (¥mn) FY12/07 FY12/08 FY12/09 FY12/10 FY12/11 FY12/12 FY12/13 FY12/14E FY12/15E FY12/16E (Assets) Cash,cash equivalents & securities 55,255 73,424 125,686 51,463 76,218 83,916 113,759 71,159 94,918 84,624 Account receivable 361,127 446,630 423,835 415,268 406,448 413,138 396,113 395,188 397,268 400,171 Inventories 148,649 219,320 198,517 187,812 192,982 206,501 225,045 210,740 218,783 216,899 Other 72,096 88,726 93,686 74,482 88,664 90,077 83,729 80,376 80,376 80,376 Allowance for doubtful accounts -2,500 -1,879 -2,278 -1,939 -6,250 -4,138 -3,860 -4,030 -4,030 -4,030 Total current assets 634,629 826,222 839,450 727,088 758,065 789,496 814,788 753,433 787,315 778,040 Tangible fixed assets 635,963 791,311 774,274 739,235 763,833 763,437 764,378 797,578 805,778 813,978 Depreciable PP&E 441,965 489,826 471,365 452,883 514,865 511,343 502,752 - - - Land 158,558 244,240 227,671 225,246 201,436 201,513 186,820 - - - Construction in progress 35,437 57,244 75,235 61,103 47,529 50,578 74,805 - - - Intangible fixed assets 386,915 449,469 734,688 658,357 816,261 821,948 836,936 816,836 773,736 717,636 Goodwill 258,780 343,975 605,210 562,492 713,749 642,190 649,519 630,619 591,719 542,819 Other 128,134 105,493 129,477 95,864 102,511 179,758 187,417 186,217 182,017 174,817 Investments & other assets 812,160 552,619 512,781 524,515 516,094 576,179 480,351 492,822 492,822 492,822 Investment securities 394,170 425,384 388,677 428,383 417,619 475,157 376,155 384,289 384,289 384,289 Other 420,874 131,182 128,511 103,562 105,156 106,749 109,487 113,824 113,824 113,824 Allowances -2,884 -3,947 -4,407 -7,430 -6,681 -5,727 -5,291 -5,291 -5,291 -5,291 Total fixed assets 1,835,038 1,793,400 2,021,743 1,922,108 2,096,189 2,161,564 2,081,667 2,107,236 2,072,336 2,024,436 Total assets 2,469,667 2,619,623 2,861,194 2,649,197 2,854,254 2,951,061 2,896,456 2,860,669 2,859,651 2,802,476 (Liabilities) Account payable 139,255 189,589 169,936 169,036 146,955 151,184 155,863 149,943 153,528 153,245 Short-term debt 404,723 163,309 271,946 196,145 230,617 195,040 148,410 240,667 241,616 184,457 Other 347,782 366,715 352,214 314,514 337,846 371,913 355,625 288,588 288,588 288,588 Total current liabilities 891,760 719,613 794,096 679,695 715,419 718,137 659,898 679,198 683,732 626,290 Long-term debt 205,075 500,581 625,494 582,790 834,486 768,584 642,667 578,400 549,480 522,006 Other 273,276 249,431 242,734 227,674 256,453 310,438 293,164 269,173 269,173 269,173 Total fixed liabilities 478,351 750,012 868,228 810,464 1,090,939 1,079,022 935,831 847,573 818,653 791,179 Total liabilities 1,370,111 1,469,625 1,662,324 1,490,160 1,806,359 1,797,159 1,595,729 1,526,771 1,502,386 1,417,469 (Net assets) Capital stock 102,045 102,045 102,045 102,045 102,045 102,045 102,045 102,045 102,045 102,045 Capital surplus 71,353 71,536 71,582 81,412 81,417 81,415 81,417 81,417 81,417 81,417 Retained earnings 781,499 839,248 860,538 821,519 801,856 796,737 850,511 853,238 862,406 875,047 Treasury stock -28,170 -29,058 -30,486 -2,985 -3,271 -3,509 -53,903 -73,668 -73,668 -73,668 Total shareholders' equity 926,727 983,771 1,003,679 1,001,991 982,048 976,689 980,071 963,032 972,200 984,841 Valuation and translation adjustments 128,083 -55,960 -22,357 -39,516 -129,126 -27,746 95,790 131,998 131,998 131,998 Total equity capital 1,054,811 927,813 981,323 962,477 852,922 948,943 1,075,861 1,095,030 1,104,198 1,116,839 Share warrant 0 162 196 207 250 203 306 310 310 310 Minority interests 44,744 222,023 217,350 196,352 194,722 204,754 224,558 238,558 252,758 267,858 Total net assets 1,099,555 1,149,998 1,198,869 1,159,036 1,047,895 1,153,901 1,300,726 1,333,898 1,357,266 1,385,007 Total liabilities & net assets 2,469,667 2,619,623 2,861,194 2,649,197 2,854,254 2,951,061 2,896,456 2,860,669 2,859,651 2,802,476

FY12/07 FY12/08 FY12/09 FY12/10 FY12/11 FY12/12 FY12/13 FY12/14E FY12/15E FY12/16E (Changes in net assets) Beginning balance 1,043,724 1,099,555 1,149,998 1,198,869 1,159,036 1,047,895 1,153,901 1,300,726 1,333,898 1,357,266 Capital stock 0 0 0 0 0 0 0 0 0 0 Capital surplus 239 183 46 9,830 5 -2 2 0 0 0 Net profits 66,713 80,182 49,172 11,394 7,407 56,198 85,656 37,500 45,700 51,000 Dividends from surplus -17,208 -22,432 -21,949 -22,878 -25,967 -27,883 -33,456 -34,706 -36,532 -38,359 Treasury stock -1,373 -888 -1,428 27,501 -286 -238 -50,394 -19,765 0 0 Valuation and translation adjustments 12,589 -184,043 33,603 -17,159 -89,610 101,380 123,536 36,208 0 0 Minority interests -4,990 177,279 -4,673 -20,998 -1,630 10,032 19,804 14,000 14,200 15,100 Other -139 162 -5,900 -27,523 -1,060 -33,481 1,677 -66 0 0 Final balance 1,099,555 1,149,998 1,198,869 1,159,036 1,047,895 1,153,901 1,300,726 1,333,898 1,357,266 1,385,007 Source: Company data, Credit Suisse estimates

Beverage Sector Initiation 68 09 December 2014

Figure 27: Consolidated profit and loss and cash flow statements (¥mn) FY12/07 FY12/08 FY12/09 FY12/10 FY12/11 FY12/12 FY12/13 FY12/14E FY12/15E FY12/16E Sales revenue (incl. alcohol tax) 1,801,164 2,303,569 2,278,473 2,177,802 2,071,774 2,186,177 2,254,585 2,202,000 2,211,000 2,233,000 Sales revenue (excl. alcohol tax) 1,400,600 1,922,800 1,918,700 1,835,200 1,748,300 1,870,600 1,943,700 1,907,000 1,921,000 1,947,000 CGS 1,078,614 1,392,895 1,383,821 1,314,809 1,218,852 1,274,472 1,287,590 1,260,000 1,267,000 1,280,000 Gross profit 722,550 910,673 894,652 862,992 852,922 911,704 966,995 942,000 944,000 953,000 SG&A 601,942 764,696 766,216 711,380 710,058 758,682 824,177 823,500 821,500 823,000 OP 120,608 145,977 128,435 151,612 142,864 153,022 142,818 118,500 122,500 130,000 Interest and dividend income 7,263 8,965 8,146 4,839 8,637 7,164 7,063 6,000 6,000 6,000 Interest expense 12,618 25,385 19,617 22,047 20,915 22,827 21,351 21,000 21,000 21,000 Equity in earnings of affiliates 10,282 11,833 8,902 9,479 10,541 -676 1,643 4,500 5,400 6,100 Other -2,146 -38,325 18,748 -2,914 -4,309 1,768 1,960 -1,500 -2,000 -2,000 RP 123,389 103,065 144,614 140,969 136,818 138,452 132,134 106,500 110,900 119,100 Extraordinary gains 22,404 96,585 44,553 39,850 44,776 34,030 73,227 4,000 0 0 Etrtraordinary losses 17,380 33,915 96,554 100,492 96,675 38,890 48,155 15,000 11,000 11,000 Pretax profit 128,413 165,735 92,613 80,327 84,918 133,592 157,206 95,500 99,900 108,100 Income taxes 50,343 68,392 28,914 57,823 61,666 60,128 53,257 44,000 40,000 42,000 Minority interests 11,355 17,160 14,526 11,109 15,844 17,265 18,292 14,000 14,200 15,100 NP 66,713 80,182 49,172 11,394 7,407 56,198 85,656 37,500 45,700 51,000 Tax rate 39.2% 41.3% 31.2% 72.0% 72.6% 45.0% 33.9% 46.1% 40.0% 38.9% Capital expenditure (tangible&intangible) 66,873 126,063 110,246 106,650 79,830 98,900 117,300 125,000 100,000 100,000 Depreciation expense (incl.brand amortization) 73,870 95,751 105,874 105,259 103,871 103,428 101,126 99,000 99,000 99,000 Goodwill amortization 7,448 22,376 21,627 34,728 38,891 42,934 47,910 49,000 49,000 49,000 EBITDA 201,926 264,104 255,936 291,599 285,626 299,384 291,854 266,500 270,500 278,000 Profitability (%) Before goodwill amortization OPM (incl. alcohol tax) 7.1 7.3 6.6 8.6 8.8 9.0 8.5 7.6 7.8 8.0 OPM (excl. alcohol tax) 9.1 8.8 7.8 10.2 10.4 10.5 9.8 8.8 8.9 9.2 After goodwill amortization OPM (incl. alcohol tax) 6.7 6.3 5.6 7.0 6.9 7.0 6.3 5.4 5.5 5.8 OPM (excl. alcohol tax) 8.6 7.6 6.7 8.3 8.2 8.2 7.3 6.2 6.4 6.7 EBITDA margin (incl. alcohol tax) 11.2 11.5 11.2 13.4 13.8 13.7 12.9 12.1 12.2 12.4 EBITDA margin (excl. alcohol tax) 14.4 13.7 13.3 15.9 16.3 16.0 15.0 14.0 14.1 14.3

FY12/07 FY12/08 FY12/09 FY12/10 FY12/11 FY12/12 FY12/13 FY12/14E FY12/15E FY12/16E (Operating activities) NP 66,713 80,182 49,172 11,394 7,407 56,198 85,656 37,500 45,700 51,000 Depreciation(+) 73,870 95,751 105,874 105,259 103,871 103,428 101,126 99,000 99,000 99,000 Goodwill amortization(+) 7,448 22,376 21,627 34,728 38,891 42,934 47,910 49,000 49,000 49,000 Account receivable(-) -39,433 -85,503 22,795 8,567 8,820 -6,690 17,025 925 -2,080 -2,903 Inventories(-) -28,762 -70,671 20,803 10,705 -5,170 -13,519 -18,544 14,305 -8,043 1,885 Account payable(+) 31,645 50,334 -19,653 -900 -22,081 4,229 4,679 -5,920 3,585 -283 Minority interests(+) 11,355 17,160 14,526 11,109 15,844 17,265 18,292 14,000 14,200 15,100 Other 2,031 33,485 -16,335 46,642 59,751 7,540 -48,984 0 0 0 Operating cashflow 114,585 131,281 189,907 218,025 196,792 212,061 205,517 204,309 195,963 206,699 (Investing activities) Capital expenditures(-) -66,873 -126,063 -110,246 -106,650 -79,830 -98,977 -117,393 -161,100 -113,100 -100,100 Purchases of marketable securities(-) -183,787 -2,144 -137,318 -86,973 -44,326 -9,639 -4,424 0 0 0 Purchases of shares of subsidiaries(-) -77,237 -73,190 -262,971 -6,659 -345,241 -1,684 -24,672 0 0 0 Other 58,276 32,067 188,881 59,365 107,739 61,921 232,015 0 0 0 Investing cashflow -269,621 -169,330 -321,654 -140,917 -361,658 -48,379 85,526 -161,100 -113,100 -100,100 (Financing activities) Debt (+) 368,754 54,092 233,550 -118,505 286,168 -101,479 -172,547 27,991 -27,971 -84,634 Dividends (-) -17,208 -22,432 -21,949 -22,878 -25,967 -27,883 -33,456 -34,706 -36,532 -38,359 Other -229,991 -4,976 -37,393 1,186 -66,987 -30,646 -66,354 -20,000 0 0 Financing cashflow 121,555 26,684 174,208 -140,197 193,214 -160,008 -272,357 -26,715 -64,503 -122,993 (Cash & cash equivalents) Increases -33,481 -11,365 42,461 -63,089 28,348 3,674 18,686 16,494 18,360 -16,394 Beginning balance 90,158 55,255 73,424 125,686 51,463 76,218 83,916 113,759 71,159 94,918 Final balance 56,677 43,890 115,885 62,597 79,811 79,892 102,602 130,253 89,518 78,524 Adjustments -1,422 29,534 9,801 -11,134 -3,593 4,024 11,157 -59,095 5,400 6,100 Source: Company data, Credit Suisse estimates

Beverage Sector Initiation 69 09 December 2014

Figure 28: Financial indicators FY12/07 FY12/08 FY12/09 FY12/10 FY12/11 FY12/12 FY12/13 FY12/14E FY12/15E FY12/16E (Safety) Current ratio (%) 71.2 114.8 105.7 107.0 106.0 109.9 123.5 110.9 115.1 124.2 Quick ratio (%) 46.7 72.3 69.2 68.7 67.5 69.2 77.3 68.7 72.0 77.4 Adjusted quick ratio (%) 13.7 45.0 46.2 26.2 33.0 43.0 76.7 29.6 39.3 45.9 Fixed ratio (%) 174.0 193.3 206.0 199.7 245.8 227.8 193.5 192.4 187.7 181.3 Interest-bearing debt (¥mn) 609,798 663,890 897,440 778,935 1,065,103 963,624 791,077 819,068 791,097 706,463 Average debt interest rate (%) 3.0 4.0 2.5 2.6 2.3 2.3 2.4 2.6 2.6 2.8 Dependence on debt (%) 24.7 25.3 31.4 29.4 37.3 32.7 27.3 28.6 27.7 25.2 Net debt (¥mn) 554,543 590,466 771,754 727,472 988,885 879,708 677,318 747,909 696,178 621,838 Equity capital ratio (%) 42.7 35.4 34.3 36.3 29.9 32.2 37.1 38.3 38.6 39.9 D/E ratio (%) 57.8 71.6 91.5 80.9 124.9 101.5 73.5 74.8 71.6 63.3 Long-term debt ratio (%) 33.6 75.4 69.7 74.8 78.3 79.8 81.2 70.6 69.5 73.9 Working capital (¥mn) -257,131 106,609 45,354 47,393 42,646 71,359 154,890 74,235 103,583 151,750 Net interest expense (¥mn) -5,355 -16,420 -11,471 -17,208 -12,278 -15,663 -14,288 -15,000 -15,000 -15,000 Cash plus marketable securities (¥mn) 55,255 73,424 125,686 51,463 76,218 83,916 113,759 71,159 94,918 84,624 Interest coverage ratio (x) 10.13 6.10 6.96 7.10 7.24 7.02 7.02 5.93 6.12 6.48 Financial leverage (x) 2.34 2.82 2.92 2.75 3.35 3.11 2.69 2.61 2.59 2.51 A/R to A/P ratio (%) 259.3 235.6 249.4 245.7 276.6 273.3 254.1 263.6 258.8 261.1 Dividend on equity (%) 1.7 2.3 2.3 2.4 2.9 3.1 3.3 3.2 3.3 3.5 (Profitability) ROE (%) 6.5 8.1 5.1 1.2 0.8 6.2 8.5 3.5 4.2 4.6 ROE (%) - Before goodwill amortization 7.2 10.3 7.4 4.8 5.1 11.0 13.2 8.0 8.6 9.0 ROA (%) 5.4 5.7 4.7 5.5 5.2 5.3 4.9 4.1 4.3 4.6 ROA (%) - Before goodwill amortization 5.8 6.6 5.5 6.8 6.6 6.8 6.5 5.8 6.0 6.3 Inventory turnover ratio (x) 13.4 12.5 10.9 11.3 10.9 10.9 10.4 10.1 10.3 10.3 A/R turnover ratio (x) 5.3 5.7 5.2 5.2 5.0 5.3 5.6 5.6 5.6 5.6 A/P turnover ratio (x) 14.6 14.0 12.7 12.8 13.1 14.7 14.7 14.4 14.6 14.6 Inventory turnover days (days) 27.2 29.2 33.5 32.4 33.5 33.3 34.9 36.1 35.5 35.6 A/R turnover days (days) 69.2 64.0 69.7 70.3 72.4 68.4 65.5 65.6 65.4 65.2 A/P turnover days (days) 25.0 26.1 28.8 28.4 27.8 24.9 24.9 25.3 25.0 25.1 Sales per employee (¥mn) 70.8 71.9 63.6 64.9 57.3 53.6 55.6 55.2 55.4 55.9 OP per employee (¥mn) 4.7 4.6 3.6 4.5 4.0 3.8 3.5 3.0 3.1 3.3 (Per share data) EPS (¥) 69.9 84.0 51.5 11.9 7.7 58.4 90.8 41.0 50.0 55.8 EPS (¥) - Before goodwill amortization 77.7 107.5 74.2 48.4 48.1 103.1 141.5 94.5 103.7 109.5 BPS (¥) 1104.8 972.2 1029.4 1000.5 886.9 986.9 1157.7 1199.0 1209.0 1222.9 Sales per share (¥) 1886.1 2413.5 2388.2 2283.1 2154.0 2273.3 2389.0 2406.3 2420.9 2445.0 Operating cashflow per share (¥) 120.0 137.5 199.1 228.6 204.6 220.5 217.8 223.3 214.6 226.3 DPS (¥) 17.0 21.0 23.0 25.0 27.0 29.0 36.0 38.0 40.0 42.0 Dividend ratio (%) - Before goodwill amortization 21.9 19.5 31.0 51.7 56.1 28.1 25.4 40.2 38.6 38.4 (Growth) EPS growth (%) 24.8 20.3 -38.6 -76.8 -35.5 658.8 55.3 -54.8 22.1 11.6 BPS growth (%) 6.2 -12.0 5.9 -2.8 -11.4 11.3 17.3 3.6 0.8 1.1 Total assets growth (%) 25.8 6.1 9.2 -7.4 7.7 3.4 -1.9 -1.2 0.0 -2.0 Sustainable growth rate (%) 5.1 6.5 3.6 0.6 0.4 4.5 6.3 2.1 2.6 2.8 (Investment profitability) Capital invested (¥ mn) 1,533,162 1,677,825 1,849,551 1,772,941 1,943,861 2,027,965 2,011,692 1,942,603 1,922,851 1,908,018 NOPAT (¥ mn) 78,271 70,178 107,355 44,314 40,825 84,750 96,818 65,521 75,490 81,998 ROIC (%) 5.1 4.2 5.8 2.5 2.1 4.2 4.8 3.4 3.9 4.3 WACC (%) 2.9 3.1 2.6 2.7 2.5 2.5 2.7 2.7 2.7 2.8 EVA (¥ mn) 33,692 17,445 58,551 -4,333 -6,976 33,891 43,068 13,231 23,292 28,034 EVA spread (%) 2.2 1.0 3.2 -0.2 -0.4 1.7 2.1 0.7 1.2 1.5 (Cashflow) FCF (¥mn) -155,036 -38,049 -131,747 77,108 -164,866 163,682 291,043 43,209 82,863 106,599 Operating C/F margin (%) 6.4 5.7 8.3 10.0 9.5 9.7 9.1 9.3 8.9 9.3 Operating C/F to current liabilities rate (%) 12.8 18.2 23.9 32.1 27.5 29.5 31.1 30.1 28.7 33.0 Operating C/F to debt rate (%) 18.8 19.8 21.2 28.0 18.5 22.0 26.0 24.9 24.8 29.3 Operating C/F to Investment C/F rate (%) 42.5 77.5 59.0 154.7 54.4 438.3 -240.3 126.8 173.3 206.5 (Other) Employees numbers 27,543 36,554 35,150 31,966 40,348 41,246 39,922 39,922 39,922 39,922 Consolidated subsidiaries numbers 345 371 285 259 263 257 236 234 234 234 Equity method affiliates numbers 22 27 25 22 19 18 16 16 16 16 Average shares outstanding (mn) 955.0 954.5 954.1 953.9 961.8 961.7 943.7 915.1 913.3 913.3 End-of-period shares outstanding (mn) 954.7 954.4 953.3 962.0 961.7 961.5 929.3 913.3 913.3 913.3 Source: Company data, Credit Suisse estimates

Beverage Sector Initiation 70 09 December 2014

HOLT analysis Our HOLT analysis (DCF model premised on long-term average trendline) indicates potential upside of 28% for Kirin's share price based on analyst forecasts for FY14–16 and average trendline FY12/17 and thereafter).

Figure 29: HOLT analysis

Source: Company data, Credit Suisse estimates, HOLT estimates

Beverage Sector Initiation 71 09 December 2014

Companies Mentioned (Price as of 08-Dec-2014) Asahi Group Holdings (2502.T, ¥3,850, NEUTRAL, TP ¥4,050) CALPIS Co., Ltd. (Unlisted) Danone (DANO.PA, €56.6) DyDo DRINCO (2590.T, ¥5,040) GlaxoSmithKline plc (GSK.L, 1460.0p) House Foods Grp (2810.T, ¥2,063) Ito En (2593.T, ¥2,144) Kirin Holdings (2503.T, ¥1,562, UNDERPERFORM, TP ¥1,400) POKKA SAPPORO Food & Beverage (Unlisted) PepsiCo, Inc. (PEP.N, $97.78) Sapporo Holdings (2501.T, ¥544) Suntory Beverage & Food (2587.T, ¥4,385, NEUTRAL, TP ¥4,600) Suntory Holdings (Unlisted) The Coca-Cola Company (KO.N, $43.14) Please refer to Figures 28-31 for other companies mentioned

Disclosure Appendix

Important Global Disclosures I, Masashi Mori, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

3-Year Price and Rating History for Asahi Group Holdings (2502.T)

2502.T Closing Price Target Price Date (¥) (¥) Rating 12-Jan-12 1,702 2,200 O 14-Jun-12 1,667 1,700 N 22-Aug-12 1,880 1,900 30-Oct-12 1,850 1,800 25-Feb-13 2,338 2,600 O 23-May-13 2,448 3,100 22-Jan-14 2,884 3,200 24-Feb-14 2,735 3,100 18-Apr-14 2,912 NR * Asterisk signifies initiation or assumption of coverage. OUTPERFORM NEUTRAL N O T RAT ED

3-Year Price and Rating History for Kirin Holdings (2503.T)

2503.T Closing Price Target Price Date (¥) (¥) Rating 12-Jan-12 920 1,100 N 24-Feb-12 966 1,000 22-Aug-12 983 1,050 25-Feb-13 1,330 1,600 O 08-May-13 1,758 1,800 N 23-Aug-13 1,438 1,500 24-Feb-14 1,371 1,300 18-Apr-14 1,410 NR * Asterisk signifies initiation or assumption of coverage. NEUTRAL OUTPERFORM N O T RAT ED

The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months.

Kirin Holdings (2503 / 2503 JP) 72 09 December 2014

Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ra tings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, 12-month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10- 15% and -10-15% levels in the Neutral stock rating definition, respectively. Prior to 10th December 2012, Japanese ratings were based on a stock’s total return relative to the average total return of the relevant country or regional benchmark. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances.

Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation: Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.

Credit Suisse's distribution of stock ratings (and banking clients) is:

Global Ratings Distribution Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 46% (53% banking clients) Neutral/Hold* 38% (50% banking clients) Underperform/Sell* 14% (44% banking clients) Restricted 2% *For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.

Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research-and- analytics/disclaimer/managing_conflicts_disclaimer.html Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties.

Price Target: (12 months) for Asahi Group Holdings (2502.T)

Method: We base our ¥4,050 target price for Asahi Group Holdings on an EV/EBITDA of just under 11x applied to our FY12/15 forecast. We derive our fair-price multiple from the average Bloomberg FY1 consensus forecast for European and North American beer majors (AB InBev, SABMiller, Heineken, Carlsberg, Molson Coors).

Risk: Risks to our ¥4,050 target price for Asahi Group Holdings include: upside: (1) taking further domestic market share and (2) increasing shareholder returns; downside: (1) a shrinking impact from cost cuts in Oceania and (2) slower growth and intensifying competition in Southeast Asia.

Price Target: (12 months) for Kirin Holdings (2503.T) Method: Our ¥1,400 target price for Kirin Holdings is based on the average EV/EBITDA of the past seven years (roughly 7.4x) applied to our FY12/15 estimates. Our 7.4x multiple corresponds to the bottom of the trading range since the introduction of Abenomics, which brought about an about-face in Japan's stock market.

Kirin Holdings (2503 / 2503 JP) 73 09 December 2014

Risk: Upside risks to our ¥1,400 target price for Kirin Holdings include; (1) a rebound in domestic market share, (2) renewed market expansion in Oceania and Brazil, and (3) improved shareholder returns.

Price Target: (12 months) for Suntory Beverage & Food (2587.T)

Method: We base our ¥4,600 target price for Suntory Beverage & Food on an EV/EBITDA of roughly 9.5x applied to our FY12/15 estimates. The multiple reflects the average FY1 Bloomberg consensus for European and North American soft drink majors (Coca-Cola, PepsiCo, Monster Beverage, Dr Pepper, Coca-Cola Enterprises, Coca-Cola Amatil, Danone, Nestle). Risk: Risks to our ¥4,600 target price for Suntory Beverage & Food include: Upside: (1) a substantial increase in domestic market share, and (2) substantial declines in commodity prices such as coffee beans. Downside: (1) a dip in consumer sentiment in Europe, and (2) slower growth and stiffer competition in the Southeast Asian market.

Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections.

See the Companies Mentioned section for full company names The subject company (2502.T, 2587.T, KO.N, PEP.N, GSK.L) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (2587.T, KO.N, PEP.N, GSK.L) within the past 12 months. Credit Suisse has managed or co-managed a public offering of securities for the subject company (KO.N, GSK.L) within the past 12 months. Credit Suisse has received investment banking related compensation from the subject company (2587.T, KO.N, PEP.N, GSK.L) within the past 12 months Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (2502.T, 2503.T, 2587.T, KO.N, PEP.N, GSK.L) within the next 3 months. As of the date of this report, Credit Suisse makes a market in the following subject companies (KO.N, PEP.N). As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (DANO.PA). As of the date of this report, an analyst involved in the preparation of this report has the following material conflict of interest with the subject company (PEP.N). A Credit Suisse analyst involved in the preparation of this report has a long position in the common stock of PEP.N

For other important disclosures concerning companies featured in this report, including price charts, please visit the website at https://rave.credit- suisse.com/disclosures or call +1 (877) 291-2683. Important Regional Disclosures Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report. The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (2502.T, 2503.T, 2587.T, KO.N, PEP.N, DANO.PA, GSK.L) within the past 12 months Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit http://www.csfb.com/legal_terms/canada_research_policy.shtml. The following disclosed European company/ies have estimates that comply with IFRS: (DANO.PA). Credit Suisse has acted as lead manager or syndicate member in a public offering of securities for the subject company (2587.T, KO.N, GSK.L) within the past 3 years. As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report. Principal is not guaranteed in the case of equities because equity prices are variable. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Credit Suisse Securities (Japan) Limited ...... Masashi Mori

Kirin Holdings (2503 / 2503 JP) 74 09 December 2014

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Kirin Holdings (2503 / 2503 JP) 75 09 December 2014

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