09 December 2014 Asia Pacific/Japan Equity Research Beverage (Food (Japan)) / MARKET WEIGHT Beverage Sector Initiation Research Analysts INITIATION 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 YEBISU (Sapporo) (%) (10k cases) 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;70 as a consequence, domestic consumptionAsahi of beer and beer-like beverages has Kirin been decreasing by nearly 2% per year over the past 10 years. Several factors seem to be 60 Sapporo contributing, including: (1) increasing health-consciousness,Suntory especially among the middle- aged50 and elderly; (2) a tendency among younger Japanese to eschew alcohol; and (3) a crackdown40 on drunken driving. 37.6% If30 we delve deeper, we find that (1) the market for expensive34.8% but top-quality premium beers is growing, while (2) higher health consciousness is underpinning relatively strong demand 20 for "healthy-type" beers advertised as low-calorie or14.7% zero sugar (such beers also attract a lower tax). In this manner, the market is becoming increasingly bifurcated. 10 12.0% In0 1H 2014, Kirin lost market share while the others posted gains. Kirin apparently has no plans53 to58 mount63 68 a full73 -fledged78 83 assault88 93 on98 th03e premium08 13 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 Happoshu 7 Beer 6 5 4 3 2 1 0 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 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) Dry Premium (YTD) 400(10k cases) YEBISU (Sapporo) 10% Thea %Premium of premium Malt's beer (Suntory) (RHS) 2,000350 9%16% a % of premium category in regular beer 8% 1,800300 14% 7% 1,600 250 6%12% 1,400 200 5% 1,200 10% 150 4% 1,000 3%8% 100 800 2%6% 50 600 1% 0 0%4% 400 200 2% 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.