Kirin Brewery Reports Strong Q1 & Strategic Changes (KNBWY)

| About: Kirin Holdings (KNBWY)

Kirin Brewery (OTCPK:KNBWY) reported a strong first quarter y-o-y recovery and issued notice that it plans to acquire wholly its currently 59+% owned Kirin Beverage Corporation in order to create a pure holding company system in July 2007. I guess that means it wasn't a potential acquisition target of Berkshire Hathaway (BRKA) after all.

First, a look at Kirin's consolidated first quarter earnings:

    • 350.1 billion yen (US$3.14b) in Sales (+12.4% y-o-y)
    • 14.286 billion yen ($128.1m) in Operating income (+223.7%)
    • 6.369 billion yen ($57.1m) in Net income (+544.9%)
    • 6.66 yen Net income per share versus 1.03 yen y-o-y

Kirin reported that sales in Q1 "were favorable in each business segment and particularly in the alcoholic beverage business."

Its forecast of annual results for the year ending Dec. 31, 2006 remains unchanged from its disclosed projections in February. Kirin is expecting very small but positive growth in Sales of 1.73%, Operating income 1.92%, and Net income 1.10%.

As for the announcements released earlier today in Japan, Kirin plans not only to create a holding company system but also announced it will delist its shares from the London Stock Exchange and has applied to have its shares excluded from trading on the NASDAQ (NASDAQ:NDAQ). That means its ADRs will simply be traded through over-the-counter markets such as the Pink Sheets. Kirin said it "believes that the practical impact that the delisting and the exclusion may have on shareholders and investors is overall limited." Both of these actions are to be effective June 29th pending application approval. (Note: a link below to Kirin's announcement contains contact information for ADR holders that have any questions.)

I have mixed feelings regarding its application for exclusion of trading on the NASDAQ. Granted its trading volume probably won't be hurt too much -- we can look at Nintendo (OTCPK:NTDOY) as an example where trading volume is pretty decent on the OTC markets -- however, one has to wonder why a company this big and profitable would delist primarily to reduce fixed costs.

My take on the situation is that by trading on a big name exchange you gain at least some added benefit by association. Investors benefit because of the stricter listing requirements. This is likely a big part of Kirin's reason to cease trading on the NASDAQ because the stricter requirements refer to accounting related issues and meeting certain exchange and SEC standards, all of which means more money to get the books and filings in order (on top of the listing fees).

It seems to me as if Kirin would want to maintain its NASDAQ listing as all things Japan become increasingly in vogue. With seemingly growing numbers of Japanese ex-pats, Americans who have worked or studied in Japan craving Japanese beer, and a boom in the popularity of sushi restaurants, sales volume in North America as well as interest in Kirin should be on a steady uptrend. Instead of taking a step down from the NASDAQ it should be making more noise and disruptions in North America and European markets. Place a nifty ad in The Wall Street Journal and/or put some witty commercials on TV. That's what I would do but it's nowhere near the company's focus. Instead, Kirin is targeting growth in Asia and Oceania.

Per its 2015 Group Vision: "Under KV 2015 Kirin is targeting a quantum leap in growth to become a leading company in Asia and Oceania, with sales reaching 3 trillion yen by 2015 and operating profit of more than 10%." This is quite aggressive but perhaps feasible given the high growth opportunities in those regions. I guess you can't blame Kirin for not going after Western markets where both alcoholic and non-alcoholic beverage markets are more mature and look more like the fiercely competitive Japanese market where profit margins are slim.

Kirin's ordinary shares closed up 0.11% at 1,775 yen ahead of its after hours earnings release. Its ADRs are trading lower by 0.62% at $16.00 in intra-day trading.

Click here [PDF] for a link to Kirin's Q1 financial results.

Click here [PDF] for a link to Kirin's news release about plans to implement a pure holding company system and its tender offer for Kirin Beverage.

Click here [PDF] for a link to its notice of application for delisting from London and exclusion from NASDAQ trading.

Click here for the "Kirin Group Vision 2015: Kirin Group's Long-Term Business Framework." [PDF]

Kirin Brewery Company, Ltd. (ADR: KNBWY) 1-yr chart: