Japanese Beer Woes, Kirin Shares Stuck

An Associated Press article, "Japanese beer faces woes despite revival" carried in the International Herald Tribune highlights the unenviable environment in which Japanese breweries must compete. Nonetheless, Kirin (KNBWY) has led the way as the beer industry recorded its first increase in first-half domestic shipments in a decade. However, it really looks like its shares have peaked and everything good has been factored in.

The problems for Japan's beer industry are related primarily to demographics and trends, both of which appear to be irreversible -- at least for the foreseeable future.

Declining overall population

Increase in population over age 65, now at 21%, the world's highest level

Growing consumer interest in wine and spirits

Health concerns/attitudes towards alcohol consumption

China is not "to the rescue" --> competition is fierce, competitors' low pricing, political risk

Overseas growth will have limited near-term impact

Diversification efforts outside of alcoholic/non-alcoholic beverages obscures reality of core business

Among Japan's big-4 beer manufacturers only Kirin and privately-held Suntory reported higher first-half profits. Kirin upward revised its full-year sales forecast and it overtook Asahi (Tokyo: 2502) for the number-one ranked market share for the first time in five years. Asahi reported lower first-half net profit and Sapporo's (Tokyo: 2501) first-half loss widened -- both firms lowered full-year guidance.

As you can see from the chart below, Kirin's ADRs peaked a few months back and continue to trade lower after a strong rebound in June-July. In the meantime and despite more negative factors, rival Asahi has traded higher. I think Japanese investors are focusing on Asahi's lower trailing P/E ratio (20 vs 30), its slightly higher dividend yield (1.0% vs 0.89%), and its lower trading unit of 100 shares versus 1,000 shares per trade.

Last Thursday, Kirin reported its best first-half profit (Jan.-Jun. period) since 2000 but the following day Morgan Stanley lowered its target share price on Kirin's ordinary shares (Tokyo: 2503) to 1,950 yen ($16.85) from 2,020 yen ($17.45). Kirin closed at 1,633 yen ($14.11) overnight in Tokyo. Its now pink sheet traded ADRs closed yesterday at $13.85.

Click here to link to Kirin's first-half '06 earnings release (pdf format).

Kirin Brewery (KNBWY) 1-year chart: