On-Trade Beer Volume Improving From April, but Cost Pressure Still Threatens Asahi's Profits

Narrow-moat Asahi’s double-digit profit decline in the first quarter was no surprise, given on-trade weakness in Japan and Oceania in addition to cost inflation. While sales fell short of the internal target, profits appeared better than expectations thanks to rigid cost control. We anticipate second-quarter on-trade demand will further pick up, although the cost surge is likely to advance at a faster pace. We have maintained our fair value estimate of JPY 6,000 per share, indicating attractive 28% upside to our intrinsic value. Suntory’s sizable price hikes on domestic soft beverage will benefit Asahi, which will follow suit, in our view. Healthy growth of its domestic beer sales also reiterates our thesis that favorable excise tax rates imposed on beer will continue to prompt consumers to shift to beer, in which Asahi holds a commanding lead and amasses an economic moat.