See important disclosures, including any required research certifications, beginning on page 28 ■ Investment case BreadTalk’s share price has underperformed the FSSTI and the average of its local consumer peers by 16% and 24% YTD, respectively, on the back of a slew of negative press in 2015, notably regarding the soy-milk scandal in Singapore. We think management has responded well to the situation by offering to take remedial action. And more importantly, we have not seen any significant impact on underlying consumer demand arising from the news. As such, we believe the stock should be rerated, once the headlines have moved on, and this should happen in the next 6 months. We are positive on BreadTalk’s outlook, driven by potential new store openings for its 3 business segments (bakeries, restaurants and food courts) and EBITDA margin expansion, due it culling its underperforming RamenPlay restaurants. Accordingly, we initiate coverage on BreadTalk with a Buy (1) rating, and forecast a 26.3% net-profit CAGR over 2014-17, on the back of a 9.6% revenue CAGR and 3pp EBITDA margin expansion. ■ Catalysts Bakeries: we expect 189 new outlets (20% rise from 30 June 2015) to open by the end of 2017E, with 150 franchised bakery stores. We view this positively as franchised outlets allow BreadTalk to expand store count without much risk (low capital outlay). Food courts: the company aims to have 80 food courts by 2017, up from 62 as at 30 June 2015. We view this as a positive given the relatively stable revenue per food court. Restaurants: we expect the overall EBITDA margin expansion to come from the company either closing its non-performing RamenPlay restaurants and giving up the lease or closing them and converting the space to house its better-performing brands, Din Tai Fung and Sanpoutei, which lead to higher SSSG (11.7% over 2014-17E) for the restaurant business. ■ Valuation We initiate coverage with a Buy (1) rating and 12-month target price of SGD1.31, based on 2016E PER of 19.6x, which is the stock’s past-5- year mean. ■ Risks The key risks to our call would be: 1) more food scandals, and 2) if the company were unable to find good locations for new outlets. Consumer Staples / Singapore BREAD SP 9 September 2015 BreadTalk Group Initiation: comfort food • A bakery, restaurant and food-court company whose share price has underperformed peers on the back of negative news flow • This seems unjustifiable given its revenue growth for 2015-17E, and as we expect further upside from outlet and margin expansion • Initiate coverage with Buy(1) rating and 12-month TP of SGD1.31; we see a net-profit CAGR of 26.3% over 2014-17E Source: FactSet, Daiwa forecasts Consumer Staples / Singapore BreadTalk Group BREAD SP Target (SGD): 1.31 Upside: 16.4% 8 Sep price (SGD): 1.13 Buy (initiation) Outperform Hold Underperform Sell 1 2 3 4 5 85 93 100 108 115 1.10 1.23 1.35 1.48 1.60 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Share price performance BreadTalk (LHS) Relative to FSSTI (RHS) (SGD) (%) 12-month range 1.11-1.58 Market cap (USDbn) 0.22 3m avg daily turnover (USDm) 0.18 Shares outstanding (m) 282 Major shareholder George Quek (52.6%) Financial summary (SGD) Year to 31 Dec 15E 16E 17E Revenue (m) 637 703 776 Operating profit (m) 28 41 52 Net profit (m) 12 19 25 Core EPS (fully-diluted) 0.044 0.067 0.087 EPS change (%) 1.1 53.2 30.1 Daiwa vs Cons. EPS (%) (7.2) 6.9 8.7 PER (x) 25.8 16.8 12.9 Dividend yield (%) 1.3 1.3 1.3 DPS 0.015 0.015 0.015 PBR (x) 2.9 2.5 2.2 EV/EBITDA (x) 5.4 4.2 3.4 ROE (%) 11.6 16.0 18.1 Shane Goh (65) 6499 6546 [email protected]How do we justify our view? How do we justify our view?
Transcript
See important disclosures, including any required research certifications, beginning on page 28
■ Investment case BreadTalk’s share price has underperformed the FSSTI and the average of its local consumer peers by 16% and 24% YTD, respectively, on the back of a slew of negative press in 2015, notably regarding the soy-milk scandal in Singapore. We think management has responded well to the situation by offering to take remedial action. And more importantly, we have not seen any significant impact on underlying consumer demand arising from the news. As such, we believe the stock should be rerated, once the headlines have moved on, and this should happen in the next 6 months. We are positive on BreadTalk’s outlook, driven by potential new store openings for its 3 business segments (bakeries, restaurants and food courts) and EBITDA margin expansion, due it culling its underperforming RamenPlay restaurants.
Accordingly, we initiate coverage on BreadTalk with a Buy (1) rating, and forecast a 26.3% net-profit CAGR over 2014-17, on the back of a 9.6% revenue CAGR and 3pp EBITDA margin expansion. ■ Catalysts Bakeries: we expect 189 new outlets (20% rise from 30 June 2015) to open by the end of 2017E, with 150 franchised bakery stores. We view this positively as franchised outlets allow BreadTalk to expand store count without much risk (low capital outlay). Food courts: the company aims to have 80 food courts by 2017, up from 62 as at 30 June 2015. We view this as a positive given the relatively stable revenue per food court. Restaurants: we expect the overall EBITDA margin expansion to come from the company either closing its non-performing RamenPlay restaurants and giving up the lease or closing them and converting the space to house its better-performing brands, Din Tai Fung and Sanpoutei, which lead to higher SSSG (11.7% over 2014-17E) for the restaurant business. ■ Valuation We initiate coverage with a Buy (1) rating and 12-month target price of
SGD1.31, based on 2016E PER of 19.6x, which is the stock’s past-5-year mean. ■ Risks The key risks to our call would be: 1) more food scandals, and 2) if the company were unable to find good locations for new outlets.
Consumer Staples / SingaporeBREAD SP
9 September 2015
BreadTalk Group
Initiation: comfort food
• A bakery, restaurant and food-court company whose share price has underperformed peers on the back of negative news flow
• This seems unjustifiable given its revenue growth for 2015-17E, and as we expect further upside from outlet and margin expansion
• Initiate coverage with Buy(1) rating and 12-month TP of SGD1.31; we see a net-profit CAGR of 26.3% over 2014-17E
Source: FactSet, Daiwa forecasts
Consumer Staples / Singapore
BreadTalk GroupBREAD SP
Target (SGD): 1.31
Upside: 16.4%
8 Sep price (SGD): 1.13
Buy (initiation)
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Share price performance
BreadTalk (LHS) Relative to FSSTI (RHS)
(SGD) (%)
12-month range 1.11-1.58Market cap (USDbn) 0.223m avg daily turnover (USDm) 0.18Shares outstanding (m) 282Major shareholder George Quek (52.6%)
We forecast revenue CAGR of 9.6% over 2014-17, driven by new store openings. We expect 189 new outlets (20% rise from 30 June 2015), largely due to the bakery and food-court segments. We also forecast a 3pp expansion in the EBITDA margin, to 15% by 2017, on the back of higher SSS for BreadTalk’s restaurant segment, as it continues to rationalise its underperforming RamenPlay outlets.
Source: Company, Daiwa forecasts
Valuation BreadTalk: earnings per share (SGD cents)
We initiate coverage with a Buy (1) rating and 12-month target price of SGD1.31, implying 16.4% upside potential from current share price levels. Our target price is based on a 2016E PER of 19.6x, which is the same as BreadTalk’s past 5-year mean. Our target price is 15.5% below that of the Bloomberg consensus, which we think is due to the other 2 brokerage houses covering the stock assigning more aggressive valuation multiples.
The Bloomberg consensus has lowered its 2015-16 EPSforecasts for BreadTalk by 30.9% and 29.2% YTD, respectively. We think this could be one factor contributing to BreadTalk’s share price decline this year. Our 2015 EPS is 7.2% below consensus, which we think is due to its lower revenue projections vs. those of its peers. However, our 2016 EPS is ahead by 6.9%, as we expect stronger EBITDA margin expansion, driven by it rationalising its underperforming restaurants.
BreadTalk Group Limited is a food and beverage company with 3 business segments: bakeries, restaurants and food courts. Founded in April 2000 by Mr. George Quek, BreadTalk launched its signature Pork Floss bun in Singapore. Today, BreadTalk has a presence in 17 countries around the world, with 932 outlets for its 10 brands, as at 30 June 2015.
We think recent negative press has been the reason for BreadTalk’s share price underperformance YTD. However, we think investors should look beyond this and focus on its core business of serving the masses through its 3 businesses under 10 brands, across 932 outlets.
Company background
BreadTalk Group Limited is a F&B company with 3 business segments: 1) bakeries (50% of 2014 revenue), 2) restaurant (22%), and 3) food courts (28%). It launched its first outlet in Singapore in April 2000. Today, it has a presence in 17 countries around the world, and has more than 900 outlets to cater to its 10 brands. Geographically, Singapore accounted for half of its revenue in 2014, Mainland China (32%), Hong Kong (11%) and 7% was generated from the rest of the world. BreadTalk: 2014 revenue breakdown by business
Source: Company
BreadTalk: 2014 revenue breakdown by market
Source: Company
BreadTalk manufactures and sells bread, drinks and Asian food such as mee siam in its bakery outlets. As at 30 June 2015, it had 837 bakery stores worldwide, with 33% of them directly owned and the remainder run under franchise agreements. From its franchise agreements, BreadTalk earns an initial franchise fee, from the sale of raw materials (eg, bread dough) to the franchisees and it also gets a percentage of their revenue. BreadTalk was operating 33 restaurants as at 30 June 2015 for its Din Tai Fung, Sanpoutei and RamenPlay brands. The restaurants are run as either joint ventures (RamenPlay and Sanpoutei) or franchise agreements (Din Tai Fung). BreadTalk operates 62 food courts under its Food Republic brand. It rents food-court space from a shopping mall’s landlord, carves it up into individual stalls and leases it out to food-operating tenants. It earns the difference between the rent paid and received, as well as a percentage of revenue generated by tenants.
Share price underperformance
BreadTalk’s share price has underperformed the FSSTI and the average of its local consumer peers by 16% and 24 % YTD, respectively. We think 3 negative news incidents in 2015 were the main reason for the share price weakness. However, we think this is just noise as BreadTalk’s fundamentals (revenue and EBITDA margin) have not been adversely impacted by the negative news flow.
Bakery operations
49.9%
Restaurant sales22.2%
Food court income28.0%
Singapore50.2%
Mainland China31.6%
Hong Kong11.4%
Rest of the world6.8%
Consumer Staples / Singapore BREAD SP
9 September 2015
- 7 -
BreadTalk’s share price performance vs FSSTI and consumer peers
Source: Bloomberg
Note: Rebased to 100 as of 31 December 2014
We note that BreadTalk’s 1Q-2Q15 revenue was positive YoY, up 8.6% and 10.7% YoY, respectively. In fact, the YoY growth signals the reverse of a downtrend, which appears to have bottomed out in 4Q14. Thus, we think that its revenue trajectory has not raised any alarm bells so far. Over the 2014-17 period, we expect further revenue growth, at a CAGR of 9.6%, driven largely by new outlet openings for its bakery and food-court segments. BreadTalk: quarterly revenue (SGDm) and YoY growth (%)
Source: Company
Despite a contraction in the quarterly EBITDA margin, from 13.7% for 4Q14 to 11.6% for 2Q15, we note that the EBITDA margin for 1H15, at 11.8%, was above the 11.5% for 1H14. Also, we notice a general upward trend in the quarterly EBITDA margin since 1Q12, with 4Q being the strongest quarter seasonally.
BreadTalk: quarterly EBITDA margin (%)
Source: Company
Management said that the narrower EBITDA margin for 1H15 (vs. 4Q14) was due to a one-off charge of SGD1.5m for the closure of 2 food courts, on the back of changes in landlord and poor performance. We do not expect this to happen again, and forecast a 3pp expansion in its EBITDA margin to 15% over 2014-17, driven by it rationalising its underperforming RamenPlay restaurants.
Negative press: a year best forgotten so far
In 2015, BreadTalk has been in the press for all the wrong reasons. In our conversations with management, they have expressed their regrets over the Lee Kuan Yew bun fiasco and unintended misrepresentation of its soy milk as being freshly prepared in house. Management has apologised to the public via the press and taken remedial steps to rectify both situations. In our opinion, management has made the best out of the situation and we believe it will closely monitor its operating processes to prevent such incidents from happening again. Lee Kuan Yew bun fiasco After the passing of Singapore’s founding Prime Minister, the late Mr. Lee Kuan Yew, on 23 March 2015, BreadTalk created a bun to commemorate the event. The bun was called “Lee bu kai ni” (loosely translating into “can’t leave you”) and was a play on Mr. Lee’s surname in Putonghua. BreadTalk said that the proceeds of the bun’s sales, estimated at SGD30,000, would be given to charity. However, the move was criticised by Singaporeans and BreadTalk promptly stopped selling the bun. To make amends, BreadTalk issued an apology on its Facebook page and donated SGD30,000 to the charity out of its own pocket.
BreadTalk FSSTI QAFThaiBev Sheng Siong Japan FoodSoup Restaurant Super group
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Consumer Staples / Singapore BREAD SP
9 September 2015
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“Freshly prepared” soy milk Until recently, BreadTalk sold 350ml bottles of soy milk, which it labelled “freshly prepared”, at its bakery outlets in Singapore. On 3 August 2015, one of BreadTalk’s staff was photographed pouring ready-made soy milk from cartons of Yeo’s into the bottles. A 1 litre carton of Yeo’s costs SGD1.50 at supermarkets, while BreadTalk sold its bottles for SGD1.80 each. Customers were irate about the price hike and felt misled, thinking the soy milk had been freshly made in house. On 4 August, BreadTalk temporarily stopped selling its bottled soy milk. BreadTalk has apologised for the incident and clarified that it did not intent to mislead its customers and should have been clearer on its labels. The bottles were used to package fresh fruit juice for sale. Apart from the bottles, BreadTalk sells soy milk via dispensing machines in 22 of its outlets. BreadTalk is looking to put dispensing machines in other stores following this incident. On 22 August 2015, The Straits Times reported that BreadTalk would give away 50,000 of its signature pork-floss buns to the public and donate SGD50,000 to the Community Chest to make amends. Additionally, BreadTalk also promised not to engage in unfair practices going forward and signed a Voluntary Compliance Agreement (VCA) with the Consumer Associate of Singapore (CASE). The VCA enables CASE to apply for a court injunction ordering any such practice be stopped in the future. BreadTalk could be held in contempt of court if it does not comply with the order. We think the move should aid in rebuilding trust with its customers. Management said the company has an agreement with Yeo’s to sell its beverages at its outlets. A check with Yeo’s came up with the same answer. Cooking oil reused In August 2015, a correspondent from an investigative TV show, Shenzhen TV, claimed that a BreadTalk outlet in Shenzhen, China, reused its cooking oil and replaced expiration labels on condiments. The correspondent, disguised as an employee, recorded behind-the-scenes footage of the bakery’s operations using a hidden camera. The footage was aired on an episode of Shenzhen Fazhi Shikong on 12 August 2015. BreadTalk has denied allegations of improper food-handling practices and highlighted inaccuracies portrayed by the programme. Management claims that the oil used for frying doughnuts, its only deep-fried product, needs to be changed every 3 days, but the outlet staff would normally change it after 1 or 2 days.
It also said that staff are not allowed to alter validity dates and such processes are closely monitored and recorded to prevent lapses.
Revenue growth driven by new stores and favourable macro trends
BreadTalk’s revenue registered a CAGR of 19.1% over 2009-2014. We expect this to continue and forecast a 9.6% revenue CAGR over 2014-17 for 2 reasons: 1) new store openings, and 2) more people eating out in Singapore. BreadTalk: Revenue (SGDm) and YoY growth (%)
Source: Company, Daiwa forecasts
New stores in the pipeline We forecast 189 new outlets to open (a 20% rise from 30 June 2015) in 2H15-17, mainly in BreadTalk’s bakery and food-court segments. Since the end of 2010, BreadTalk’s store count has doubled to 932, as at 30 June 2015, with its franchised bakery outlets openings accounting for 75% of new stores opened. BreadTalk: number of outlets
We expect BreadTalk to open 179 new bakery stores in 2015-17, with 84% under franchise. The number of BreadTalk’s bakery stores recorded a 22.1% CAGR, to 817 outlets as at the end of 2014, up from 301 stores at the end of 2009. The increase was driven by a rise in the number of franchisees, which more than tripled during this period from 182 outlets to 547 stores. Management aims to have 70% of its total bakery outlets operating under franchise agreements within the next 3 years. As at 30 June 2015, 67% of them were being managed by franchisees. The ratio has been increasing since 2006, when it was evenly split. Within China, franchised stores account for 80% of BreadTalk’s bakery outlets (405). For 1H15, BreadTalk had a net 20 store-count increase in bakery outlets, with 70% of them opened by franchisees. BreadTalk’s bakery outlets: directly owned vs. franchise
Source: Company, Daiwa forecasts and estimates
We view management’s decision to grow its franchise outlets positively, as it provides recurring income with little overheads. BreadTalk earns an initial franchise fee when setting up a new outlet. Thereafter, it earns a percentage of revenue from its franchisee and sells raw materials to its franchisee. This enables BreadTalk to expand its presence quickly, leveraging on its franchisees’ manpower and ground knowledge. Bakery franchise revenue has seen positive YoY growth since 2005, at an average of 39.3%. However, we note that revenue per franchisee outlet fell by 28.8% over 2008-14. We think this is due to a 3-fold increase in the number of franchisee outlets, from 182 to 547 between 2009 and 2014. Looking ahead, we expect sales per franchise outlet to improve by 4.1% over 2014-17E, as its stores exit their gestation period.
BreadTalk: Total franchise income (SGDm) and YoY growth (%)
Source: Company, Daiwa forecasts
BreadTalk: number of franchised bakery outlets and total franchise income per outlet (SGD ’000)
Source: Company, Daiwa forecasts
We expect the company’s food-court business to hit 80 outlets by the end of 2017. As at 30 June 2015, it had 62 outlets, close to double the 32 outlets it had at the end of 2010. We are positive on the food-court business given the low risk it presents. BreadTalk rents the space from landlords and subleases it to tenants. It earns the difference between the rent paid to the landlord and the rent it charges to the tenants. BreadTalk also earns a percentage of the revenue that tenants generate. BreadTalk’s only real operating cost is for utilities and staff expenses for the food court, such as cleaners. The risk it faces in this business is the default on rent owed and an inability to lease out stall space. We note that revenue per food court has been relatively stable over the past 5 years, at about SGD2.7m per annum. We expect a slight increase over 2015-17, at 4.1%, as half of its outlets (32 out of 62) that were opened in the past 3 years will exit their gestation period of 3 years over this period. Given the stability of sales per outlet, we think the earnings growth path for its food-court business would be the addition of new stores, rather than SSS growth.
No. of franchise outlets Total franchise income per outlet (RHS)
Consumer Staples / Singapore BREAD SP
9 September 2015
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Food-court store count and revenue per outlet (SGD '000)
Source: Company, Daiwa forecasts
BreadTalk acts as a business partner with its tenants, not just a landlord. The company has developed a stable of 8 to 10 tenants that provide a range of food to most of its food courts. When BreadTalk opens in a new location in Singapore, it offers tenants a chance to operate one of the stalls in the new food court. This way, BreadTalk saves time sourcing tenants and allows the tenants it does have to expand along with the company. Management said that tenants are keen on such an arrangement as they are able to focus on running the day-to-day operations of the stalls, while BreadTalk handles shared services, such as cleaning and accounts. Although BreadTalk is able to replicate this concept overseas, it has found that it is not able to export the entire portfolio mix as some markets are not as receptive to certain cuisines for cultural reasons. Management said it intends to open 4 more outlets in 2H15, with a focus on Shanghai. Management also said its new outlets would be in locations that have a mix of residential and commercial buildings nearby. It said that for its existing stores in pure residential or commercial spots, sales tend to decline on weekdays (for pure residential) or weekends (for pure commercial). Positioning its new outlets in an area with a mix of both property segments would be beneficial in ensuring a steady flow of customers throughout the week. We expect BreadTalk to benefit from China’s higher urbanisation rate, as management said that new store openings in the country would be biased towards the Tier-1 cities such as Shanghai and Beijing. According to The World Bank, China’s urbanisation rate rose from 49.2% in 2010 to 54.4% in 2014. In March 2014, China’s State Council and the Communist Party Central Committee released the “National New-type Urbanization Plan” with a target to raise the country’s urbanisation rate to 60% by 2020.
China: urban population as a % of the total (%)
Source: The World Bank
Singapore: a nation of foodies We expect BreadTalk to benefit from the rise in spending on F&B (as a percentage of overall spending) in Singapore, which accounted for 50% of 2014 revenue. According to the nation’s Department of Statistics, people are eating out more often, with spending on food serving services (FSS) making up 16% of average monthly household expenditure for 2012/13, up from 14% for 2002/03. Singapore: average monthly household expenditure (SGD)
Source: Singapore's Department of Statistics
We think the rise in food spending outside of the home can be attributed to 2 factors: 1) higher incomes, and 2) people working longer hours. Singaporeans’ spending power has improved over the past 10 years, as the median monthly household income has seen a 6% CAGR from 2003-14, hitting SGD8,292/ household. We believe the positive rise in household incomes is sustainable given the government’s pro-economic growth policies and new policies that we expect to be implemented in the next few years to keep the economy competitive.
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Consumer Staples / Singapore BREAD SP
9 September 2015
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Singapore: median (monthly) household income (SGD)
Source: CEIC Data
According to the Ministry of Manpower, Singaporeans worked an average of 2,392 hours annually in 2014. This is a 4.6% rise since 2011. This places Singapore as one of the cities where people work a lot, with Hong Kong the closest peer at 2,344 hours (2011 data). We think that people who spend hours in the office want the convenience of eating out in restaurants, instead of cooking at home. Annual average number of hours worked in 2011
Source: Federal Reserve Economic Data
Singapore: average number of hours worked per year
Source: Federal Reserve Economic Data, Singapore's Ministry of Manpower Note: For 2012-14, data calculated over 52 weeks
Rising dough Bread consumption has increased in 2 of BreadTalk’s key markets: Singapore and China. Singapore. The average daily consumption of bread tripled from 66.4g in 2004 to 171.4g in 2010 in Singapore, according to a National Nutrition Survey conducted by the Health Promotion Board. China. In an August 2014 press release by market research company Canadean, China’s bakery and cereals market is the largest worldwide in terms of volume. Canadean expects the market to be worth USD47bn by 2018, making it the second-most valuable, after only the US. According to Shanghai consultancy firm Daxue Consulting, China consumed about 5kg of baked goods per capita a year in 2013, more than double since 2000. We think 3 factors played major roles in this increase: 1) the influence of Western cultures, 2) urbanisation, and 3) rising spending power.
Doing more with less
We expect BreadTalk’s EBITDA margin to improve by 3pp to 15% over 2015-17E, driven by: 1) ongoing store rationalisation, and 2) cost controls. BreadTalk’s EBITDA margin narrowed by 2.3pp to 11.1% for 2012, from 13.4% for 2009, before rebounding to 12% for 2014. The contraction was due mainly to the underperformance of its RamenPlay restaurant stores, start-up costs/gestation periods relating to its rapid store expansion plans and cost pressure for its food, labour and rental expenses. We attribute the EBITDA margin expansion for 2012-14 to the restructuring of its restaurant business in 2013, when it started closing its underperforming RamenPlay outlets, thus improving the sales per outlet for its direct-owned bakery and restaurant outlets. We expect both trends to continue in 2015-17.
Store rationalisation We expect the EBITDA margin to expand as BreadTalk reduces the number of underperforming RamenPlay outlets over the next 3 years as their leases come up for renewal. In 2013, BreadTalk had 15 RamenPlay outlets. BreadTalk closed 4 in 2014. In 1H15, it closed another. As at 30 June 2015, there were 10 RamenPlay outlets left. We think BreadTalk could potentially convert the shop space and use it for its better-performing brands: Din Tai Fung or Sanpoutei. RamenPlay, a Japanese-styled noodle concept, was BreadTalk’s brainchild that it introduced in 2010. However, the company said RamenPlay is now its worst-performing brand within its restaurant portfolio. Management said the revenue of its Sanpoutei outlets, a Japanese ramen concept introduced in 2014, is double that of RamenPlay. We think the pedigree of Din Tai Fung (a 1 Michelin Star Chinese restaurant and ranked as 1 of the World’s Top-10 best restaurants by the New York Times) and its consistent food quality are 2 reasons that the crowds continue to frequent it. We do not see any discernible differences in price between the 2 restaurant chains. Based on our on-the-ground checks, Din Tai Fung has longer queues at its outlets in Singapore than RamenPlay.
BreadTalk: restaurant outlets by brand
Source: Company, Daiwa
Note: Carl’s Jr. outlets were injected into a JV formed between BreadTalk and Carl Kascher Enterprises in March 2014
Over 2005-09, we note that restaurant sales per outlet ranged from SGD4.6m-5.6m. However, this figure was between SGD3.3m and SGD3.9m over 2010-14. We believe the introduction of RamenPlay in 2010 was the key reason for the drag on sales per outlet. RamenPlay’s addition to BreadTalk’s stable of brands in 2010 also coincides with a fall in the restaurant segment’s operating margin. Restaurant revenue per outlet (SGD '000) and EBITDA margin (%)
Source: Company
In spite of this, the EBITDA margin has been increasing since 2010. We believe this is due to Din Tai Fung’s stronger performance. We note that the restaurant business has been 1 of the key drivers of BreadTalk’s overall EBITDA margin expansion since 2012, particularly in 2013-14, when the bakery and food-court businesses saw declining EBITDA margins.
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Consumer Staples / Singapore BREAD SP
9 September 2015
- 13 -
BreadTalk: EBITDA margin across brands (%)
Source: Company
With the winding down of the RamenPlay outlets, we expect a further increase in BreadTalk’s EBITDA margin. If BreadTalk converts its existing RamenPlay outlets into Din Tai Fung or Sanpoutei outlets, we expect stronger sales per outlet, leading to improved margins. In 1H15, the restaurant segment saw SSSG of 13.9% YoY and a 5.7pp YoY increase in the EBITDA margin to 17.5%. Management said this was driven by Din Tai Fung. In Singapore, Din Tai Fung saw 6-7% YoY SSSG, while Thailand’s outlets posted a high-double digit percentage SSSG, albeit from a low base. Cost controls BreadTalk has a relatively stable cost structure, encompassing 3 key components: raw materials (about 30% of total expenses), labour (28%) and operating leases (22%). BreadTalk: cost structure
Source: Company, Daiwa forecasts
With an improvement in SSS due to the continued store rationalisation that we expect over 2015-17, we expect labour costs (as a percentage of total expenses) to reduce accordingly, as BreadTalk is able to achieve higher sales per staff.
Additionally, management said that its cost-control measures, such as fine-tuning its worker overtime schedule and improving its procurement process, have helped to reduce operating expenses. In terms of rent, BreadTalk is able to negotiate on either 1 of 2 things with landlords: 1) lower rates, or 2) high-traffic store positioning. It is common to find a range of its brands located within the same shopping mall, which improves its bargaining power. BreadTalk: 4 of its brands are in this mall in Singapore
Source: Company
Opening doors for other brands
Apart from growing its existing stable of brands, BreadTalk is looking to bring new brands into Singapore. On 17 March 2014, BreadTalk introduced Sanpoutei, a Japanese ramen brand, in Holland Village, Singapore. Founded in 1967, Sanpoutei offers authentic Niigata-style ramen in a clear fish stock-based broth, in contrast to the more popular pork-bone broth versions offered by other ramen establishments in Singapore. On 15 August 2014, BreadTalk opened its second Sanpoutei outlet in Shaw House, Orchard Road. Management said the Sanpoutei business has been brisk at its 2 outlets so far. BreadTalk: Sanpoutei’s Shaw House outlet
Source: Company
0%
5%
10%
15%
20%
2010 2011 2012 2013 2014
Overall Bakery opera tions
Restaurant operations Food court operations
30% 30% 30% 30% 31% 31% 31% 31% 31%
22% 21% 21% 21% 22% 22% 22% 22% 22%
29% 28% 29% 28% 27% 28% 27% 27% 26%
0%
20%
40%
60%
80%
100%
2009 2010 2011 2012 2013 2014 2015E 2016E 2017E
Raw material Operating lease Labour Deprecia tion and Amortisation Others
Consumer Staples / Singapore BREAD SP
9 September 2015
- 14 -
BreadTalk taps its experience and network to take Singaporean brands overseas. In August 2012, BreadTalk entered into a 30:70 joint venture with JUMBO Group, a Singapore-grown F&B player, to operate restaurants under the JUMBO Seafood brand in agreed provinces in China. In December 2013, the JV unveiled its franchise outlet in Shanghai, with the second outlet opening in the same city in July 2015. Founded in 1987, JUMBO operates restaurants that offer a range of cuisines, from seafood restaurants to hot-pots and pork-rib soup. It is best known for its chili and black pepper crab and was awarded the Best Chilli Crab in the Tiger Beer Chilli Crab Championship Series 2006. As at 31 August 2015, JUMBO seafood had 7 outlets in Singapore, 5 and Shanghai, and 2 in China. JUMBO Seafood restaurant in Shanghai, in Raffles City
Source: JUMBO Seafood website
Forging relationships via its property investments
BreadTalk has been investing in property in Singapore and China since November 2009. In Singapore, BreadTalk owns stakes in TripleOne Somerset, Chijimes and Katong 112. In China, BreadTalk owns a 4% interest in Phase 1 and 2 of the Beijing Tongzhou District.
BreadTalk: property investments Date Property Stake Cost (SGDm) Market9-Jan-14 TripleOne Somerset 5.3% 17.5 Singapore15-Apr-13 Phase 2 of Beijing Tongzhou District 4.0% 14.5 Beijing, China1-Oct-12 Phase 1 of Beijing Tongzhou District 4.0% 20.1 Beijing, China4-Nov-11 Chijimes 29.0% 18 Singapore18-Nov-09 Katong 112 7.0% 14 Singapore
Source: Company, St James Holdings, Daiwa forecasts
Apart from diversifying its income sources, investing in property enables BreadTalk to foster relationships with landlords, which means its bargaining power extends beyond that single building. This gives it more access than peers to prime locations in up-and-coming malls owned by these landlords.
In Singapore, all of the properties that BreadTalk has a stake in are managed by Perennial Real Estate Holdings Limited. Perennial manages Chinatown Point and Capitol Singapore shopping malls as well, and BreadTalk has a presence in both. We think investors could be concerned with BreadTalk’s property investments given the company’s leverage position (1.2x net debt-to-equity ratio as at 30 June 2015, and we forecast it to fall to 0.3x for 2017). Management said its property investments are opportunistic in nature; hence, it is unable to provide any guidance on future investments. However, we note that BreadTalk’s interest coverage ratio was 6x for 2014. Also, management said its all-in borrowing costs were less than 2%. In 2014, the company registered a positive FCF, a reversal from its negative FCF for 2012 and 2013 (due to capex relating to the construction of its headquarters building). We do not expect any significant capex needs moving forward. Hence, we think BreadTalk should be able to service its loans and pay off its debt as needed. We forecast SGD163.4m in capital expenditure from 2015-17, lower compared to 2012-14, as BreadTalk incurred higher capex over 2009-14 to build its international headquarters and acquired investment properties. We do not expect any major capex in 2015-17.
Competition in China
Within China, 2 large Chinese bakery companies, Christine and Holiland, stand out with more 1,000 outlets each. The rise in the consumption of bread in China has attracted other foreign bakery chains. The South Korean chain Paris Baguette now has 123 stores in China, while the Taiwanese chain 85°C Bakery Café has 417. The bakery chains (including BreadTalk) tend to operate within similar provinces such as Beijing, Shanghai, Zhejiang and Jiangsu because they attract the middle class. Thus, competition is rife. Holiland was founded domestically in 1992. It has nearly 200 branches across 50 cities in China. Apart from cakes and bread, Holiland also sells rice dumplings, mooncakes and coffee drinks. Ganso, with its origins in Taiwan, set up shop in Shanghai in 1993. It has more than 260 outlets in 53 cities.
Consumer Staples / Singapore BREAD SP
9 September 2015
- 15 -
85°C Bakery Café entered Shanghai on 6 March 2007. Its products are positioned with lower to middle-range prices, catering to the tastes of the younger generation. Paul is an authentic French bakery. It is also one of the pricier bakeries in China. Ilu is known for its multi-grain bread, targeting consumers seeking healthier bread. Paris Baguette is a subsidiary of SPC Group, Korea’s leading food-product company. Established in 1986, Paris Baguette produces classic French bread and confectionery products. About 85% of Paris Baguette’s stores are in tier-1 cities, especially Beijing and Shanghai. Cleanliness is a key factor to address in China for the F&B companies. China has been plagued with food scandals over the years. Notably, the nation was rocked by one of its largest-ever food safety scandals in 2008, when industrial chemical melamine was found in dairy products, killing at least 6 babies and making 300,000 people ill. Recently, Shanghai Husi Food Co. Ltd was found supplying products containing meat that was out of date to McDonald’s, KFC, Pizza Hut, Starbucks and Burger King. The company was forced to shut down operations in July 2014.
Financial position
Increasing leverage under control As at 30 June 2015, BreadTalk’s net debt-to-equity ratio was 1.2x. Before 2012, the company was in a net cash position. The increase in debt has been used mainly to finance the construction of its international headquarters building in Singapore, which was completed in June 2013, and to fund its outlet expansion plans. Management has said it is comfortable with a net debt-to-equity ratio of 1-1.5x. BreadTalk: net debt (SGDm) and net debt-to-equity ratio (x)
Source: Company, Daiwa forecasts
Management said its all-in financing cost was about 2% a year currently. The company is able to tap on loans from Bank of China for its expansion in China. The loans have an interest rate of 0.9-1.0%, which is lower than BreadTalk’s overall financing cost. Additionally, the company has not used its medium-term-note program as its interest rate of 4-5% is higher than its existing interest rate. Hence, we do not see any financing risk in terms of availability of credit or high interest rate at the moment.
Assumptions
We forecast a 26.3% net profit CAGR for 2014-17, which we think will be driven by a 9.6% CAGR in revenue and 3pp expansion in the EBITDA margin, driven by the expansion plans for its bakery and food-court segments, and the ongoing culling of its non-performing restaurants. Number of outlets We forecast the company to open 189 new outlets (a 20% rise from 30 June 2015) in 2H15-17, mainly for the bakery and food-court businesses. Since the end of 2010, BreadTalk’s store count has doubled to 932, as at 30 June 2015, with its franchised bakery outlets accounting for 75% of new stores opened. BreadTalk: number of outlets
Source: Company, Daiwa forecasts
Management said it will open new stores selectively (it expect a 10% a year increase, as it is looking to focus on improving same store sales. Revenue per outlet We forecast a 1.9-11.7% CAGR for overall revenue per direct-owned outlet over the 2014-17 period. This will be driven mainly by higher SSS in the restaurant segment as it continues to rationalise its underperforming RamenPlay outlets.
BreadTalk: revenue per outlet by business (SGD ’000)
Source: Company, Daiwa forecasts
EBITDA margin expansion We forecast a 3pp expansion in the EBITDA margin to 15% over 2014-17. BreadTalk has a relatively stable cost structure with 3 key components: raw materials (about 30% of total expenses), labour (28%) and operating leases (22%). We forecast a gradual decline in labour as a percentage of total expenses (from 28% for 2014 to 26% for 2017) as we expect BreadTalk to achieve better SSS from the rationalisation of the RamenPlay outlets. BreadTalk: EBITDA margin (%)
Source: Company, Daiwa forecasts
BreadTalk: cost structure
Source: Company, Daiwa forecasts
Working capital cycle We expect BreadTalk to maintain its negative working capital cycle over 2015-17, albeit with a shorter number of days, as we expect payable days to fall faster than inventory and receivable days. It has had a negative working capital cycle since 2004. This is usually seen in F&B companies as their revenue is collected upon delivery of goods or from the credit card companies within 30 days of a transaction being made. BreadTalk: working capital cycle (days)
Source: Company, Daiwa forecasts
We expect inventory days to range from 12-14 days over 2015-17, below the 15-18 days over 2010-14. We attribute this mainly to better inventory management as the company improves its procurement system, leading to it holding its inventory for less time on its balance sheet. We expect receivable days to range from 4.5-5.5 days for 2015-17, continuing its declining trend from 7 days for 2012 to 6 days for 2014. This is due, in our view to better bargaining power with its franchisees as BreadTalk increases its scale. We expect payable days to narrow to 28-32 days for 2015-17. BreadTalk’s payable days have fallen from 55 days for 2011 to 34 days for 2014. This is due to shorter credit terms with its landlords for its restaurant and food-court businesses, which have expanded over the years. Dividend policy and capex We forecast a constant dividend of SGD0.015 per share for 2015-17E, as we do not expect any major capex that would require the company to hold onto its cash during this period. BreadTalk has paid out dividends for the past 9 financial years, but does not have a fixed dividend policy.
0
1,000
2,000
3,000
4,000
5,000
6,000
2009 2010 2011 2012 2013 2014 2015E 2016E 2017E
Bakery opera tions Restaurant Food Atrium
13.4%
12.6%
11.3%11.1%
11.6%12.0%
12.8%
14.2%
15.0%
10%
11%
12%
13%
14%
15%
16%
2009 2010 2011 2012 2013 2014 2015E 2016E 2017E
30% 30% 30% 30% 31% 31% 31% 31% 31%
22% 21% 21% 21% 22% 22% 22% 22% 22%
29% 28% 29% 28% 27% 28% 27% 27% 26%
0%
20%
40%
60%
80%
100%
2009 2010 2011 2012 2013 2014 2015E 2016E 2017E
Raw material Operating lease Labour Deprecia tion and Amortisation Others
(40)
(20)
0
20
40
60
2010 2011 2012 2013 2014 2015E 2016E 2017E
Inventory days Receivable days
Payable days WCC days
Consumer Staples / Singapore BREAD SP
9 September 2015
- 17 -
BreadTalk: dividend per share (SGD cents) and dividend payout ratio (%)
Source: Company, Daiwa forecasts
We forecast SGD163.4m in capex over 2015-17, lower compared to 2012-14 as BreadTalk incurred higher capex to build its international headquarters and acquired investment properties (2009-14). We do not expect any major capex in 2015-17. BreadTalk: capex (SGDm)
Source: Company, Daiwa forecasts
Valuation
We initiate coverage on BreadTalk with a Buy (1) rating and a 12-month target price of SGD1.31 based on 2016E PER of 19.6x (BreadTalk’s past-5-year PER. We expect its sales to revert back to levels seen then, when restaurant sales were doing better). This represents upside of 16.4% to current share price levels. Our PER multiple is 23% above BreadTalk’s Singapore peers but in line with the regional F&B players, on the Bloomberg consensus forecasts. We think this is justifiable given its stronger 2016E EPS growth of 53% vs. peers (7.9% to 43%). Our target price is 15.5% below the Bloomberg consensus. We think this is due to the more aggressive valuation multiple used by other brokerage houses.
On our 2015 DPS estimate, BreadTalk offers a 1.3% dividend yield. BreadTalk: 12-month-forward PER (x)
Source: Bloomberg
Our 2015E EPS is 7.2% below consensus, which we think is due to our lower sales projection vs. peers. However, our 2016E EPS is 6.9% ahead, as we expect a stronger EBITDA margin expansion during that period. BreadTalk: Earnings per share (SGD cents)
Source: Bloomberg
SWOT analysis
Strengths Brand management. BreadTalk has cultivated a suite of recognisable brands, evident from the string of awards it has won over the years. This range of brands gives BreadTalk a competitive edge over peers, in our view. Product innovation. BreadTalk has an in-house R&D team to constantly invent original flavours to refresh its offerings and attract customers. Outlet network. BreadTalk has a presence in 17 territories, with a focus on its key markets in Singapore, Hong Kong and China. This enables BreadTalk to realise scale economies, in our view.
1 1.5 1.3 1.8 1.5 1.5 1.5 1.5
24.9%
36.4%
30.4%
37.3% 34.6% 34.3%
22.4%
17.2%
0%
10%
20%
30%
40%
0
1
2
2010 2011 2012 2013 2014 2015E 2016E 2017E
Dividends per share (cents) Dividend payout ratio
0
20
40
60
80
100
120
2010 2011 2012 2013 2014 2015E 2016E 2017E
0
5
10
15
20
25
30
35
40
Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15
+1 stdev
Mean
12M forward PER (x )
-1 stdev
+2 stdev
-2 stdev
3.95 4.01 4.12 4.274.83
4.33 4.44
6.70
8.72
0
1
2
3
4
5
6
7
8
9
10
2009 2010 2011 2012 2013 2014 2015E 2016E 2017E
Consumer Staples / Singapore BREAD SP
9 September 2015
- 18 -
Weaknesses Homogenous product. There are many bakeries and restaurants in its key markets offering products similar to BreadTalk. This may make it difficult for BreadTalk to differentiate itself with products other than its signature items such as its Pork “Flosss” bun and Din Tai Fung’s “xiao long bao”. Susceptible to consumers’ changing taste buds. Although BreadTalk’s R&D team rolls out new creations regularly, customers may prefer other flavours, not offered by BreadTalk, and choose to buy from its competitors instead. Price hike. Given the array of products to choose from, customer stickiness may not be high. This implies that BreadTalk is unable to hike prices significantly without a potential dip in sales volume. In a Business Times article, published 17 December 2012, management said that it only made 4 price adjustments over 2000-end-2012. Opportunities Geographical expansion. Of its 3 key markets, we believe BreadTalk’s next target for business/revenue growth will be Thailand. Through a joint venture with Minor International, one of its substantial shareholders, BreadTalk plans to increase the number of its bakery outlets there to 100 in 5 years, up from 22 as at end-2014, by leveraging Minor’s on-the-ground expertise. Low risk expansion through franchisee. BreadTalk takes on a minimal capital outlay when
expanding through franchisees as shop renovation costs are borne by the franchisees. This enables BreadTalk to broaden its brands’ reach without taxing its cash reserves. New brands: inbound and outbound. BreadTalk can assist domestic brands expand outside of Singapore by leveraging its contacts and experience overseas. Similarly, BreadTalk can bring international brands into Singapore. In our view, both avenues will have the potential to generate new sources of income for BreadTalk. Threats Stiff competition. BreadTalk faces stiff competition with many peers in all its 3 businesses. This could lower its bargaining power with consumers. Public scandals. Year-to-date, BreadTalk has been in the press thrice for all the wrong reasons. These may have a potentially negative impact on the public’s perception of BreadTalk’s brand and its products, and cause them to stop buying from its outlets, resulting in lower sales. Low intellectual property protection. BreadTalk has a dedicated R&D team that works on creating new flavours. However, it may be easier and less time-consuming for competitors to replicate BreadTalk’s new creations once they are introduced to the market. This could result in BreadTalk’s products losing their novelty once a similar product is offered by peers.
Safety scandals Consumers have an array of food options available. If they do not trust the safety of food offered by one vendor, they have alternatives to choose from. This applies to BreadTalk as well, and indeed stands as a primary risk to our call. In August 2015, a claim was made that BreadTalk’s Shenzhen outlet reused its cooking oil beyond the safety period and relabelled the expiry date of its condiments. BreadTalk refuted these claims, but such an incident could potentially drive consumers away from its outlets. Unable to find suitable locations for stores If BreadTalk cannot find appropriate locations to open new stores, its sales growth could be limited to improving same store sales growth at existing outlets. Our assumption includes new-store openings over the forecast period of 2015-17. There may be a downside surprise in reported revenue if BreadTalk opens fewer stores than we expect, and this stands as a primary risk to our call. Raw material cost Raw material cost is a key cost item and is estimated to make up about 30% of BreadTalk’s total expenses. BreadTalk usually passes on the cost to its customers immediately. However, if BreadTalk is unable to do so, its margins might be eroded. This will lead to downward pressure on its net profit. Rental expenses BreadTalk renews the rental lease of its outlets every 3 to 7 years. However, if it is unable to obtain a favourable rental rate, it may have to pass on the cost to its customers or forgo the space. If it is unable to pass on the cost, it could narrow margins. If it has to give up the space, it will lose sales from that outlet.
Company background
BreadTalk Group Limited is a food and beverage company with 3 business segments: 1) bakery (50% of 2014 sales), 2) restaurant (22%) and 3) food court (28%). Geographically, Singapore contributed half of its revenue in 2014, Mainland China accounted for (32%), Hong Kong (11%) and 7% came from the rest of the world. BreadTalk: 2014 revenue breakdown by business
Source: Company
BreadTalk: 2014 revenue breakdown by geography
Source: Company
Started in April 2000 by Mr. George Quek, BreadTalk launched its signature Pork “Flosss” bun, a bun brushed with mayonnaise and topped with pork floss, at its first outlet in at Bugis Junction, Singapore. Today, BreadTalk has a presence in 17 territories around the world with more than 900 outlets across 10 brands. BreadTalk’s international headquarters is in Tai Seng, Singapore. Built for SGD67m in 2012-13, the building houses BreadTalk’s corporate office, research and development laboratories, training academy, warehousing facilities and central kitchens.
Bakery operations
49.9%
Restaurant sales22.2%
Food court income28.0%
Singapore50.2%
Mainland China31.6%
Hong Kong11.4%
Rest of the world6.8%
Consumer Staples / Singapore BREAD SP
9 September 2015
- 20 -
BreadTalk has won several awards since it was established. In 2014, it became the first Singapore company to win an award at the World Retail Awards in Paris. BreadTalk: key awards won Year Organisation Award 2014 World Retail Awards 2014 Growth Market Retailer of the Year 2012 Brand Finance One of the Top 100 Singapore Brands 2012 World Brand Laboratory Five Star Diamond Award 2009 SPBA Toast Box is the Overall Winner of Promising Brands 2009 Brand Finance One of the Top 100 Singapore Brands 2008 SPBA Food Republic is the Overall Winner of Promising Brands 2006 World Brand Laboratory Five Star Diamond Brand Award and Diamond Awards 2005 SPBA Gold Award and CitiBusiness Regional Brand Award 2004 SPBA Silver Award 2004 Hong Kong Design Centre Design for Asia Award 2003 SPBA Distinctive Brand Award
Source: Company
BreadTalk: corporate history Year Description 2000 1st BreadTalk outlet opens at Bugis Junction, Singapore, on 1 July 2000
Launches its signature “Flosss” bun 2001 Receives more than 1,000 international franchise enquiries for BreadTalk
2003 BreadTalk Group Limited is listed on the Singapore Exchange’s Sesdaq (now known as Catalist board) First overseas outlet opens in Jakarta, Indonesia Sets up its China headquarters and opens its first China outlet in Shanghai
2004 Opens its inaugural store in Philippines
Brings in Din Tai Fung Singapore, ranked one of the World’s Top Ten Best Restaurants by The New York Times
2007 Opens 100th store worldwide in Shanghai, China First Food Republic opens in Kuala Lumpur’s Pavilion Shopping Centre in Malaysia
2008 Opens inaugural stores in Oman Launches The Icing Room for young adults to engage in Design-It-Yourself cakes Launches new BreadTalk design concept store at CityLink Mall, Singapore
2009 Signs 12-country Middle East Master Franchise agreement with Bahraini partner, Pan Arabian Gourmet BreadTalk Group Limited transfer of listing to the SGX Mainboard on 11 June 2009 Launches Bread Society at ION Orchard, Singapore Partners with Japanese Sanpou Group to launch RamenPlay Obtains franchise to operate Carl’s Jr. in China
2011 Ground-breaking ceremony for its international headquarters in Singapore
2012 Introduces the Generation 4 concept of BreadTalk in Shanghai with an original line-up of novel products Launch of heritage Thye Moh Chan confectionary
2014 BreadTalk has a presence in 17 territories worldwide
Started in April 2000, BreadTalk is a bakery that offers local Asian flavours such as its signature Pork Floss bun. Its outlets are all open plan, allowing customers to watch chefs at work.
Bread Society is an artisan bakery offering dine-in options. It was launched in 2009. Its products are more European-inspired. Its cafe serves soup, Japanese curry rice and desserts, such as salted caramel lava chocolate cake.
Toast Box is a cafe concept developed in October 2005. Its outlets are designed to resemble local Nanyang coffee shops of the 1960/70s. It serves food such as mee siam, nasi lemak and soft-boiled eggs, as well as drinks such as coffee and tea.
The Icing Room is a cake shop chain that started in 2008. It distinguishes itself by offering a “Design-It-Yourself” personalised cake-decoration service, allowing customers to design their own cakes.
Thye Moh Chan sells traditional handcrafted Teochew confectionary. BreadTalk relaunched the 70-year old brand in 2012.
Restaurants
Din Tai Fung is a 1 Michelin Star Chinese restaurant and ranked as 1 of the World’s top-10 best restaurants by the New York Times. It is known for its famous signature xiao long bao (steamed pork dumplings) and steamed chicken soup.
RamenPlay serves authentic Japanese ramen in its restaurants, which have upbeat and lively interiors. In 2009, BreadTalk collaborated with Japanese Sanpou Co. Ltd to introduce Ramenplay.
Founded in 1967, Sanpoutei offers authentic Niigata-style ramen in a clear fish stock-based broth, in contrast to the more popular pork-bone broth version offered by other ramen establishments in Singapore. BreadTalk launched its first Sanpoutei outlet in Singapore in 2014.
Carl’s Jr. is a popular burger chain in the west of the US and is known for being the first within the Quick Service Restaurant industry to charboil meat patties over an open flame. BreadTalk partnered with Aspac F&B International Pte Ltd to bring Carl’s Jr. into China.
Food court
Food Republic is a food court that offers local hawker and street food at affordable prices in an air-conditioned setting. BreadTalk entered the business by acquiring China’s 大食代 (dashidai) chain in 2005.
Source: Company
Management said it spreads its supplier concentration risk for any particular raw material. In Singapore, it has 3 suppliers to provide its flour needs, while its overseas’ outlets source their raw materials locally.
Consumer Staples / Singapore BREAD SP
9 September 2015
- 21 -
Bakery business
BreadTalk manufactures and sells bread, drinks and Asian food such as mee siam at its bakery outlets under the BreadTalk, Bread Society, Toast Box, The Icing Room and Thye Moh Chan brands. As at 30 June 2015, it had 837 stores worldwide, with 33% direct-owned and the remainder under franchise agreements. About half of the stores are in Mainland China, with the rest spread across other markets such as Singapore. BreadTalk directly manages its bakery outlets in Singapore, Malaysia, Hong Kong, Taiwan, Shanghai and Beijing. Stores in other countries and the other China cities are franchised. The lease duration for its direct-owned bakery outlets is usually 3 years. Previously, BreadTalk directly owned its outlets in Thailand, but it restructured the stores under a 50:50 venture with its major shareholder, Minor Investments, an F&B player in Thailand. Minor Investments runs the day-to-day operations of the bakery outlets. According to its website, BreadTalk sells 1 of its signature Floss buns every 10 seconds worldwide, with over 100m Pork Floss buns sold to date. BreadTalk makes available for sale a regular range of buns daily, and it introduces new flavours to mark annual holidays such as the Lunar New Year or Christmas. The BreadTalk brand has been through 4 generations of store designs since inception. Generation 1 (2000-04): Outlets pioneered the use of full glass open kitchens in Singapore. The stores were furnished with stainless steel and white display tops, finished with sleek and clean lines. BreadTalk: Generation 1 outlet
Source: Company
Generation 2 (2004-08): The look of outlets was changed to bronze stainless steel.
BreadTalk: Generation 2 outlet
Source: Company
Generation 3 (2008-11): BreadTalk adopted sleeker displays to showcase its products. BreadTalk: Generation 3 outlet
Source: Company
Generation 4 (2012 to present): BreadTalk has opted for a more rustic feel to coincide with the change in its menu, which now offers healthier options. BreadTalk: Generation 4 outlet
Source: Company
Bread Society is BreadTalk’s artisan bakery arm that draws inspiration from Europe. It has a dine-in concept, unlike BreadTalk outlets, and offers Japanese curry rice and desserts such as salted caramel lava chocolate cake among other things.
Consumer Staples / Singapore BREAD SP
9 September 2015
- 22 -
Bread Society outlet
Source: Company
Introduced in October 2005, Toast Box is a cafe designed to resemble local coffee shops of the 1960/70s. It serves Asian food such as mee siam. ToastBox outlet in Shaw Centre, Singapore
Source: Company
The Icing Room is a cake shop chain that started in 2008, distinguishing itself as offering a “Design-It-Yourself” personalised cake-decoration service, allowing customers to design their own cakes.
An Icing Room outlet
Source: Company
BreadTalk relaunched Thye Moh Chan in 2012, a 70-year old brand that sells traditional handcrafted Teochew confections. Thye Moh Chan outlet
Source: Company
Franchise income BreadTalk earns a royalty fee and percentage of sales (franchisee income) and ingredient sales (sales to franchisees) from its franchise agreements. BreadTalk’s bakery franchisee agreement has 2 components: development and operating rights. Under development rights, franchisees’ performance, such as number of store openings and sales targets, are tracked to ensure they abide by the terms set out in the franchise agreement. Operating rights give the franchisee the right to use the BreadTalk brand for a period of time, usually 5-10 years. In the event a franchisee is unable to fulfil its performance targets, BreadTalk can withdraw the development rights but can choose to allow the franchisee to retain the operating rights. This allows the franchisee to continue operating the BreadTalk brand at its existing outlets, but cancels its ability to open new outlets. Management said this is a safety mechanism to protect the company, but noted that it has never been used.
Consumer Staples / Singapore BREAD SP
9 September 2015
- 23 -
BreadTalk seeks out fellow entrepreneurs with a common goal when it comes to franchising. In Indonesia, it partnered with Mr Johnny Andrean, who formerly ran a successful hair salon chain. As at 31 December 2013, Indonesia had 121 bakery outlets. Apart from deepening its roots in its existing markets, BreadTalk is constantly looking to extend its presence in new markets. In October 2014, BreadTalk opened its first bakery outlet in Phnom Penh, Cambodia. It also entered Qatar and Saudi Arabia in 2014 with the BreadTalk bakery brand. Constantly reinventing itself BreadTalk has an in-house R&D team that develops new bread and flavours to refresh its product offerings and cater to the ever-evolving consumer tastes. On any given day, its bakery outlets display around 60 bread options, comprising regulars such as its signature Pork Floss bun and new products. In 2014, BreadTalk introduced healthier choices, such as Chia Seed Toast and Pumpkin Toast, which have no trans-fats and are low in cholesterol.
Restaurants
BreadTalk’s current portfolio of restaurant brands includes Din Tai Fung, RamenPlay and Sanpoutei. As at 30 June 2015, BreadTalk had 33 restaurants located in Singapore (27), Thailand (2) and Shanghai, China (4). The restaurants are held under joint ventures (RamenPlay and Sanpoutei) or franchise agreements (Din Tai Fung). About 85% of its restaurants are in Singapore, with the remainder in Mainland China and Thailand. The lease duration for its restaurants is usually 3 years. The outlets are located in upmarket shopping malls such as Paragon and Marina Bay Link Mall in Singapore. In 2H15, management expects to open 2 new restaurants. We think they will be either Din Tai Fung or Sanpoutei outlets. Breadtalk entered the restaurant business in 2003 by acquiring the franchise rights to bring the Taiwanese Din Tai Fung brand into Singapore. Din Tai Fung is a Chinese restaurant famous for its dumplings. Management shared that Din Tai Fung is its best-performing restaurant brand to date. BreadTalk also has Din Tai Fung’s franchise rights for Thailand. It has 21 outlets in total, of which 19 are in Singapore and 2 in Thailand. Management said more than 80% of its restaurant sales are generated by Din Tai Fung.
In 2015, the company renewed its franchise agreement with Din Tai Fung for another 10 years. Management said that it is the company’s best-performing franchise, thus mitigating the risk of Din Tai Fung retracting the licence. Din Tai Fung outlet
Source: Company
In 2010,BreadTalk created its own restaurant brand, RamenPlay, via a joint venture with a Japanese company. RamenPlay offers Japanese-styled noodles, rice and hot pots. However, management said it has been rationalising its RamenPlay stores and will continue to do so. It has 11 outlets, comprising 7 in Singapore and 4 in Shanghai. RamenPlay outlet
Source: Company
In 2014, BreadTalk opened 2 Sanpoutei outlets in Singapore. Founded in 1967, Sanpoutei serves authentic Niigata-style ramen in a clear fish stock-based broth, in contrast to the more popular pork-bone broth version offered by other ramen establishments in Singapore. Management shared that business has been brisk at its 2 outlets so far.
Consumer Staples / Singapore BREAD SP
9 September 2015
- 24 -
Sanpoutei’s Holland Village outlet
Source: Company
BreadTalk used to own a Carl’s Jr. franchise in China. In 2009, it opened the first Carl’s Jr. outlet in Shanghai. However in March 2014, BreadTalk restructured its Carl’s Jr. business by converting it into a joint venture-franchise model, with BreadTalk taking a 40% stake and Carl Karcher Enterprises, owner of the Carl’s Jr. fast-food chain, holding the remainder. Following the restructuring exercise, the US partner has taken the lead in spearheading the expansion in Mainland China, while BreadTalk will provide support with its knowledge of the local F&B scene. As at 31 December 2014, Carl’s Jr. had 4 outlets in Shanghai and Nanjing. Carl’s Jr. outlet in China
Source: Company
Food-court business
BreadTalk operated 62 food courts under the Food Republic brand as at 30 June 2015. It rents food-court space from the landlords of shopping malls, carves it up into individual stalls, and leases it out to food operating tenants. It earns the difference between the rent paid and received, as well as a percentage of sales generated by the tenants. As at 30 June 2015, it had 32 food courts in China, 14 in Singapore, 8 in Hong Kong, 3 in Taiwan, 3 in
Thailand and 2 in Malaysia. The typical food court measures 10,000-15,000 sq ft and houses 10-11 stalls. BreadTalk will consider opening a smaller food court (4,000-5,000 sq ft) if the location has strong foot traffic. And management said it would consider bringing in 3 popular stalls, and run it like a cafe/restaurant, with service charges and taxes. BreadTalk entered the food-court business in 2005, when it acquired China’s Topwin Investment Holding Pte Ltd for SGD11m. At the time of the acquisition, Topwin owned and operated 13 food courts under the “Megabite” brand (Dashidai, 大食代). Megabite was the first international food court concept introduced in Shanghai in 1997, before expanding to Beijing, Tianjin, Nanning and Shenyang. In October 2005, BreadTalk launched its first Food Republic outlet in Wisma Atria, Singapore. The 900-seat food court offered a blend of hawker fare and mini-restaurants across 23,000 sq ft. This was followed by the opening of a second outlet in Vivocity, Singapore, in 2006. In late-2005, Food Republic unveiled its first food court in Hong Kong at the Cityplaza mall in Tai Koo Shing. Food Republic outlet
Source: Company
Dashidai (大食代) food court in Taichung, Taiwan
Source: Wikipedia
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The lease duration for its food courts is usually 6 years, with an option to extend for another 3. When negotiating for the extension, BreadTalk sometimes considers renewing its leases for another 6 years, instead of 3.
Management
Mr George Quek – Chairman and founder. Mr Quek started his F&B business in Taiwan in 1982 and grew it into a chain of 21 outlets across Southeast Asia before setting up Topwin Singapore and Megabite China in 1992 and 1996, respectively. In 2000, he started the bakery business with BreadTalk Pte Ltd. Mr Quek continues to drive the group’s strategic direction and development. Ms Katherine Lee Lih Leng – Deputy Chairman. Ms Lee oversees the group’s research and development function, pioneering new product ideas and brand concepts. Ms Lee has more than 20 years of experience in the F&B industry. She was the finance director of Topwin Singapore prior to her current appointment. Mr Oh Eng Lock – Group CEO. Mr Oh was appointed group CEO on 1 January 2011. He oversees the group’s global operations with a focus on strategic planning, investments and business development and regional expansion. Prior to his appointment, Mr Oh was a regional managing director with Merrill Lynch Asia Pacific Ltd in Hong Kong. Mr Chan Ying Jian – Group CFO. Mr Chan was appointed group CFO on 10 June 2015, after joining the group in August 2014 as a financial controller of the food-court division. He is responsible for the group’s finance, legal and risk functions. Prior to joining the group, Mr Chan was a vice president in the equity research team of J.P. Morgan Securities Singapore.
Shareholding structure
BreadTalk has 2 substantial shareholders: 1) Mr George Quek and 2) Primacy Investment, a wholly owned subsidiary of Minor International (MINT TB Equity, Non-rated) in Thailand. BreadTalk sold a 2.6% stake in the company to Primacy in early 2013. Primacy increased its interest to 11% by buying shares in the open market before the end of 2013. MINT is involved in hotels, restaurants and consumer products such as fashion and cosmetics. In August 2014, BreadTalk established a joint-venture company with MINT to operate its bakery business in Thailand. BreadTalk had 22 bakeries, 2 restaurants and 3 food courts in Thailand as at end-2014. MINT aims to have 100 bakery outlets by 2020. BreadTalk: Shareholding structure as of 8 September 2015
Source: Bloomberg
BreadTalk
Mr. George Quek
52.6%
Primacy Investment
12.0%
Other public
35.4%
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