News

• Oldtown Berhad announced in a bursa filing last Friday that its indirect subsidiary Shenzen Kopitiam Asia Pacific Limited had entered into a territorial license agreement on the 4th of July 2016 with G&L Food and Beverage Management Company Limited.

• The territorial agreement confers the right to operate and to sub-license the territorial rights to operate the restaurant business under the brand name of “Oldtown White Coffee” in the province of Jiangsu, the People’s Republic of China.

• G&L is a company incorporated in China on 31 May 2016 solely for this agreement. G&L is scheduled to open its first China outlet in the city of Wuxi, in the southern Jiangsu province in October 2016.

Our thoughts

• We are not surprised by the announcement as it was already touted in the most recent analyst briefing. We are neutral with a positive bias on this news flow as it commences the group’s re-entry into the China F&B market after a hiatus and a revaluation of their strategy in China.

• Our positive bias stems from the fact that the group’s future strategic directions for its F&B segment for the Greater China region appear in tact and in motion.

• We are neutral, as we don't anticipate that the outlet opening in Wuxi alone to have a significant contribution to our earnings forecast in the near term. The success of Jiangsu is fundamental to the whole Greater China Project as it will determine if the renewed strategy is effective and there is acceptance by the local consumers.

• We can anticipate that having a physical presence will also complement its robust FMCG segment in the region.

• Although China’s economy is structurally changing, there is ample opportunity for the group as it is by and large a huge market; as such there is still ample room for the group to grow in China over the long term. To note the Jiangsu province alone has a total population of circa 45.2m people.

Risks

• Domestically, risk to this stock stems mainly from the persistently subdued consumer sentiments, which affects scalability of its F&B operations. For the FMCG segment, risk stems from import bans or changes in regulatory requirements, which could hamper sales.

Forecasts

• Unchanged.

Rating

HOLD

• Positives: 1) Strong earnings growth; 2) Market leader under the white coffee business; 3) Decent dividend policy; and 4) Resilient earnings and low capex requirements.
• Negatives: 1) Competitive industry with low barriers of entry; and 2) Global economic slowdown could jeopardize group’s sales and earnings.

Valuation

Downgrade to a HOLD given the run in share price with TP of RM1.83 based on P/E multiple of 15.2x based on FY3/18 EPS or circa 25% discount to regional peers’ average of 20.2x (which are much larger in terms of market cap)

Source: Hong Leong Investment Bank Research - 18 Jul 2016