{"id":66242,"date":"2023-09-28T01:05:57","date_gmt":"2023-09-28T05:05:57","guid":{"rendered":"https:\/\/ifintechworld.com\/news\/th-international-limited-strong-buy-updates-part-i-nasdaqthch\/"},"modified":"2023-09-28T01:06:04","modified_gmt":"2023-09-28T05:06:04","slug":"th-international-limited-strong-buy-updates-part-i-nasdaqthch","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=66242","title":{"rendered":"TH International Limited: Strong Buy Updates (Part I) (NASDAQ:THCH)"},"content":{"rendered":"
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Investment Thesis<\/strong><\/h2>\n

In our writeup dated Jan 14, 2023, we were of the view that the substantial underperformance of TH International Limited (NASDAQ:THCH<\/span>) was not warranted and believed that the valuation gap would converge as there appeared to be a potential alignment of macro, fundamental and technical factors in 2023.<\/span><\/p>\n

As of September 26, 2023, THCH was down another 32% year to date (following a 72% decline in 2022) while its licensor Restaurant Brands International (QSR) was up 5%, coffee chain competitor Luckin Coffee (OTCPK:LKNCY) was up 48% and fast food competitor Yum China Holdings (YUMC) was up 3%. THCH also underperformed the Global X MSCI China Consumer Discretionary ETF (CHIQ) by a large margin during the same period, with CHIQ down just 11%.<\/p>\n

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\"THCH<\/span>
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Bloomberg.<\/p>\n<\/figcaption><\/figure>\n<\/p>\n

At the same time, THCH reported solid and improving operating and financial results for the Tim Hortons business while announcing its acquisition of the exclusive right to develop Popeyes brand restaurants in mainland China. On the technical side, the company completed the warrant exchange to both reduce future dilution and alleviate the low free float caused by the deSPACing process. The deepening disconnect between THCH’s fundamentals and the stock performance was arguably driven in large part by increasing concerns about China (macro) and the company’s own poor communication with the investor community.<\/span><\/p>\n

We remain convicted in our investment thesis and believe that THCH has been unfairly penalized by macro and technical factors. Its current stock price is now lower than the implied price paid by institutional investors in private rounds, which represents a rare opportunity with asymmetric upside and limited downside. In this update we will analyze THCH’s store opening status, the China discount factor and investor relations efforts. We will dig deeper into the fundamentals and valuation analysis in subsequent writeups.<\/p>\n

Store Openings: Acceleration Ahead in 2H 2023<\/strong><\/h2>\n

Per its earnings release, THCH operated 700 Tim Hortons stores by the end of 2Q 2023 with a target of opening an additional 300 stores during the second half of this year (see chart below). Separately the company opened its first Popeyes store in Shanghai in August and planned to open 10 stores in 2023 and 1,700 stores across China in the next 10 years.<\/p>\n

THCH Total Store Count<\/h4>\n

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\"Total<\/span>
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Company filings.<\/p>\n<\/figcaption><\/figure>\n<\/p>\n

THCH did not break down the store numbers by city in its earnings release. Based on the data we collected via THCH social media channels and a Baidu map, the company likely operated stores in 56 cities in China as of August 31, 2023, up from 39 cities at the end of 2022. While THCH added most of these new cities in its four main clusters centered around Shanghai, Beijing, the Chengdu-Chongqing region, and the Pearl River Delta, it also opened stores in some relatively remote but strategically important new markets (marked by the Tims logo in the map below), such as Lanzhou (Gansu Province), Yinchuan (Ningxia Province), Changchun (Jilin Province) and Urumqi (Xinjiang Province).<\/p>\n

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\"Store<\/span>
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Company filings and social media channels.<\/p>\n<\/figcaption><\/figure>\n<\/p>\n

Given that THCH needs to open at least 300 new stores to hit its full year target of 1,000 stores, it will have to accelerate its pace of new store openings to an average of 150 stores per quarter or 50 stores per month from July to December, which would be a historic high since 2021 (see chart below). The previous record was 131 stores per quarter during 4Q 2022 which could be partially due to seasonality and partially due to the lifting of COVID restrictions in November 2022. How will THCH achieve this new pace of 150 stores in 2023? The answer might be the franchised stores.<\/p>\n

THCH New Store Openings Per Quarter<\/h4>\n

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\"Store<\/span>
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Company filings.<\/p>\n<\/figcaption><\/figure>\n<\/p>\n

The share of THCH franchised stores was almost unchanged at around 5% of the store mix until 3Q 2022 when the number started to increase by 3-4 percentage points per quarter (see chart below). By the end of 2Q 2023, the franchised stores accounted for 18% of THCH stores in China.<\/p>\n

THCH Store Mix: Company Stores vs. Franchised Stores<\/h4>\n

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\"Owned<\/span>
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Company filings.<\/p>\n<\/figcaption><\/figure>\n<\/p>\n

If we break down the quarterly store openings by store type, we can clearly see the growth strategy shift in 3Q 2022 (see chart below) when the franchised stores started to play an increasingly important role in driving growth. The key shift came in 1Q 2023 when the pace of newly opened franchised stores surpassed that of the company stores. This trend may continue for the rest of 2023 and onwards as the company shifts towards a more “asset-light” model with a higher return on capital. We would not be surprised at all if most of the upcoming new stores in 2H 2023 are franchised stores.<\/p>\n

New Store Openings per Quarter: Company Stores vs. Franchised Stores<\/h4>\n

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\"Owned<\/span>
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Company filings<\/p>\n<\/figcaption><\/figure>\n<\/p>\n

THCH in 2023 is very similar to SBUX in 1995 in terms of store count and growth stage (see tables below). THCH operated 700 stores at the end of 1H 2023 and plans to open an additional 300 stores by year end. By 2026, the company targets a level of 2,750 stores in China and should be able to surpass 3,000 total stores by 2027. SBUX operated 677 stores at the end of 1995 and it took the company five years to hit and surpass the milestone of 3,000 stores.<\/p>\n

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THCH Store Count<\/p>\n<\/td>\n<\/tr>\n

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1H 2023<\/p>\n<\/td>\n

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700<\/p>\n<\/td>\n<\/tr>\n

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2023E<\/p>\n<\/td>\n

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1,000<\/p>\n<\/td>\n<\/tr>\n

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2026E<\/p>\n<\/td>\n

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2,750<\/p>\n<\/td>\n<\/tr>\n

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2027E<\/p>\n<\/td>\n

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>3,000<\/p>\n<\/td>\n<\/tr>\n<\/table>\n

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