CFA Institute Research Challenge Hosted by CFA Society Taiwan National Taiwan University
PRESIDENT CHAIN STORE CORP (2912.TT) SELL CFA Institute Research Challenge‧ NTU Team Jan 19, 2014 Equity | Taiwan | Retail
19 January 2014
Slower further growth, more future risks Target Price: NT$ 162 / US$5.36
Price (19 Jan 2014): Taiwan CVS revenue growth deteriorates when competitors catch up NT$ 193 / US$6.39 We see limited further benefits from expanding store scale after 58% of its Upside/Downside: convenient stores (CVS) have been transformed into large store format. -16 % The conversion of remaining CVS into large store format might become profitless considering challenges from space availability and aggressive competitors adopting similar strategies. We expect the growth of CVS’s average sales per store to decrease from 8.4% in 2012 to 2% in 2018, while Trading Data gross margin may become stagnated going forward. Date Established 19-Jan-2014 Hard to expect sharp growth from retail subsidiaries 52-Week Range NT$ 157-NT$ 223 Among the retail subsidiaries such as President Pharmaceutical and Mkt Val / Shares Out (mn) NT$ 200,647/ 1,040 Cosmed, we only see stable growth of the persistent subsidiaries while the Avg. 3M Daily Volume (mn) 1.14 powerless ones still showed no signs of potential turnaround. President Bloomberg / Reuters 2912 TT / 2912.TW Pharmaceutical faces intensifying competition of facial mask industry in ROE (2013F) 29.2% China and sluggish industry growth prospect in Taiwan while Cosmed will Free Float 49.4% further lag behind industry leader, Watsons, due to slow expansion and the Dividend Yield 2.5% lack of innovative strategies. As a result, we see NI CAGR will tumble to 8.6% in 2014-2016 from 30% in 2010-2013.
Starbucks might disappoint the catering growth 230 8,800 Shanghai Starbucks has seen intensifying competition along with its 210 8,400 slowing store expansion. We are also concerned about the relatively higher 190 National Taiwan University expense ratios and believe market consensus could be too bullish. 8,000 As for Taiwan Starbucks, the market has become more saturated compared 170 Randy Cheng [email protected] Chris Fu [email protected] with other Asia countries, leading to our conservative attitude toward the 150 7,600 prospect of Taiwan Starbucks’ expansion. Daniel Lai [email protected] Tom Lee [email protected] Wendy Lu [email protected] Pre. Chain Store TSE Taiex 2010 2011 2012 2013F 2014F 2015F
Revenue 169,917 189,252 208,264 217,284 232,394 248,123
Net Income 5,726 6,352 6,789 8,399 8,518 9,215 National Taiwan University Randy Cheng [email protected]
Earnings per Share 5.51 6.10 6.53 8.08 8.51 8.86 Chris Fu [email protected] Daniel Lai [email protected] EPS Growth (%) 41.1 10.9 6.9 23.7 5.4 4.10 Tom Lee [email protected] Dividend per Share 4.90 4.80 4.85 4.95 5.05 5.15 Wendy Lu [email protected] Dividend yield (%) 3.03 2.94 3.22 2.20 2.32 2.41
Book Value per Share 19.44 19.91 22.04 25.27 28.78 32.64
Return on Asset (%) 8.46 8.86 8.73 9.87 9.49 9.03
Return on Equity (%) 25.34 26.68 26.70 29.14 26.48 24.02
This report is published for educational purposes only by students competing in the CFA Institute ResearchBusiness Challenge Description:.
1 CFA Institute Research Challenge‧NTU Team Jan 19, 2014
Business Description Figure 1: Revenue breakdown by business Best leader, but advantage narrowing President Chain Store Corporation (PCSC) was founded by Uni-President Enterprise in 1978 as a CVS brand. Nowadays, it has become the retail conglomerate operating 55 subsidiaries and its operations are divided into 3 business segments and 1 support function:
(1) Convenience store (CVS) segment, which includes 7-11 in Taiwan, Shanghai and the Philippines. (2) Retail segment, which includes Cosmed, Transnet, Pharmaceutical and others. (3) Catering segment, which includes Starbucks in Taiwan and Shanghai. (4) Logistics support function, which supports all the business segments. Source: Company data
Convenience store segment (CVS, 68% of revenue) Figure 2: Profit breakdown by business 7-11 Taiwan: Core business Since the opening of the first convenience store in 1979, 7-11 Taiwan has become the leader of the convenience store industry with a market share of around 49% and reshaped Taiwanese’s daily lives. With a strong network of stores and dynamic group synergy, 7-11 Taiwan provides comprehensive products and one-stop shopping services as a representation of convenient lives.
7-11 Shanghai: Loss producing Since 7-11 entered into Shanghai market in 2009, 7-11 Shanghai has had only Source: Company data 75 stores with 1% market share and suffered from the strenuous burden of its operation costs. The insignificant market share and cost pressure culminate in 7-11 Shanghai’s continuous loss-making to this day. Figure 3: Ownership structure of PCSC
7-11 Philippines: Rapid growth PCSC invested Philippine Seven Corporation in 2000. It has dominated 70% of the market with 1,012 stores in 2013 and it plans to expand the number of Corporate 46% stores with 25% growth rate annually and sets a target of 2,000 stores by Retail Investor 2017. 12%
Other Retail segment (27%) Foreign Institutions Investor Cosmed: Slow expansion 1% 41% Founded in 1995, Cosmed is one of the major drugstore chains in Taiwan with 358 stores in 2012. Their competition position is weakening due to the threats Source: Company data from Watsons, the industry leader in Taiwan. Figure 4: 7-11 Taiwan Sales Breakdown
President Pharmaceutical: Facing fierce competition Founded in 1992, President Pharmaceutical is a retailer and wholesaler of Non-food health and beauty products in Taiwan. The company holds a portfolio of Avene, Products Food Kawai Kanyu Drops, and Nature Made brands. 50% of its revenue comes from 28% Services its private label products, My Beauty Diary, which sells facial masks. General 16% Food Catering segment (4%) Products Others Beverages Starbucks: Most profitable 10% 11% 35% Founded in 1998 with a share of 30% in the joint venture, President Starbucks has 300 stores in Taiwan and 345 stores in Shanghai and Zhejiang Province in 2013. Source: Company data
2 CFA Institute Research Challenge‧NTU Team Jan 19, 2014
Industry Overview and Competitive Positioning Figure 5: Declining GDP growth restricts domestic consumption CVS sales is highly correlated to GDP growth (Appendix 3). Taiwan GDP growth has slowed down in recent years, which might be as low as 2% in 2014 and stay lethargic until 2018. (Appendix 4.) Declining real monthly salary and the reforms of social insurance impact domestic consumption as well (Figure 5, ), which is expected to be only 1.6% in 2013 and unlikely to revive in 2014, directly restricting CVS sales growth. Saturated Taiwan CVS market, rising competition from other retailers There are already more than 10,000 convenience stores in Taiwan as of Feb, 2014. Taiwan CVS market is mature with a density of 42.8 stores per 100K people, the highest in the world, compared with 36.7 for Japan and 19.5 for Source: Company data and Team estimates Shanghai. Therefore, there is little room for new convenience stores in Taiwan. Figure 6: Highest CVS density(stores/ The number of CVS grows slowly in recent years (Figure 6.); with new stores 100K people) implies the market mature mostly set up by major competitor. The boundary between CVS and other retails such as wholesale stores and department stores are diminishing. For instance, Pxmart starts to provide fresh food and initiates private-label products and ecommerce business.
Hiking operating cost In Taiwan, although most CVS have already adopted LED light to reduce utilities expense, margin will decrease as Taiwan Power Company raised the price of electricity. Besides, the rise of minimum hourly wage will further affect CVS operating margin. (Appendix 5, 6.) Source: Company data and Team estimates Lack of new products cycle Companies are focusing on boosting the sales contribution of fresh food and converting stores to the large format, which would be beneficial to Figure 7: Family Mart catching up in same-store-sales growth. Revenue and profit growth are currently supported market share (in terms of stores #) by the rising sales of higher-margin products and continuous penetration of 52.0% 48.5% 50% non-product services. However, these strategies are becoming less effective. 40% E-commerce is considered as the new opportunity for CVS, while the 28.7% contribution is still very little. 30% 25.2% 20% Food safety concerns 10% Several food scandals broke out recently, such as tainted starch and fake 0% cotton oil events. Many products in convenience stores were involved and thus 2008 2009 2010 2011 2012 2013 Family Mart PCSC affected CVS reputation and customers’ confidence. The share price also reflected impact of these events. (Appendix 7.) As Taiwanese people are more Source: Company data caring about food safety, it becomes a concern for CVS. Figure 8: Family Mart catching up in Competition Positioning: More future threats 2012-13 sales growth PCSC operates 7-11 in Taiwan, commanding 49.7% of the CVS market in terms of number of stores in 3Q13. Yet the aggressive store expansion and 20% 15% similar strategies of competitors may limit PCSC’s future development. 10% 1. Family Mart: The second largest operator is catching up quickly 5% The market share of Family Mart has grown from 25.2% in 2008 to 28.7% 0% in 2013, narrowing its gap by 7% with PCSC’s 52.0% to 48.5%. In addition -5% -10% to the more aggressive store expansion, Family Mart also enjoyed higher -15% revenue growth in 2012-13, outperforming PCSC with the increasing 2008 2009 2010 2011 2012 2013 PCSC Family Mart benefits from economies of scale. We expect the long-cherished leading
Source: Company data and Team estimates
3 CFA Institute Research Challenge‧NTU Team Jan 19, 2014
advantages of PCSC to diminish gradually in the future, as Family Mart continues to improve its average store sales through better product-mix and expansion of number of stores until reaching its optimal scale in the equilibrium state. (Figure 7, 8)
In China, Family Mart has outgrown PCSC with early entry in Shanghai in 2004, and it currently owns 776 stores or 12.1% market share. Turning profitable in 3Q13, the gap between the two firms is expected to widen as PCSC suffers from the lack of scale with only 73 stores, or 1.1% market share, and therefore turnaround in the near future is unlikely. (Figure 9)
2. Pxmart: Uprising competitor with lower price and aggressive expansion Pxmart is the biggest supermarket chain in Taiwan with more than 700 stores selling products of a wider variety than CVS do but at around 20% Figure 9: Operation in China comparison
discount compared with convenience stores. Pxmart’s consignment Family Mart PCSC strategy that requires no slotting fee for suppliers endows Pxmart with a Operation areas Shanghai, Guangzhoe,
lower working capital and funding requirement. Pxmart plans to expand to Suzhou, Hangzhou, Shanghai
1000 stores, from 700 by 2017. Chengdu
Operations Family Mart Shanghai 7-11 Shanghai Pxmart has also been experimenting various floor plans, including the Holdings 18.3% 100% followings: (1) New-style supermarket in Taipei provides freshly-cooked Stores(2013) 767 73 food, dining environment, and more product assortments. (2)It has started Market share to accept credit cards; customers welcome such move and have made 12.1% 1.1% Profit contribution more than NT$100mn transactions via credit cards. (3)Adjust store format (24.5) (447) according to the location, catering to customers’ appetites. in 2012 (NT$ mn) Source: Company data We have considered Pxmart as a potential long-term threat to PCSC, and Figure 10: 7-11 large store format definition our concern has risen after Pxmart recently announced to invite Mr. Space >100 m² Chung-Jen Hsu, former CEO of PCSC, to be the new CEO of Pxmart. Mr. Hsu’s experience and comprehensive understanding of the retail business Distribution Northern: lower %( due to limited space) could bring fierce competition to traditional CVS, including PCSC. (For Other areas: Higher%(with detailed comparison please see Appendix 8) parking & restrooms) Fresh foods 16~17%, 1% higher than Investment Summary: Time to sell traditional store Capex 4 mn Core convenience store growth decelerates Large store 1st-year SSSG +10~15% 1. Foresee limited enhancement in sales and margin of 7-11 Taiwan improvement Gross Margin + 0.1% Profit + 5%~10% Large store format conversion (Figure 10) has brought more customers and Source: Company data sales to 7-11 Taiwan after store expansion is muted by saturated market for years. However, we are concerned that the conversion would be less effective Figure 11: Sales growth decelerates as in boosting sales, and may slow down. The market in Northern Taiwan large store format conversion slows down accounts for 57% of Taiwan CVS stores and revenue, but it also requires much higher rent expense and has heavy competition as store density is the highest in urban areas. (Appendix 9) With limited development in 2 tiers cities (Appendix 10), we expect 7-11’s sales growth should start to decelerate going forward, as both conversion speed and effectiveness deteriorate on account of increasing difficulty of conversion and inflated base point.
As a result, we only expect 1-2% of annual conversion of existing stores into large store format, which should only increase its large store format, as a percentage of total number of stores, to 70% at 2018 instead of 80% guided by
Source: Company data and Team estimates.
4 CFA Institute Research Challenge‧NTU Team Jan 19, 2014 the PCSC (Figure 11). The slower than expected store conversion could Figure 12: Next peak cycle will be lower by depress growth of the average sales per store (Figure 11), decreasing from weaker higher-margin product sales% 8.4% in 2012 to 2% in 2018. We forecast 2014-18 revenue CAGR to reach 3.4%, compared with 5.6% during 2007-12.
We have assumed mild 0.2% gross margin improvement of CVS in 2014-15 respectively (Figure 12; calculation see Appendix 10), to reflect the continuous increase of higher-margin product sales. However, further increase is likely to be capped considering competition from Family Mart’s identical product mix (Appendix 11) and aggressive expansion, as well as recurring food safety crisis that we believe has turned from one-time event to structural issues. Source: Company data and Team estimates
As a result, both decelerating sales growth and limited margin improvement Figure 13: 7-11 Taiwan decreasing SSSG can lead to a more challenging future for 7-11 Taiwan (70% NI, 2012). as market becomes saturated
2. 7-11 Shanghai: Heavy operation cost and fierce competition We believe the loss-making situation of Shanghai 7-11 will deteriorate and breakeven in the next 2 years will be unlikely due to the following reasons:
(1) Constrained future same store sales growth(SSSG): Despite its success in raising the penetration of fresh food into the
market (40% of total sales) in the past, Shanghai 7-11 aims at increasing Source: Company data and Team estimates market share without practical plans to further boost sales, which might increase losses while still searching for the correct business model. As Figure 14: 2012 market shares in Shanghai Shanghai 7-11 plans to expand and reach 100 stores in 2014, we hold a less optimistic view toward its future SSSG due to the uncertainty.
(2) Inefficient expansion limits further growth: (Figure 14) The number of stores of Shanghai 7-11 accounts for only 1% in the market of 6400 stores, and the situation is likely to deteriorate by the immaturity of its franchise system and the aggressive expansion of its
competitors. On the other hand, Family Mart’s 12% market share Source: Company data alleviated their cost and breakeven is expected to be attained by Figure 15: 7-11 sales cannot cover cost increasing franchise stores and improving stores’ quality in 2013. As a % of sales (3) Hiking operation cost (Figure 15, 16) : In the past, Shanghai 7-11 enjoyed better SSS level because of the higher consumption power in the business districts, but the strenuous burden of operating cost per store such as rents has incurred losses for Shanghai 7-11. The labor cost has spiked 13% p.a. in Shanghai since 2010 with rising demand fueled by rapid economic growth. Rents of commercial real estate in first-tier cities have also increased by 7% p.a. as demand of commercial real estate surged. In the future, the Source: Company data
establishment of Shanghai Pilot Free Trade Zone in 2013 will further Figure 16: Rent and salary growth push the rents and wages level upward in this city.
Wage CAGR 13%
Rent CAGR 6%
Source: Company data
5 CFA Institute Research Challenge‧NTU Team Jan 19, 2014
Limited growth on major retail subsidiaries Figure 17: Retail business NI growth
President Pharmaceutical and Cosmed are major retail subsidiaries with 8.7% contribution to the consolidated income of PCSC. However, the great NI CAGR of 30% in 2010-2013 will not be seen in the future. On the contrary, we see low single digit NI CAGR, 8.6%, in 2014-2016. (Figure 17)
President Pharmaceutical offers skincare products and dietary supplements, Source: Company data and Team estimates which respectively account for 45% and 28% of total product lines. 50% of the revenue comes from facial masks, My Beauty Diary. China and Taiwan are the Figure18: Taiwan Drug & Cosmetics retail sales major markets with 70% contribution to total revenue. In Taiwan, the drug & cosmetics retail sales has grown sluggishly (Figure 18), leaving little sustainable sales growth. In the fast-growing China skincare industry, however, the competition is fierce with more than 100 players and dominating brands, posing further threats to PCSC. We see increasing difficulty in boosting sales on account of competition in China and disappointing prospect of Taiwan. Overall, we expect that President Pharmaceutical could only have a fading but stable growth rate of net profit at around 16% in the future, compared with an Source: Taiwan Institute of Economic Research average of 67% in the past three years. (Appendix 12) Figure19: Number of stores Cosmed is the second largest drug store in Taiwan, providing cosmetics, dietary supplements and necessities through 358 stores. Its biggest competitor, Watson’s, has 456 stores in 2013. We expect the gap of number of stores will widen in 2014 as slower expansion plan results in a falling market share. (Figure 19) Besides, Cosmed’s recent strategies of introducing professional consultants and new format stores are less effective as Watson’s has leveraged the same strategies with its greater market share before. We Source: Company data and Team estimates expect little improvement of Cosmed in both market positioning and growth momentum as NI growth falls to -10% in 2014 from its peak, 79%, in 2010. Figure 20: SSSG of Starbucks (Appendix 12, 13) 8% 8% 8% 8% 7% Starbucks growth might disappoint the catering growth
There were approximately 13,000 cafés in Shanghai city in 2012 tailored to 3% 2% satisfy all classes. Shanghai Starbucks is a leader in high-end cafés and expected to contribute around NT$500mn profit to PCSC in 2013. However, we see some future risks of Shanghai Starbucks and we believe market 2010 2011 2012 2013 2014F Shanghai US consensus could be too bullish. Source: Company data and Team estimates (1) Relative lower and limited SSSG The SSSG of Shanghai Starbuck was much less than US in 2013 due to Figure 21: Zhejiang 3&4 tiers vs Shanghai different consumption behaviors. People prefer “Stay In” rather than “To Go” in Shanghai. On the other hand, market becomes more competitive with aggressive peers: (i) MAAN Coffee provides supreme services, foods and cozy space. (ii)Costa Coffee & Pacific Coffee expanding aggressively with rents advantages pose threat to the SSSG of Shanghai Starbucks and market shares. (Figure 20) (2) Increasing cost High rent and wage levels caused by rapid economic growth and construction activities amount to a staggering operation cost, Source: Company data and Team estimates
6
7% 8% 8% 8% 8%
3% 2%
2010 2011 2012 2013 2014F
Shanghai US CFA Institute Research Challenge‧NTU Team Jan 19, 2014
approximately 34% total sales of Shanghai Starbucks in 2013. In the Figure 22: Starbucks stores per 100K future, we believe the operation cost will keep on rising as noted before. people in Asia
(3) Flattish expansion plan (Figure 21) Shanghai Starbucks is planning to expand to Zhejiang, focusing on 3-tier and 4-tier cities due to lower rent level and less competition. We expect low contribution from such plans to PCSC as GDP per capita, population density and coffee culture are not mature enough to help generate much profit to contribute to the growth of PCSC.
Taiwan President Starbucks: limited expansion capacity Source: Company data Taiwan President Starbucks opened its 300th store and attained their record high sales and profit contribution in 2013. However, we are much concerned Figure 23: Starbucks 2014Q1 new stores that the further growth of Taiwan Starbucks might disappoint due to the in Taiwan following reasons:
(1) Saturated market The store density of Starbucks in Taiwan is the second highest in Asia. (Figure 20) It suggests that Taiwan is a relatively saturated market and it lacks expansion capacity.
(2) Conservative expansion (Figure 23)
In Starbucks’s 2014Q1 expansion plan, the opening of only 6 new stores Source: Company data is considered, which is less than that in the previous year. Its conservative expansion suggests the flattish future growth of Taiwan Figure 24: ROE become less attractive Starbucks.
Financial Analysis: Stability might not be preferred
Return slows down after reaching peak in 2013 PCSC experienced very strong profit growth in 2013, expected EPS is NT$8.10, up 24.9% YoY, yet we expect the pace to slow in 2014F/2015F at NT$8.21/8.89. The deceleration is attributed to the rising operating expense (i.e. electricity fee and labor cost), and flattish investment income. Projected ROE will drop to 25.7%, compared with 29.2% in 2013. (Figure 24) Source: Company data and Team estimates
Excessive return narrowing Figure 25: Narrowing Excessive return Declining excessive return (=ROIC-WACC) as an indicator implies a downside implies downside correction correction of PCSC share price, since the return investors can earn over opportunity cost is slumping, from 21.26% in 2013 to 16.78% in 2014. Decrease in return on invested capital (ROIC) can explain the result. Both operating margin and capital investment turnover drop because sales growth cannot catch up with cost hike and asset growth. (Figure 25, Appendix 251)
Revenue grows yet fails to meet market expectation 2014F revenue is NT$232,394mn, up 7% YoY. Improvement in operation efficiency and new business expansion are key growth drivers, yet the Source: Company data and Team estimates lower-than-consensus revenue is because (Figure 26 in next page):
(1) Effects of conversion to large store format are diminishing, as the number of stores available for conversion decreases. Besides, competitors have adopted the same strategy as well.
7 CFA Institute Research Challenge‧NTU Team Jan 19, 2014
(2) Saturated market and more severe competition from peers. Declining Figure 26: Sales and OPM lower than consensus real per capita wage also offsets the upside of the recovering economy. (3) Revenue contribution from subsidiaries will not be as good as expected. 250,000 Most profitable subsidiaries contribute little to PCSC, such as Shanghai Starbucks and President Transnet, yet other subsidiaries keep suffering 200,000 from losses, like Shanghai 7-11 and Coldstone. 150,000 Margins will grow slightly, lower than expected 2013F 2014F 2015F We expect gross and operating margin would reach 31.2% and 5.2% in 2013 NTUe Sales Consensus Sales respectively, and would be stable at 31.5% and 5.0% in 2015. Both gross and operating margins have been growing, as large store format and private-label 8% product strategy work, while we expect the growth to slow down. 6% 4% Dividend yield becomes less attractive as stock market revives 2% Dividend yield will be low to 2% for 2014, which is lower than before, implying 0% 2013F 2014F 2015F downside correction of the share price. (Figure 27)
NTUe OPM Consensus OPM Valuation: Fully priced, trim into consensus optimism Source: Company data and Team estimates Figure 27: PCSC dividend yield down
Target price NT$162 from Sum-of-the-parts (SOTP) valuation 5.5 4% Our price target is NT$162 with 14.9% downside (currently NT$ 188.0, see 5.0 2% Figure 28), which is derived from Sum-of-the-parts valuation and implies 19.0x 2014F P/E (Figure 29). We divides PCSC into four segments for valuation, 4.5 0% 2010 2011 2012 2013F 2014F 2015F including convenience stores, retails, logistics, and caterings. Methodologies for each part are illustrated as following: Dividend Per Share Dividend Yield
Source: Company data and Team estimates Figure 28. SOTP Table and contribution pie chart
Business Parts Methodology Fair Value (mn) NAV per share (NT$) % of firm value Per share value %
Convenience Store 98,670 94.9 58.6%
Catering 7-11 Taiwan DCF 82,426 79.3 49.0% Net cash 3% 19% 7-11 Philippines 68.0x PER 564 0.5 9.3% Logistics Convenience 2% 7-11 Shanghai 1.0x PBR 15,680 15.1 0.3% Store 59% Retail 8.6x PER 29,100 28.0 17.3% Retail Logistics 3.4x PBR 3,461 3.3 2.1% 17% Catering 5,740 5.5 3.4% Figure 29: Forward PE Band, 20-32x in the Shanghai Starbucks 8.6x PER 3,947 3.8 2% past 3 years
Taiwan Starbucks 3.4x PBR 1,257 1.2 1%
Others 1.0x PBR 536 0.5 0.3%
SOTP
Sum-of-the-Parts Value 136,971 131.8 81%
Net cash/ (net debt) 31,370 30.2 19%
Fair Value 168,341 161.9 100%
Outstanding Shares(mn) 1,040
Target Price (NT$) 161.9 Source: Company data and Team estimates
8 CFA Institute Research Challenge‧NTU Team Jan 19, 2014
Convenience Store Segment: Figure 29. Stock price sensitivity to WACC 7-11 Taiwan: DCF and all store sales growth
Our DCF model is under the assumption of 8.9% WACC (Appendix 14) All store sales growth (YoY) (Risk-free rate: 1.46%, Beta: 0.64 (Appendix 15), Market risk premium: 3% 4% 5% 6% 7% 13.26%) and 1.46% terminal growth rate. (Appendix 16) 7.9% 116 144 174 206 238
(1) Revenue: We forecast 3.4% of total revenue CAGR in 2013-18, 8.4% 114 140 168 196 226 compared with 5.6% in 2007-2012. The top line growth will slow down WACC 8.9% 112 137 162 188 216
as competition intensified and CVS market steps into a saturated stage. (Figure 30) 9.4% 111 133 157 182 207
9.9% 110 131 153 175 199 (2) Operating income: The operating income growth is likely to slow with gradually fading momentum of sales growth and rising operating Note: Growth of average sales per store decreases 1% per expenses including unit labor cost, utility fees and store format year from 5% in 2013 to 2% in 2016, and stay at 2% till 2018. conversion. (Figure 31)
(3) CAPEX& NWC requirement: According to PCSC’s guidance, the 7-11 Taiwan will incur NT$3 bn CAPEX per year, as the store Figure 30: 7-11 Taiwan forecasts conversion and re-decoration cost remain stable. We found that net CAGR 2007-12 2013F-18F
working capital accounts for around -3.21% of total revenue in the Total revenue 5.6% 3.4% past 10 years, which is used as our assumption for modeling. Gross profit 4.4% 4.0%
7-11 Philippines: 68.0x PER Operating expenses 4.6% 4.5%
We apply the current PER in Philippines stock market, considering 7-11 Operating income 3.6% 1.6% Philippines’ high earning growth and business expansion. The market Net income 7.4% 2.4% consensus on it is over 70x PER. However, we see the future of it to remain stable due to the high base of 2013, more crowded CVS market and the lack of new strategy. Thus we discount its PER to 68x. Source: Company data and Team estimate Figure 31. Cost of capital assumption 7-11 Shanghai: 1.0x PBR We apply the multiple of 1.0x PBR, due to the loss-making situation of 7-11 Weight Cost W x C Shanghai, and we see little chance for it to turnaround in near future, as the Equity 99.0% 8.97% 8.88% operating cost rises while 7-11 Shanghai faces more severe competition. Debt 1.0% 0.98% 0.01%
Retail Business WACC 8.89% We apply 8.6x PER for retail business, considering the businesses in this Cost of Equity 8.97% segment, including President Pharmaceutical, President Transnet, President Risk Free Rate 1.46% Drug Store and etc., have higher sales growth compared to CVS. The multiple Risk Premium 11.8% is derived from declining net profit CAGR, which stands at 8.6% for 2014-16. Beta 0.64x Logistics support function Cost of Debt 0.98% Logistics segment includes three main companies: Wisdom distribution Source: Bloomberg and Team estimates service, Uni-president cold-chain and Retail support international. We apply
3.4x PBR which is calculated by the PB-ROE method with 32% average ROE, 8.97% cost of equity and 95% payout ratio.
Caterings segment For Shanghai and Taiwan Starbucks, we apply 5.8x PER/ 3.6x PBR respectively, referring to PEG and PB-ROE methods. For other loss-making subsidiaries we use 1.0x PBR.
9 CFA Institute Research Challenge‧NTU Team Jan 19, 2014
Investment Risk: Limited upside potential
Stronger-than-expected sales and gross margin recovery in Taiwan CVS Figure 32: What we differ from consensus
CVS sales is highly correlated to the macro environment, so better domestic Segment Our research Consensus consumption could boost PCSC's sales growth & operating margin. If limited Stronger sales& 7-11 improvement gross margin conversion into large store format speeds up more than we expected, and Taiwan in sales and margin recovery 7-11 Taiwan’s SSSG is lifted to high single digit growth; or the product mix 7-11 Cannot turn around Early turn around enhancement progresses at a higher pace, improving the gross margin, the Shanghai in 2014 Income level, population density stock price might outperform our target price. (Figure 32) Shanghai Zhejiang has much suggest that Starbucks potential growth Zhejiang is not a Early turnaround in China business great market China business Growth with new Shanghai Starbucks is likely to have a surging growth due to aggressive faces fierce products and President competition and services by Pharmaceutical expansion in Zhejiang and a turnaround of 7-11 Shanghai operation because Taiwan business aggressive of better execution and location selection is another upside risk to our grows sluggishly promotion events Maintain double 7-11 Metro Manila is digit growth in the estimates. Philippines saturated future Outstanding growth momentum on major subsidiaries Source: Bloomberg and Team estimates President Pharmaceutical and 7-11 Philippines have high double digit growth steadily in recent years. Once any of them initiates new products and services, or aggressive promotion events, an unexpected growth may happen.
However, we see the aforementioned two risks as limited due to their low contribution and the uncertainty of China business model. We also have a bull and bear scenario analysis below to explain how the valuation will change based on our first risk, the core of PCSC.
Figure 32: Bull and bear scenario analysis of 7-11 Taiwan
(NTS) 250 14 198 200 13 9 13 162 24 150 119 6
100
50
0 Bearish Weak APSG Worse GM Fewer Store Base More Store Better GM Strong APSG Bullish Numbers Numbers
Scenario Bearish Base Bullish
Net add store # /year 24 48 52
Gross Margin Adjustment -0.1% 0% +0.1%
All Store Sales Growth 4% 5% 5.5%
Note: For detailed assumptions and calculations, please refer to Appendix 10, 14.
10 CFA Institute Research Challenge‧NTU Team Jan 19, 2014
Appendix 1: Company Profile: Best leader, but advantage narrowing
A. The history of services provided by 7-11 Taiwan
Tuition and Fees Collection Clothing Telecommunication ibon Online purchase payment and collection Beauty Product Café Low temperature door to door delivery BienTang Cloud Mall Door to door delivery Mail Receivement Recycling Microwaved Food 1985 1990 1995 2000 2005 2010 2015
B. 7-11 TAIWAN: REMAIN THE BIGGEST CONTRIBUTOR OF FOUR MAIN BUSINESS GROUPS
Company name Ownership Main business Profit contribution Sales contribution
7-11 TAIWAN 100% CVS 82% 63%
C. Retailing : contributed 10% total profit and 16.3 consolidated sales
Major subsidiaries Ownership Main business Profit contribution Sales contribution
President pharmaceutical 74% Medicines 3% 5.6%
President drugstore 100% Drugs, cosmetics 3% 2.7%
President Transnet 70% Delivering 2% 3.0%
Philippine seven corporation 52% CVS 2% 5.0%
Total major retailing 10% 16.3%
Others 3% 10.7%
Total retailing 13% 27.0%
D. Logistics : contributed 3% total profit and 0% consolidated sales because of related party transaction
Profit Major subsidiaries Ownership Main business Sales contribution contribution
E-commerce logistic Wisdom distribution service 100% 0% 0% Magazine delivery
Uni-president cold-chain 60% Frozen food delivery 2% 0%
Room-temperature food Retail support international 25% 1% 1% Delivery
Total logistics 3% 1%
E. Others : contributed 5% total profit and 9% consolidated sales
Major subsidiaries Ownership Main business Profit Sales contribution
11 CFA Institute Research Challenge‧NTU Team Jan 19, 2014
contribution
President chain store (shanghai) 100% CVS -5% 1%
Shanghai President Starbucks 30% Coffee Chain 3% -
President Starbucks 30% Coffee Chain 1% -
Others major total -1% 1%
Others - - 9% 8% (more than10 firms)
Others total 5% 9%
Source : Company data
F. Revenue breakdown by business G. Profit breakdown by business
Others Others 5% 9% Logistic 0%
Logistics 1% Retails 13% 7-11 7-11 Taiwan Taiwan 63% 82% Retails 27%
Source: Company data Source: Company data
H. Financial summary of PCSC’s majorOwnership subsidiaries Company Name Recognized Profit Sales NT$ mn 100%2008 2009 2010 72011-11 Taiwan2012 82%08 -13 62% P PRESIDENT PHARMACEUTICAL 74% President Pharmaceutical Corp 3% 5.60% BV 100% 356 411 473 586Cosmed 734 3% 2.70% RECOGNIZED NI 70% 44 66 President123 Transnet203 Corp302 2% 3% ROE 52% 12% 16%Philippine 26% Seven Corporation35% 41 % Avg. ROE 2% 26% 5% PRESIDENT DRUGSTORE 100% Wisdom Distribution Service Corp 0% 0% BV 60% 549 Uni714-President 755 Cold-Chain826 Corp782 2% 0% RECOGNIZED NI 25% 97 Retail166 Support 297 International 338 Corp283 1% 0% ROE 100% 18%President 23% Chain Store39% (Shanghai)41% Ltd36% Avg. ROE -5% 31% 1% PRESIDENT TRANSNET 30% Shanghai President Starbucks Corp 3% - BV 30% 363 487 President616 Starbucks793 Corp876 1% - RECOGNIZED NI - 99 124 143 163 Others177 5% 21%
ROE Source : Company data 27% 25% 23% 21% 20% Avg. ROE 23%
PHILIPPINE SEVEN CORPORATION
BV 411 486 557 644 703
RECOGNIZED NI 56 104 185 144 339
ROE 14% 21% 33% 22% 48% Avg. ROE 28%
12 CFA Institute Research Challenge‧NTU Team Jan 19, 2014
WISDOM DISTRIBUTION SERVICE
BV 190 177 251 258 213
RECOGNIZED NI 48 34 102 98 47
ROE 25% 19% 41% 38% 22% Avg. ROE 29%
UNI-PRESIDENT COLD-CHAIN
BV 353 377 434 457 479
RECOGNIZED NI 86 103 155 160 180
ROE 24% 27% 36% 35% 37% Avg. ROE 32%
RETAIL SUPPORT INTERNATIONAL
BV 134 133 141 152 141
RECOGNIZED NI 31 30 40 45 51
ROE 23% 23% 28% 30% 36% Avg. ROE 28%
PRESIDENT CHAIN STORE
(SHANGHAI)
BV - 382 208 568 383
RECOGNIZED NI - -89 -161 -324 -447
ROE - -23% -77% -57% -117% Avg. ROE -69%
SHANGHAI PRESIDENT STARBUCKS
BV 193 223 259 434 553
RECOGNIZED NI 50 69 113 224 324
ROE 26% 31% 44% 52% 58% Avg. ROE 42%
PRESIDENT STARBUCKS
BV 137 156 224 263 286
RECOGNIZED NI 20 33 99 127 140
ROE 15% 21% 44% 48% 49% Avg. ROE 35%
13 CFA Institute Research Challenge‧NTU Team Jan 19, 2014
Appendix 2: Financial Statements
Financial Summary: President Chain Store Co.
(Year to Dec.31, NT$mn)
Income Statement 2012 2013F 2014F 2015F Cash Flow Sattement 2012 2013F 2014F 2015F Net sales 208,264 217,284 232,394 248,123 Net profits 7,624 9,431 9,936 10,348 COGS (145,044) (149,491) (159,538) (170,088) Depreciation 4,317 4,531 4,767 5,032 Gross profit 63,220 67,793 72,856 78,035 Other adjustments 5,047 3,930 2,933 3,035 Operating expenses (54,493) (56,494) (60,887) (65,504) Cash flow from operating 16,987 17,892 17,636 18,415 Operating income 8,727 11,299 11,968 12,530 (Purchases) sale of FA (capex) (6,806) (6,439) (6,883) (7,416) Non-operating income 747 491 452 404 (Purchases) sale of L/T investment 984 239 1,364 241 Interest income (12) 74 217 247 Other adjustments (632) (632) (632) (632) Investment income 256 358 317 349 Cash flow from investment (6,454) (6,831) (6,150) (7,807) Disposal of investment 987 263 105 - Increase in L/T debt (1,670) (113) (43) (42) Other (484) (205) (187) (191) Cash dividends (4,990) (5,042) (5,146) (5,250) Pre-tax income 9,474 11,789 12,420 12,935 Other adjustments (23) (484) (101) 248 Income tax (1,850) (2,358) (2,484) (2,587) Cash flow from financing (6,683) (5,639) (5,290) (5,044) Minorities (834) (1,032) (1,087) (1,132) Exchange Influence (205) - - - Net income 6,789 8,399 8,849 9,215 Net change in cash 3,645 5,422 6,196 5,564 EPS (NT$) 6.53 8.08 8.51 8.86 Cash Equiv.-End 20,025 25,447 31,642 37,206
Balance Sheet 2012 2013F 2014F 2015F Financial Ratios 2012 2013F 2014F 2015F Cash 20,025 25,447 31,642 37,205 Margins Mkt securities 6,163 6,163 6,163 6,163 Gross margin 30.4% 31.2% 31.4% 31.5% Accounts/Notes receivables 4,125 4,303 4,603 4,914 Expense ratio 26.2% 26.0% 26.2% 26.4% Inventory 10,610 10,690 11,294 11,910 Operating margin 4.2% 5.2% 5.2% 5.1% Others 4,209 4,352 4,566 4,788 Pretax margin 4.5% 5.4% 5.3% 5.2% Current Assets 45,131 50,955 58,268 64,979 Net margin 3.3% 3.9% 3.8% 3.7% Long-term investments 9,329 9,431 8,368 8,459 Fixed assets 21,436 23,323 25,438 27,822 YoY growth Other assets 5,317 5,355 5,393 5,431 Sales 10% 4% 7% 7% Total Assets 81,213 89,064 97,466 106,691 Gross profit 4.7% -45% -41% -6% Opex 6% -73% -129% -35% Accounts/Notes payable 21,097 21,728 23,239 24,812 Operating profit -2% -73% -129% -35% Other S/T liabilities 27,077 27,900 29,567 31,647 Net profit 7% -72% -107% 166% Total current liabilities 48,173 49,629 52,806 56,459 EPS 7% -72% -107% 166% Other liabilities 4,142 6,262 6,739 7,256 L/T debt 2,264 2,150 2,107 2,065 Cash div. payout ratio 74% 60% 58% 57% Total liabilities 54,578 58,041 61,652 65,780 Div. yield 3.2% 2.2% 2.3% 2.4% Liabilities / Equity 205% 187% 172% 161% Common stock 10,396 10,396 10,396 10,396 Liabilities / Assets 67% 65% 63% 62% Reserves 6,028 5,933 5,965 6,361 ROAE 27% 29% 26% 24% Retained earnings 6,825 10,277 13,948 17,517 ROAA 9% 24% 24% 24% Other equity (338) (338) (338) (338) AR/NR turnover (days) 26.0 25.1 24.9 25.7 Minority interest 3,724 4,756 5,843 6,975 AP/NP turnover (days) 52.3 51.4 51.6 53.5 Shareholders' equity 26,634 31,024 35,814 40,911 Inventory turnover (days) 7.1 7.0 7.0 7.3 Total liabilities & equity 81,213 89,064 97,466 106,691 Cash conversion cycle (days) (19.2) (19.3) (19.7) (20.6) NTU Research
14 CFA Institute Research Challenge‧NTU Team Jan 19, 2014
Appendix 3: Regression: CVS sales(Y) on GDP per capita(X)
Regress CVS sales YoY growth on GDP YoY growth 10%
CVS sales YoY growth 5%
0% -5% 0% 5% 10%
-5% GDP YoY growth
Equation: Y=0.016+0.873x, Adjusted R-square: 0.59, t-stat: 3.78,
Source: Government data and Team estimates
Appendix 4: Declining purchasing power limited CVS development
Declining real salary 48,000 47,000 46,000 45,000 44,000 43,000 42,000 41,000 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Real Salary(basis:2011)
Source: Government data and Team estimates
15 CFA Institute Research Challenge‧NTU Team Jan 19, 2014
Appendix 5: Hiking electricity expense spikes operating cost
Taiwan CVS annual electricity usage (kWh) 1,660 mn Taiwan CVS store # (2013 average) 9,937
Average annual electricity usage per store (kWh) 167 K
PCSC store # (End of 2013) 4,922
PCSC annual electricity usage (kWh) 816 mn Electricity price (NT$/kWh) 3.5 PCSC annual electricity expense (NT$mn) 2,856
Electricity hike 5% Annual additional electricity expense 143 Full-year impact in 2014 (NT$mn) 107
Source: Team estimates
Appendix 6: Higher hourly wage expense spikes operating expense
Full-year impact in 2014(NT$ MN) 500 Base salary increase(NT$/hr) 6.0
Incremental annual salary expense(NT$K/store) 102 PCSC store 4,922 Average number of time workers
Day Shift/Night Shift/Graveyard 2.1/2.1/1.6
Number of working hours 8
Source: Team estimates Appendix 7: Food scandal affects PCSC share price
50% Cottonseed oil Tainted Starch 40% event, PCSC -3% event, PCSC - (TAIEX -2%) 7% (TAIEX -1%) 30%
20%
10%
0%
-10%
PCSC TAIEX
Source: Team estimates
16 CFA Institute Research Challenge‧NTU Team Jan 19, 2014
Appendix 8: Comparison of major retail competitors
7-Eleven Family Mart Pxmart
Number of Stores 4922 2894 700
Franchising (%) 89% 90.4% -
Private-Label Products Yes Yes No
Product Assortment 2,000-3,000 2,000-3,000 10,000
Target Customers Convenience first Convenience first Seek for Lower Price
Conglomerate Expand CVS business overseas Cheaper price Advantages Number of Stores prior to PCSC Cost reduction
New Format; Replace hyper-market; Strategy Focus and brand restructure New Business; Change format New Area
To 1000 in 2017 Expansion - - (CAGR: 9.32%)
Cooperate with Yahoo and E-Commerce Yes, 7-net. No, but allow credit card. PayEasy
Expand CVS business prior to 1. Lower price and cost
Threats to 7-11 - PCSC, and will benefit from the 2. Hsu’s management
growth of great China. 3. Aggressive Expansion
Source: Company data and Team estimates
17 CFA Institute Research Challenge‧NTU Team Jan 19, 2014
Appendix 9: Densely populated CVS in Northern Taiwan (5 cities); high rent cost
Density of 7-11, Family Mart, and Pxmart in Taipei City(Stores # per km2)
PCSC Family Mart Pxmart 10
8
6
4
2
0 Wanhua Songshan Daan Zhongshan Shihlin Xinyi Tatung Zhongzheng Nangang Wenshan Wenshan Beitou Neihu
Source: Company data
Density of 7-11, Family Mart, and Pxmart in New Taipei City(Stores # per km2)
10 PCSC Family Mart Pxmart
5
0 Yonghe Luzhou Banciao Sanchung Hsinchuang Zhonghe Tucheng Shulin Taishan Yingge Dan Shuei Xizhi Xindian Wugu Linkou
Source: Company data
Density of 7-11, Family Mart, and in Taoyuan City(Stores # per km2)
4
3
2
1
0 Chungli Pingjhen Longtan Bayberry ShinWu Guanyin Taoyuan Guai Shan Bade Dasi Fuxing Dayuan Luzhu
Density of 7 -11, Family Mart, and in Hsinchu City (Stores # per km2)
3 2.5 2 1.5 1 0.5 0 Northern Eastern XiangshanJubei City Hukou Xinfeng Sinpu Kansa Qionglin Baoshan Zhudong Wufeng Hengshan Jianshih Beipu Emei
Density of 7-11, Family Mart, and in Miaoli City(Stores # per km2)
0.8
0.6 0.4 0.2 0 Chunan Tofen Sanwan South Lion Houlong Tongsiao Yuanli Miaoli Zaociao Touwu Manor Tahu Taian Gong Sanyi Lake Jhuolan Lake
Source: Company data
18 CFA Institute Research Challenge‧NTU Team Jan 19, 2014
High rent cost in Northern Taiwan (NT$/3.3m2)
3,000 2,000
1,000
0 Taipei City New Hsinchu Taoyuan Taichung Kaohsiung Ilan Tainan Taipei City
Source: Company data and 581 Ren
19 CFA Institute Research Challenge‧NTU Team Jan 19, 2014
Appendix 10: Forecasted gross margin calculation
Incremental % of total high-margin products sales(%) 4% 3% 2% 1% 0% 2007 2008 2009 2010 2011 2012 2013F 2014F 2015F 2016F 2017F 2018F
Sales % 7-select City Cafe Fresh foods Total Net add sales% 2010 4.20% 4.50% 17.80% 26.50% 3.80% 2011 5.00% 6.00% 16.50% 27.50% 1.00% 2012 5.37% 7.00% 17.00% 29.37% 1.87% 2013F 5.77% 7.50% 17.50% 30.77% 1.40% 2014F 6.17% 7.75% 18.00% 31.92% 1.15% 2015F 6.57% 8.00% 18.50% 33.07% 1.15% 2016F 6.97% 8.25% 19.00% 34.22% 1.15% 2017F 7.37% 8.50% 19.50% 35.37% 1.15% 2018F 7.77% 8.75% 20.00% 36.52% 1.15% Gross margin 40% 55% 35% Detailed calculation: (PL = private label products = high margin products = 7-Select+city café + fresh food; GM = gross margin) PL GM % Other GM Total GM 2012 GM 11.95% 24.55% 29.28%
2012 Sales 29.37% 70.63%
Assumption: The gross margin of “others” products will remain the same as 2012 in the future.
Total PL PL PL Others Total CVS Others Sales Sales Sales % Sales GP GP GP GM
2012 127,949 29.4% 37,579 90,371 15,287 22,182 37,470 29.28%
2013e 135,688 30.8% 41,751 93,937 17,040 23,058 40,097 29.55%
2014e 142,654 31.9% 45,535 97,119 18,589 23,839 42,427 29.74%
2015e 148,289 33.1% 49,039 99,250 20,023 24,362 44,385 29.93%
2016e 152,516 34.2% 52,191 100,325 21,315 24,625 45,940 30.12%
2017e 156,728 35.4% 55,435 101,293 22,644 24,863 47,507 30.31%
2018e 160,921 36.5% 58,768 102,153 24,010 25,074 49,084 30.50%
Source: Team estimates
20 CFA Institute Research Challenge‧NTU Team Jan 19, 2014
Appendix 11: Family catching up on private-label products
Category Family Mart 7-11
Readily made food
Clothing 7-Select / Family Mart Collection Beverages
Daily Necessities
Coffee
Ice-cream
Microwaved Meal
Launched Date November 2013 2009
Source: Team estimate Appendix 12: Tumbling net income growth on two major retail subsidiaries
President Pharmaceutical Cosmed NI(NT$, MN, LHS) YoY Growth(RHS) NI(NT$, MN,LHS) YoY Growth(RHS) 400 100% 500 100% 90% 466 79% 338 87% 350 450 90% 70% 80% 402 297 297 400 80% 300 283 267 60% 350 65% 70% 302 250 300 60% 40% 49% 200 14% 250 50% 166 203 5% 20% 200 32% 40% 150 150 123 30% -10% 0% 16% 100 -16% 100 66 20% 50 -20% 50 10% 0 0% 0 -40% 2009 2010 2011 2012 2013F 2014F 2009 2010 2011 2012 2013F 2014F
Appendix 13: Comparison of Watson’s and Cosmed Watson’s Cosmed
Target Customers 18-29 ladies 40 middle-aged women
50% Cosmetics 30% Drugs Product mix 20% Drugs 30% Cosmetics 30% Daily Products 30% Daily Products
Store Format Two-floors One-floor to two
Professional Consultants Yes Yes
Source: Company Data
21 CFA Institute Research Challenge‧NTU Team Jan 19, 2014
Appendix 14: Assumption of 7-11 Taiwan DCF Valuation
Stock price sensitivity to WACC and all WACC assumptions: store sales growth
All store sales growth (YoY) Weight Cost W x C
3% 4% 5% 6% 7% Equity 99.0% 8.97% 8.88%
7.9% 116 144 174 206 238 Debt 1.0% 0.98% 0.01%
8.4% 114 140 168 196 226 WACC 8.89% WACC 8.9% 112 137 162 188 216 Cost of Equity 8.97%
9.4% 111 133 157 182 207 Risk Free Rate 1.46%
9.9% 110 131 153 175 199 Risk Premium 11.8% Note: Growth of average sales per store decreases 1% Beta 0.64x per year from 5% in 2013 to 2% in 2016, and stay at Cost of Debt 0.98% 2% till 2018. Source: Bloomberg and Team estimates
Appendix 15: Beta calculation
Daily return scatter plot 2003-2013
7%
0%
return PCSC's -7% -7% 0% 7% Market return
Market Model: Result : significant level = 5% �_��="0.0007"+�.�����_�� �=2735 �-Square=0.1951,Adj R-Square=0.1948 F = 662.8098 (Significant) T = 2.2320, p-value = 0.025686
Source: Team estimates
22 CFA Institute Research Challenge‧NTU Team Jan 19, 2014
Appendix16: Terminal growth calculation
2018 growth rate forecast: Assuming 2013~18 CAGR = past 5 years CAGR
GDP growth: 2.7% Upper bound, 0.25 Weighting
Terminal growth 1.5% = 2.7%*0.25 + 1.1%*0.75 Inflation: 1.1% Lower bound, 0.75 Weighting
Source: Team estimates
Appendix 17: As we forecast, the contribution to EBIT of the major retail subsidiaries in 2014 could only around 5% at most.
Major Subsidaries' NI to consolidated EBIT 8
6
4
2
0 2011 2012 2013F 2014F 2015F Preisdent Pharmaceutical President Transnet President Drug Store Philippine 7-11 Shanghai Starbucks
Source: Company data, Team estimates
Appendix 18: Saturated market with limited store expansion capacity
According to our analysis, there is little room to expand convenience stores.
Stores GDP per Capita Population GDP per store Region (A) (B) (C) (B*C)/A
Taipei 1,726 $31,079.97 2,688,140 48,405,163 Taiwan 10,012 $20,850.00 23,377,515 48,405,163 Stores at End of *Assume Taiwan GDP per store 2014 10,070 will catch up with Taipei’s Implied Capacity 58 Stores (*Net increase) Assumptions:
1. Taipei’s GDP per store is the saturated point 2. Taiwan GDP per store will catch up with Taipei’s
3. “58 stores” capacity is the “net increase”
With PCSC/Family Mart gaining from other players. Source: Team estimate
23 CFA Institute Research Challenge‧NTU Team Jan 19, 2014
Appendix 19: PCSC is no longer a defensive stock According to rising beta and significant regression, we infer that PCSC’s stock performance and average store sales are
correlated with macro economy
0.8 Rising beta trend for PCSC 0.698 0.7
0.6
0.5
0.4
0.3
0.2
0.1
0 18y 17y 16y 15y 14y 13y 12y 11y 10y 9y 8y 7y 6y 5y 4y 3y 2y 1y
Source: Bloomberg
Regress average quarterly sales per store on GDP per capita
8,000
7,000
6,000
5,000 Average quarterly
sales persales store(NT$K) 4,000 125,000 135,000 145,000 155,000 165,000
GDP per capita (NT$)
Equation: Y=0.0684X -3864.6
Adjusted R-square : 0.64 t-stat: 5.78
Source: Government data and Team estimates
.
24 CFA Institute Research Challenge‧NTU Team Jan 19, 2014
Appendix 20: Peers comparison PE Ratio PB Ratio ROE
Ticker Company Name Price(US$) 2011 2012 2013F 2011 2012 2013F 2011 2012 2013F
Taiwan
TSEC:2912 PCSC 6.40 27.46 24.96 23.70 8.64 7.59 8.17 26.68 26.70 29.14
GTSM:5903 Family Mart 5.76 26.65 36.21 38.02 6.28 7.00 9.73 24.23 18.62 25.45
Japan
TSE:3382 Seven & I 41.14 18.53 14.97 23.92 1.10 1.19 1.85 6.48 8.34 -
TSE:2651 Lawson 76.70 21.78 17.38 22.91 2.35 2.67 3.31 12.64 15.32 15.19
TSE:9946 MINISTOP 16.14 12.99 12.81 37.09 0.76 0.73 0.79 5.27 4.03 2.50
Thailand
SET:CPALL CP ALL PCL 1.21 29.16 42.00 33.52 11.72 17.21 14.22 41.75 44.54 41.17
Source: Capital IQ
Appendix 21: PCSC is the second expensive according to PEG analysis
P/E Price Earning to EPS Growth Analysis 40 Family Mart PEG=1X 23.7 35 CPALL
30 PCSC 26.1 25
Seven & I 20
15
10
5
0 0 5 10 15 20 25 30 35 40 EPS Growth (%) PCSC Seven & I CPALL Family Mart
Source: Capital IQ
Company Country PEG(X) EPS Growth (%)
PCSC Taiwan 1.1 23.7
Family Mart Taiwan 1.06 35
Seven & I Japan 1.02 22.48
CPALL Thailand 2.24 14.3
Source: Capital IQ
25 CFA Institute Research Challenge‧NTU Team Jan 19, 2014
Appendix 22: Limited capacity analysis of future Shanghai Starbucks expansion
Shanghai Shanghai Shanghai Taipei Taipei Taipei Shanghai Main business district Lujiazui Jingan Huangpu Zhongzheng Daan Xinyi Xujiahui
Population Density(K/KM²) 4.0 32.3 33.1 21.4 27.6 20.3 19.8
Coffee chain stores Density(N/KM²) 2.94 5.64 2.83 5.13 3.95 2.32 0.88
Potential customer(K) /Store 1.4 5.7 11.7 4.2 7.0 8.8 22.6
Total chain Stores(N) 5 43 58 39 45 26 48
Mature capacity 5 43 78 39 45 26 124
Capacity for new stores 0 0 20 0 0 0 76
Source : Company data, China government, Team estimates
The results suggest that (1) Shanghai Xujiahui has more capacity to expand than Huangpu, and (2) Approximately 100 new stores capacity in Shanghai major business district.
Appendix 23: Cash flow trend
113 106 105 111 112 CFO CFI FCF 80
48 183 16 170 174 167 179 124 72 76
(28) (56) (44) (62) (56) (70) (65) (72)
2008 2009 2010 2011 2012 2013F 2014F 2015F Source: Company data, Team estimates
Appendix 24: PB Band, 6-10x in past three years
Source: Company data and Team estimates
26 CFA Institute Research Challenge‧NTU Team Jan 19, 2014
Appendix 25: ROIC down as OPM and turnover drops
6% 2013 30.13% 2014 29.45% 5%
2012 Operating margin Operating 5% 29.45%
4% 6.0 7.0 8.0 9.0 Capital Invested Turnover
Appendix 26: Risk matrix
Impact
Stronger-than-expected Significant SSSG and gross margin recovery in Taiwan CV
Outstanding growth
Moderate momentum on major
subsidiaries
Early turnaround in China Minor business
Low Medium High Probability
Source: Team estimates Appendix 27: E-commerce would contribute low even given high revenue growth
Revenue from 7net 7net % of 7-11 Sales 4000 4.0% 2.0% 1.6% 1.6% 1.8% 2000 1.2% 1.3% 1.3% 1.5% 2.0% 0.5%
0 0.0% 2010* 2011 2012 2013F 2014F 2015F 2016F 2017F 2018F
Given 20% revenue yoy in 2016-2018 Source: Company data and Team estimates
27
Disclosures: Ownership and material conflicts of interest: The author(s), or a member of their household, of this report does not hold a financial interest in the securities of this company. The author(s), or a member of their household, of this report does not know of the existence of any conflicts of interest that might bias the content or publication of this report. Receipt of compensation: Compensation of the author(s) of this report is not based on investment banking revenue. Position as a officer or director: The author(s), or a member of their household, does not serve as an officer, director or advisory board member of the subject company. Market making: The author(s) does not act as a market maker in the subject company’s securities. Disclaimer: The information set forth herein has been obtained or derived from sources generally available to the public and believed by the author(s) to be reliable, but the author(s) does not make any representation or warranty, express or implied, as to its accuracy or completeness. The information is not intended to be used as the basis of any investment decisions by any person or entity. This information does not constitute investment advice, nor is it an offer or a solicitation of an offer to buy or sell any security. This report should not be considered to be a recommendation by any individual affiliated with CFA Taiwan, CFA Institute or the CFA Institute Research Challenge with regard to this company’s stock.
CFA Institute Research Challenge