JUMBO GROUP (JUMBO SP) (Initiate Coverage)

SINGAPORE

Retail Market Monitor Wednesday, 25 November 2015

MONEY TALK BUY JUMBO GROUP (JUMBO SP) (Initiate Coverage)

A Chilli-Hot Consumer Play Share Price S$0.365 Jumbo with its strong brand equity, is a key ambassador of Singapore’s popular Target Price S$0.49 chilli crab on a global level. Riding on its strong brand equity, Jumbo has Upside 34.2% enjoyed success in its initial entry into the Chinese market. As Jumbo expands its network of stores in China, investors can look forward to strong earnings growth and robust cashflow generation from this chilli-hot consumer play. COMPANY DESCRIPTION INVESTMENT HIGHLIGHTS Jumbo Group is a F&B provider with 14 F&B outlets in Singapore and 2 F&B outlets in • Initiate coverage with BUY and DCF-based target price of S$0.49. Of note, China currently operating under 5 restaurant Jumbo Group (Jumbo) had one of the strongest showing in terms of earnings growth, brands. return on equity and net margins among local peers in FY14. Jumbo has the highest

FY16F return on equity of 24% vs its peers average of 15%. GICS sector Consumer Discretionary • Strong brand equity. Established in 1987, Jumbo is a household name in the local Bloomberg ticker: JUMBO SP restaurant industry. As a key ambassador of Singapore’s wildly popular chilli crab to Shares issued (m): 641.3 the international community, Jumbo has even attracted the likes of international Market cap (S$m): 234.1 Hollywood star, Reese Witherspoon during her recent visit to Singapore. Jumbo was Market cap (US$m): 165.5 also listed as one of the 50 iconic attractions to visit in Singapore by Tripadvisor for Singapore’s 50th anniversary. 3-mth avg t’over (US$m): 5.6

• Stable cost structure. As a result of its strong brand equity, Jumbo seafood is PRICE CHART considered a “dining destination” for consumers, meaning that Jumbo does not rely

on impulse foot traffic (diners pre-plan their trips to Jumbo). As a result, all Jumbo (lcy) JUMBO GROUP LTD Jumbo Group Ltd/FSSTI Index (%) Seafood outlets are not located at shopping centres where rental increases have 0.45 180 170 eroded the margins of its peers. To manage labour issues, Jumbo manages a pool of 0.40 160 casual labour (enticing them with bonuses and flexible working hours), has a central 150 kitchen and employs technological upgrades, such as the usage of iPads to improve 0.35 140 130 productivity. As such, rental and labour as a percentage of total costs have remained 0.30 120 stable over the last few years. Of note, Jumbo enjoys higher profitability ratios of 10- 110 0.25 100 11% as compared to its peers of about 5% in the local restaurant segment. 90 0.20 80 • Strong cashflow generation. Sales transactions are usually conducted on a cash 100 basis. While Jumbo may extend credit terms to corporate clients such as tour Volume (m) agencies, contributions from these clients form less than 1% of total sales. As such 50 0 Jumbo has been able to generate very strong free cash flow of S$4m-13m from Nov 15 Nov 15 FY12-14. Management has stated their intentions to distribute at least 30% of its profits in FY16 and FY17, and this translates to a potential dividend yield of 2% Source: Bloomberg • China, the engine of growth. Despite its limited operating history in China (entered the market only in late 2013), we noted that Jumbo’s first outlet at iAPM, Shanghai, was ranked among the top five restaurants in the mall by consumers according to Dianping.com. Of note, we estimate that the outlet at iAPM has turned in positive ANALYSTS cashflow in six months, recouping the group’s investment just two/three years into its Andrew Chow, CFA operations. With the imminent opening of the third outlet in Shanghai in Jan 16, +65 6590 6633 Jumbo has identified China as its key engine of growth, and we believe there may be [email protected] plans to increase the number of outlets to 10 in the next 3 to 5 years Brandon Ng Chenhao, CFA KEY FINANCIALS +65 6590 6615 Year to 30 Sep (S$m) 2013 2014 2015F 2016F 2017F [email protected] Net Turnover 97.6 112.4 126.8 138.0 153.3 EBITDA 12.7 18.718.4 21.7 24.7 EBIT 10.0 15.515.3 19.1 20.7 PATMI 9.5 13.712.8 15.4 16.4 Adjusted PATMI 9.5 13.7 14.0 15.4 16.4 Adjusted EPS (cts) - - 2.2 2.4 2.6 Adjusted P/E - - 16.7 15.2 14.3 P/B (x) - - 4.5 3.7 3.1 Dividend Yield (%) - - - 2.0 2.1 Adjusted PATMI Margin (%) 9.8 12.2 11.0 11.2 10.7 Net Debt(cash) to Equity (%) - - (91.1) (72.9) (60.2) Interest cover (x) 498.5 508.6 459.4 487.5 453.5 Adjusted ROE (%) 24.1 26.4 26.7 24.2 21.6 Source: Bloomberg, UOB Kay Hian

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Retail Market Monitor Wednesday, 25 November 2015

Investment Highlights Strong brand equity. The chilli crab dish is one of Singapore’s signature dishes and it was even listed on CNN Go as one of the “World’s 50 Most Delicious Foods” in 2011. Established in 1987, Jumbo is a household name in the local restaurant industry and a key ambassador of Singapore’s wildly popular chilli crab to the international community. Jumbo has even attracted the likes of international Hollywood star, Reese Witherspoon during her recent visit to Singapore. Jumbo was also listed as one of the 50 iconic attractions to visit in Singapore by Tripadvisor for Singapore’s 50th anniversary. Stable cost structure. As a result of its strong brand equity, Jumbo seafood is considered a “dining destination” by consumers, meaning that Jumbo does not rely on impulse foot traffic to attract crowds to its restaurants (diners pre-plan their trips to Jumbo). As such all Jumbo Seafood outlets are not located at shopping centers where rental increases have eroded the margins of other food & beverage (F&B) players. To manage labour issues, Jumbo also manages a constant pool of casual labour by enticing them with bonuses, flexible working hours ), has a central kitchen and adopts technology such as iPads to improve productivity. As such, rental and labour as a percentage of total costs have remained relatively stable over the last few years. As a result of its stable cost structure, we note that Jumbo enjoys one of the highest net profit margins among its local peers. Jumbo enjoys higher profitability ratios of 10-11% as compared to its peers of about 5% in the local restaurant sector according to Singapore Department of Statistics (please refer to pg 9). Strong cashflow generation. Sales transactions are usually conducted on a cash basis. While Jumbo may extend credit terms to corporate clients such as tour agencies, revenue contributions from these clients form less than 1% of total sales. As such Jumbo has been able to generate very strong free cash flow of S$4m-13m (S$0.007-S$0.02/share) from FY12-14. While Jumbo does not have any fixed dividend policy, management intends to distribute dividends of at least 30% of its profits in FY16 and FY17, which we think this is sustainable given the group’s strong cash flow generation. Based on our FY16 and FY17 net profit forecasts, this could translate to a potential dividend yield about 2.0% China, the engine of growth. Jumbo entered the Chinese market through a (Jumbo) 70:30% JV with Breadtalk in 2013, and has received very positive feedback from local media and consumers. Despite its limited operating history in China, Jumbo’s first outlet at iAPM, - Shanghai, has been ranked among the top five restaurants in the mall by consumers according to Dianping.com. Of note, Jumbo’s outlet at iAPM has outperformed expectations, and we estimate that it has turned in positive cashflow in six months, recouping the group’s investment two/three years into operations. Riding on the success of its first outlet at iAPM, Jumbo’s second outlet at Raffles City, Shanghai, has also received very positive feedback possibly due to its location (in a more mature mall) and higher brand awareness following Jumbo’s success at iAPM. We expect Jumbo’s profit to grow in FY16, driven by a full-year contribution from its second outlet at Raffles City, Huang Pu, Shanghai (which opened in Aug 15) and its third outlet at IFC mall, at Pu dong, Shanghai which will be opening in Jan 16. We estimate each new outlet to contribute about S$0.6-0.8m to profit in its steady state.

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Valuation We initiate coverage on Jumbo with a BUY recommendation and DCF-based target price of S$0.49. Our target price has an implied FY16F PE of 20.5x, which is at a premium to its regional and peers’ average of 15.5x. However we think that the premium is justifiable given Jumbo’s positive expansion plans in China, and strong brand equity. Of note, Jumbo also has one of the highest free cashflow generation, return on equity and net margins among local peers. Jumbo has the highest FY16F return on equity of 24% vs its peers average of 15%. Our assumption is based on four new store openings in Shanghai, China from FY17-20, in accordance with the group’s intention to open at least four new outlets in China and/or Singapore in the next 24 months. FIGURE 1: DCF VALUATION 2016F 2017F 2018F 2019F 2020F Net income 15.4 16.4 17.2 18.3 18.9 Add Depreciation 2.6 4.0 4.2 4.4 4.4 Less CAPEX (15.9) (18.0) (6.2) (6.4) (4.4) Less change in net working capital (0.8) (1.1) (0.6) (0.7) (0.6) Add Net debt increase FCFE 1.3 1.3 14.6 15.6 18.3 269.9 PV of FCFE 1.2 1.3 14.3 15.3 283.7

Sum of PV of FCFE 315.7 Risk free rate 3% no. of shares 641.3 MRP 7.0% TP 0.492 Beta 1 Implied adjusted PE Cost of Equity 10% Terminal FY15F 22.6 growth 3% FY16F 20.5 * We expect higher CAPEX in FY16 and FY17 as the Group build its new HQ and house its new central kitchen Source: UOB Kay Hian FIGURE 2: SENSITIVITY ANALYSIS FY16 EPS variation -15% -10% -5% 0% 5% 10% 15% 17.5 0.357 0.378 0.399 0.420 0.441 0.462 0.483 18.5 0.378 0.400 0.422 0.444 0.466 0.489 0.511 19.5 0.398 0.421 0.445 0.468 0.492 0.515 0.539 PE 20.5 0.418 0.443 0.468 0.492 0.517 0.542 0.566 valuation 21.5 0.439 0.465 0.491 0.516 0.542 0.568 0.594 22.5 0.459 0.486 0.513 0.540 0.567 0.594 0.621 23.5 0.480 0.508 0.536 0.564 0.593 0.621 0.649

cost of equity 9.0% 9.5% 10.0% 10.5% 11.0% 2.0% 0.489 0.461 0.437 0.416 0.397 2.5% 0.523 0.491 0.463 0.438 0.417 terminal g 3.0% 0.562 0.525 0.492 0.464 0.440 3.5% 0.609 0.564 0.526 0.494 0.466 4.0% 0.665 0.611 0.566 0.528 0.496 Source: UOB Kay Hian

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Retail Market Monitor Wednesday, 25 November 2015

FIGURE 3: PEER COMPARISION Company Ticker Price @ Mkt Cap ------PE (x) ------ROE (%) ------23/11/2015 (US$m) 2014 2015 2016 2014 2015 2016 Hong Kong Cafe De Coral Holdings Ltd 341 HK 25.85 1,945 25.3 22.1 19.8 15.9 18.4 19.5 Xiabuxiabu Catering Manageme 520 HK 3.60 494 17.6 14.1 12.4 8.8 17.1 n.a. Ajisen China Holdings Ltd 538 HK 3.37 475 13.3 15.0 13.9 8.3 7.1 7.7 Fairwood Holdings Ltd 52 HK 24.10 394 21.1 n.a. n.a. 25.4 n.a. n.a. Tao Heung 573 HK 2.50 330 12.3 n.a. n.a. 11.8 n.a. n.a. Tsui Wah Holdings Ltd 1314 HK 1.82 332 16.3 14.6 11.9 13.2 13.7 14.7 Fulum Group Holdings Ltd 1443 HK 1.02 171 7.0 n.a. n.a. 22.9 n.a. n.a. Tang Palace China Holdings 1181 HK 1.63 89 10.6 n.a. n.a. 13.7 n.a. n.a. Food Idea Holdings Ltd 8179 HK 0.05 38 2.1 n.a. n.a. 49.6 n.a. n.a. U Banquet Group Holding Ltd 1483 HK 0.49 29 9.8 n.a. n.a. 26.3 n.a. n.a. Average 13.5 16.5 14.5 19.6 14.1 14.0 Singapore Japan Foods Holding Ltd JFOOD SP 0.45 55 16.5 n.a. n.a. 15.8 n.a. n.a. Select Group Ltd SCSL SP 0.48 48 11.2 n.a. n.a. 32.6 n.a. n.a. Sakae Holdings Ltd SAKAE SP 0.43 42 28.7 n.a. n.a. 4.0 n.a. n.a. Soup Restaurant Group Ltd SOUP SP 0.19 39 60.6 n.a. n.a. 7.0 n.a. n.a. Tung Lok Restaurants 2000 TUNG SP 0.10 19 41.7 n.a. n.a. 5.1 n.a. n.a. Breadtalk Group Ltd BREAD SP 1.14 226 26.2 29.1 19.6 12.4 10.2 13.9 Neo Group Ltd NGL SP 0.65 67 n.a. 21.7 13.0 n.a. 18.5 23.7 Singapore Average 30.8 25.4 16.3 12.8 14.3 18.8 Singapore + Hong Kong Average 20.5 19.5 15.5 17.0 13.5 14.8 Jumbo Jumbo SP 0.355 163 16.3 14.8 26.4 26.7 24.2 Source: Bloomberg FIGURE 4: LOCAL PEER COMPARISON Jumbo Neo Group Japan Food Sakae Tung Lok Breadtalk Food Catering (eg. Neo Bakery (eg. Breadtalk, Garden catering, Orang Ajisen Ramen- Toastbox) - 50% of Jumbo Seafood Clove)- 74% of revenue 48% of revenue revenue Restaurants - 75% of revenue Food Retail (eg. Umi Menya Musashi - Range of restaurants Restaurants (eg. Din Sushi, nanami udon) - 16% of revenue Sakae Sushi - include Tong le Private Tai Fung) - 22% of Other brands (eg. Ng 24.8% of revenue 86% of revenue dining, TungLok Seafood, revenue Ah Sio Bak Ku Teh, Other brands (eg. Lao Beijing. (The Group Chui Huay Lim Food & Catering Fruit paradise, Other products does not provide Food Court (eg. Food Teochew Cuisine, and supplies and others - Kazokutei) - 36% and services - breakdown of revenue by Republic) - 28% of About Jpot) - 25% of revenue 1.1% of revenue of revenue 14% of revenue brands) revenue Figures based on FY14 (S$m) YE 30-Sep 31-Jan 31-Mar 31-Dec 31-Mar 31-Dec Revenue 112.4 52.4 62.8 97.7 77.9 589.6 GP 70.4 36.4 51.2 69.1 56.1 310.6 EBITDA 18.7 9.1 13.0 10.9 (1.6) 72.5 PBT 15.6 6.9 8.8 4.0 (10.0) 22.8 Net profit 13.8 6.4 7.3 2.1 (10.0) 16.1

OCF 16.3 7.9 11.7 6.8 0.3 73.3 CAPEX (3.6) (15.3) (5.8) (5.1) (7.9) (43.3) Free cashflow 12.8 (7.4) 5.9 1.7 (7.7) 30.1 Market cap 227.7 94.3 78.5 60.0 26.3 319.6 Free cashflow yield 6% -8% 8% 3% -29% 9%

Revenue growth 15% 25.6% 2.4% -1.3% -4.4% 9.9% % yoy Net profit 44% 111.9% 14.0% -62.3% NA -0.5% growth % yoy Net gearing % net cash 38.1% -64.7% 38.4% -73.4% 88.4% ROE 26% 31.2% 24.9% 4.0% NA 13.9% ROA 19% 14.7% 19.0% 2.0% NA 9.5%

GP margin 62.6% 69.5% 81.6% 70.8% 72.1% 52.7% EBITDA margin 16.7% 17.3% 20.7% 11.2% -2.1% 12.3% PBT margin 13.9% 13.1% 14.0% 4.1% -12.9% 3.9% Net profit margin 12.3% 12.2% 11.6% 2.1% -12.8% 2.7% Source: Company websites, UOB Kay Hian

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Retail Market Monitor Wednesday, 25 November 2015

Industry outlook Commonly known as the “food paradise”, the F&B industry contributed to about 3.2% of Singapore’s GDP in 2013. F&B establishments in Singapore are classified into five segments: restaurants, fast food outlets, food caterers and others (including cafes, coffee houses, snack bars, food courts, canteens and pubs.) FIGURE 5: NUMBER OF ESTABLISHMENTS FIGURE 6: OPERATING RECEIPTS BY ESTABLISHMENTS

S$m 4,000 3,410 3,454 3,444 3,500 3,299 3,500 3,042 3,099 3,138 2,835 3,000 3,000 2,714 2,430 2,480 2,500 2,324 2,500 2,000 2,000

1,500 1,500 1,000 904 940 973 864 906 1,000 794 401 439 453 350 374 500 330 500 - Restaurants Fast food Food Caterers Others - Restaurants Fast food Food Caterers Others 2011 2012 2013 2011 2012 2013

Source: Hungrygowhere.com, UOB Kay Hian, Singtel, While there was little change in the number of establishments in 2013, operating receipts continued to grow across all types of F&B establishments in 2013, rising 4.7% yoy to S$8.3b. Operating receipts from restaurants continued to register the strongest growth among all the establishments, growing 8.5% yoy to S$3.3b forming 39.7% of total operating receipts. With an increase in dual income families, and growing consumer wealth and purchasing power in Singapore, the outlook for the local F&B industry continues to remain positive. Annual disposal income grew at a 2011-14 CAGR of 4.2% to US$154.1b, with consumer expenditure growing at a similar pace of 2011-14’s CAGR of 5.5% to US$117.2b. Consumer expenditure on food in particular, grew at a 2011-14 CAGR of 5.3% to US$7.4b in 2014 according to Euromonitor. According to the Singapore Department of Statistics, the average monthly household expenditure on food serving services (consisting of meals bought from restaurants, hawker centers, food courts and other outlets) increased by 64% from S$466 in 2003 to S$764 in 2013, as the spending on food serving services as a percentage of average monthly household expenditures rose from 13.9% in 2003 to 16.2% in 2013. FIGURE 7: AVERAGE MONTHLY HOUSEHOLD EXPENDITURE FIGURE 8: SPENDING ON FOOD SERVING SERVICES AS A % OF AVERAGE ON FOOD SERVING SERVICES IN SINGAPORE MONTHLY HOUSEHOLD EXPENDITURES

S$ 900 16.50% 16.20% 764 800 16.00%

700 15.50% 600 15.00% 500 466 14.50% 400 13.90% 14.00% 300 13.50% 200 100 13.00% - 12.50% 2003 2013 2003 2013

Source: Singapore Department of Statistics

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Purchases of food materials came in as the main business cost component for the overall F&B industry, followed by remuneration, rental expenditure and utilities accounting for 31.1%, 28.7% and 16.8% and 4% of the industry’s total cost for 2013 respectively. FIGURE 9: SHARE OF TOP 4 BUSINESS COSTS TO OVERALL F&B SERVICES INDUSTRY'S OPERATING EXPENDITURE IN 2013

35.0% 31.1% 28.7% 30.0%

25.0%

20.0% 16.8% 15.0%

10.0% 4.0% 5.0%

0.0% Purchases of Remuneration Rental Utilities F&B for sale expenditure

Source: Singapore Department of Statistics As we focus on the restaurant segment in particular, cost of food materials (ingredients etc.) remained as the sector’s main cost component, followed by remuneration, rental expenditure and utilities.

FIGURE 10: SHARE OF TOP 4 BUSINESS COSTS TO RESTAURANS’ OPERATING EXPENDITURE IN 2013

35.0% 31.9% 30.4% 30.0%

25.0%

20.0% 16.2% 15.0% 10.0% 3.8% 5.0% 0.0% Purchases of Remuneration Rental Utilities F&B f or sale expenditure

Source: Singapore Department of Statistics

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Investment Highlights Strong brand equity. In 2011, the chilli crab was listed on CNN Go as one of the “World’s 50 Most Delicious Foods” with the dish being ranked no.35. It was also one of only two Singaporean signature dishes that made it to the list (the other being chicken rice which was ranked at no.45 on the list.) Established in 1987, Jumbo is a household name in the local seafood restaurant industry and a key ambassador of Singapore’s chilli crab to the international community, even attracting the likes of international Hollywood star, Reese Witherspoon during her recent visit to Singapore. FIGURE 11: REESE WITHERSPOON VISITED JUMBO SEAFOOD RESTAURANT DURING HER RECENT TRIP TO SINGAPORE.

Source: Facebook In conjunction with Singapore’s 50th anniversary, Tripadvisor had compiled a selection of 50 iconic attractions in Singapore. Of note, Jumbo was the only restaurant to have made the list, joining other iconic attractions such as Gardens By The Bay, Merlion Park and S.E.A. Aquarium. Jumbo is also often cited among food bloggers and websites such as Yelp and Hungrygowhere as one of the must-visit places for chilli crabs in Singapore. FIGURE 12: JUMBO IS OFTEN CITED AMONG FOOD BLOGS AND WEBSITES AMONG THE PLACES TO VISIT FOR CHILLI CRABS IN SINGAPORE

Source: Hungrygowhere.com, Yelp.com

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Stable cost structure. Some of the challenges plaguing the local F&B industry are rising rental costs and shortage of labour. Fortunately for Jumbo, it has managed these problems quite well over the years, as its cost structure remained relatively stable over the years. As a result of its strong brand equity, Jumbo seafood is considered as a “dining destination” for consumers. Diners visit Jumbo (regardless of the distance) because they want to dine at Jumbo, and not because of an impulse decision. Since Jumbo does not rely on foot traffic to attract crowds to its restaurants, it does not need to be located at shopping centers where rental increases have eroded the margins of other local F&B players. A quick look at Jumbo Seafood’s restaurants in Singapore reveals that they are located at standalone places, away from bustling shopping centers. FIGURE 13: JUMBO SEAOOD RESTAURANTS IN SINGAPORE Jumbo Seafood (Singapore) Address East Coast Seafood Centre (flagship) Blk 1206 East Coast Parkway, East Coast Seafood Centre #01-07/08 Singapore 449883 National Service Resort and Country Club, Changi 10 Changi Coast Walk, SAFRA Resort, Singapore 499739 Dempsey Hill, Dempsey Block 11 Dempsey Road, #01-16, Singapore 249673 Riverside Point, Clarke Quay 30 Merchant Road, #01-01/01A/02, Riverside Point, Singapore 058282 The Riverwalk, Clarke Quay 20 Upper Circular Road, #B1-44/45/46/47/48, The Riverwalk, Singapore 058416 Source: Jumbo To prevent shortage of labour, Jumbo manages a constant pool of casual labour. Unlike other temporary jobs, Jumbo provides incentives and bonuses to attract casual labour to work more hours (the more one works, the higher the bonus). Jumbo also contributes CPF to its casual workers and has flexible working hours to attract Singaporean housewives. To improve productivity, Jumbo has embraced technological improvements such as IT automation with the usage of iPads for menu selection. The Group also has a central kitchen to speed up mundane processes such as the chopping of vegetables. In addition, the central kitchen also helps to underpin the consistency of Jumbo’s food quality across its different restaurants with the preparation of sauces in a singular location. FIGURE 14: RENTAL AND LABOUR AS % OF TOTAL COSTS HAS FIGURE 15: EST BREAKDOWN OF TOTAL COSTS IN 2014 REMAINED RELATIVELY STABLE

35% 31% 31% Rental , 30% Others, 30% 9% 18%

25%

20%

15% 9% 10% 8% 9% Food costs, 5% Labour, 42% 31% 0% 2012 2013 2014

Rental/Total costs Labour/Total costs Source: Jumbo

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As a result of its relatively lower rental costs (compared with other F&B players located in shopping centers) and productivity measures, Jumbo has managed to enjoy higher profitability ratios as compared with peers in the local restaurant segment. FIGURE 16: PROFITABILITY RATIO

25.0%

20.9% 19.9% 20.0%

15.0%

11.2% 10.1% 10.0% 6.6% 6.0% 4.8% 4.8% 5.0% 3.9% 3.1%

0.0% Jumbo Restaurants Fast food Food Caterers Others

2012 2013

* Profitability ratio (defined as the ratio of operating surplus to operating receipts) Operating surplus: Operating receipts - operating expenditure + depreciation of fixed assets. Operating receipts: Includes those arising from services rendered, commission charges, sale of goods and rental of premises, machinery and equipment. Operating expenditure: All current expenses connected to the business operations such as purchases of goods and services, remuneration, utilities and professional services. It includes depreciation and adjustment for changes in inventory. Source: Singapore Department of Statistics, UOB Kay Hian A cash cow. Due to the nature of its business, Jumbo typically generates very strong cash flow. Sales transactions are usually conducted on a cash basis (including credit card and electronic payments, with the group typically receiving from banks within three days from the transaction dates). While Jumbo may extend credit terms of up to 60 days to corporate clients such as tour agencies, revenue contributions from corporate clients form about less than 1% of total sales. Of note, Jumbo’s suppliers extend credit terms of up to 30 days to the group. FIGURE 17: JUMBO’S STRONG CASH FLOW GENERATION HAS ALLOWED IT TO MAINTAIN A HEALTHY BALANCE SHEET OVER THE YEARS. S$m FY2012 FY2013 FY2014 Operating Cash Flow 10.1 12.9 16.3 CAPEX (5.6) (2.7) (3.6) Free Cash Flow (FCF) 4.5 10.2 12.8 FCF/share* 0.007 0.016 0.020 Cash 29.3 37.4 47.4 Debt (1.0) (0.9) (0.8) Net cash 28.3 36.6 46.6 *FCF/share based on post invitation shares of 641.3m shares Source: UOB Kay Hian, Jumbo While Jumbo does not have any fixed dividend policy, the directors intend to recommend and distribute dividends of at least 30% of its profits in FY16 and FY17, which we think is sustainable given the group’s strong cash flow generation. Based on our FY16 and FY17 net profit forecasts, this could translate to a potential dividend yield of about 2.0%

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China, the engine of growth. Jumbo entered the Chinese market in 2013 through a (Jumbo) 70:30% JV with Breadtalk. It opened its first outlet at iAPM n Nov 13 and will be opening its third outlet in IFC Mall in Jan 16. FIGURE 18: JUMBO WILL BE EXPANDING ITS STORE OUTLETS IN CHINA (SHANGHAI) Outlet Location Date of establishment Seating capacity

1 iAPM Mall, Xuhui, Shanghai Nov 13 250

2 Raffles City, Hangpu , Shanghai Aug 15 200

3 IFC Mall, Pudong, Shanghai Jan 16 (opening soon) 150

Source: UOB Kay Hian, Jumbo Taking reference from Jumbo’s first outlet in China at iAPM Mall, we note that it enjoyed slightly higher profit before tax margins vs its Singapore outlets. This may be due to: 1) Lower rental rate • While Jumbo’s China outlets are located in shopping centers, we understand that Jumbo has managed to secure preferential rental treatment (which they locked in for nine years with the rental rate increase being capped) from landlords due to the unique nature of its food (Singapore’s delicacy) as shopping centers seek to attract interesting tenants to boost foot traffic to the mall. 2) Lower labour costs

• In addition to the lower labour costs in China relative to Singapore, we note that nearly half of the employees in Jumbo’s Shanghai outlets (including its Raffles city and IFC Mall outlet (to be opened soon)) is/will be using students/interns from local culinary schools, and this would further reduce labour costs. Despite employing students/interns, we note that Jumbo’s outlets at iAPM Mall and Raffles City Shanghai, continue to enjoy high ratings of above 9 for service quality according to Dianping.com (a local consumer review website in China) 3) Higher average spending/person in China as compared with Singapore.

• We note that the average spending/person in Jumbo China tends to be about 11- 17% higher than in Jumbo Singapore. While one of the reasons is due to the higher prices of crabs (as it is imported), the selling prices of other food items such as vegetables are comparable to Singapore despite the cost of the raw food ingredients being lower, and hence boosting profit margins. The sauces (eg. chilli crab sauces) are imported from the central kitchen in Singapore to maintain secrecy of the recipe. The spices and herbs are also cheaper in Singapore than in China.

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A warm welcome into China. Since opening its first outlet at iAPM, in Xuhui, Shanghai in Nov 13 Jumbo has been well received by the local consumers and media. Within a year of its opening, Jumbo Seafood/iAPM had received accolades as one of 2014’s Best Restaurant Selections by Modern Weekly, and listed as one of the best restaurants in Shanghai by Tatler Beijing and the Shanghai Best Restaurants Guide 2014. FIGURE 19: JUMBO FIRST OUTLET IN SHANGHAI HAS BEEN WELL RECEIVED BY LOCAL CONSUMERS AND MEDIA.

Source: dianping.com Despite its short operating history in China, Jumbo is well-liked and known among Chinese consumers due to its strong brand equity in Singapore. According to Dianping (a Chinese consumers review website similar to Yelp and hungrygowhere), Jumbo’s first flagship outlet at iAPM, was ranked among the top five restaurants at iAPM, in terms of rating, popularity and number of reviews. A quick look at the reviews also revealed that some of the consumers had visited the shop due to their pleasant dining experience in Singapore, reaffirming Jumbo’s strong brand equity. FIGURE 20: PICTURES BY ONLINE REVIEWERS

Source: dianping.com Of note, Jumbo’s first outlet at iAPM had outperformed expectations, we estimate that that it has turned cash flow positive in six months, recouping the group’s investment just two/three years into operations (management estimates the initial investment cost per outlet in China to be about S$2m with a payback period of about 3 years).

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Going forward, management has outlined a clear blueprint for its expansion in China. Through its JV, Jumbo is looking to ride on its success in Shanghai by increasing the number of outlets in the cosmopolitan city. Jumbo has opened its second outlet at Raffles City, Shanghai, and has received very positive feedback possibly due to its location (in a more mature mall) and higher brand awareness following the success at iAPM. According to dianping.com, Jumbo Seafood at Raffles City, has received over 700 ratings since its opening in Aug 15, with its ratings on taste, environment and service, each achieving high score ratings of over 9 out of 10 respectively. FIGURE 21: JUMBO’S SECOND OUTLET AT RAFFLES CITY, SHANGHAI, HAS RECEIVED POSITIVE FEEDBACK FROM CONSUMERS.

Source: dianping.com Management is looking to open its third outlet at the IFC Mall at Pudong Shanghai by early-16. We believe China will be one of the key drivers of growth for Jumbo, as the Group’s plans to open at least 4 new outlets in China and/or Singapore in the next 24 months. Besides increasing its number of outlets, Jumbo is also seeking to boost profitability through economies of scale with the potential set-up of a central kitchen in Shanghai as its number of outlets grows. We estimate that profit contribution from China will rise from 3% in FY15 to 13% by FY18, driven by increased efficiency and higher brand awareness of Jumbo in Shanghai. We have assumed four new stores opening in China in FY17-20, and this would bring its total number of outlets in China to 7 by 2020. We expect a jump in profit contribution from China in FY16 driven by full-year contribution from Jumbo’s second outlet at Raffles City, Huang Pu, Shanghai which was opened in Aug 15, and the third outlet at IFC Mall at Pudong, Shanghai which is set to open in Jan 16. FIGURE 22: CHINA RISING CONTRIBUTION TO JUMBO

S$m 2.5 13% 14% 12% 12% 2.0 10%

1.5 8% 8%

6% 1.0

4% 4% 3% 0.5 2%

- 0% 2014 2015F 2016F 2017F 2018F

Est China contribution net to jumbo % of total profit

Source: UOB KayHian

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Expansion into the catering/banquet market in Singapore. Jumbo is looking to leverage on its established brand and central kitchen to expand into the catering and banquet market in Singapore through potential acquisitions or JVs. We believe the expansion in business scope lies within the group’s expertise, and we are upbeat on the potential of this business prospect given Jumbo’s experience in managing crowds during peak festive periods like Chinese New Year and Mother’s day. To recall, according to the Singapore department of statistics, food caterers have the highest profitability ratios among the different food establishments. FIGURE 23: PROFITABILITY RATIO

25.0%

20.9% 19.9% 20.0%

15.0%

11.2% 10.1% 10.0% 6.6% 6.0% 4.8% 4.8% 5.0% 3.9% 3.1%

0.0% Jumbo Restaurants Fast food Food Caterers Others

2012 2013

40.0% 35.6% 35.0% 30.0% 26.8% 25.0% 20.0% 15.0% 9.9% 10.0% 4.9% 5.0% 0.0% Purchases of Remuneration Royalties Maintenance F&B for sale

* Royalties: Royalties/franchise & management fees *Maintenance: Maintenance and minor repair of premises, machinery, equipment and vehicles Source: Singapore Department of Statistics

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Vote of confidence from institutional investors. Jumbo’s IPO was met with overwhelming response from the investment community. The CEO of Jumbo, Mr Ang Kiam Meng and his family continue to hold a majority stake in Jumbo after the IPO through JBO, with a 57.9% stake. Mr Tan Gee Jian and Mr See Boon Huat co-founded Jumbo Seafood back in 1987 and they each hold a 6.6% and 4.4% stake in the group respectively after the IPO. FIGURE 25: JUMBO’S SHAREHOLDING No. of new shares (m) % of shares outstanding Average price per share (S$) Substantial shareholders JBO 371.6 57.9% 0.017 Mr Tan Gee Jian 42.3 6.6% 0.012 Mr See Boon Huat 28.2 4.4% 0.012 Substantial shareholders 68.9% Corner stone investors Orchid 1 investments Pte. Ltd (managed and controlled by Heliconia Capital Management, a wholly owned subsidiary of Temasek) 40.0 6.2% 0.25 Ron Sim Chye Hock (Founder, Chairman and CEO of Osim International) 32.1 5.0% 0.25 Substantial shareholders + Corner stone investors 80.2% Institutional investors ICH Gemini Asia Growth Fund Pte Ltd 8.0 1.2% 0.25 Fidelity International 6.0 0.9% 0.25 Affin Hwang Asset Management Bhd 4.6 0.7% 0.25 Lion Global Investors 4.6 0.7% 0.25 Nikko Asset Management Asia 4.6 0.7% 0.25 Samsung Asset Management (HK) Ltd 4.6 0.7% 0.25 Substantial shareholders + Corner stone investors + Institutional investors 85.2% * As at IPO date 6 Nov 15 Source: Jumbo , UOB KayHian With Jumbo’s strong cash flow generation, and positive earnings growth momentum with the group looking to expand in China, Jumbo has attracted the attention of various renowned investors such as Orchid 1 Investments (a wholly-owned subsidiary of Temasek) and Mr Ron Sim (CEO of Osim International).

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Earnings And Financials We expect Jumbo to record a slight drop in reported net profit in FY15 to S$12.8m mainly due to one-off IPO expenses. Excluding the non-recurring expenses, we forecast FY15’s adjusted net profit to be comparable to FY14. Going forward into FY16, Jumbo is expected to enjoy profit growth driven by full-year contribution from its second outlet at Raffles City, Huang pu, Shanghai (which opened in Aug 15) and its third outlet at IFC mall, at Pu dong, Shanghai which will be opening in Jan 16. By the start of 2016, Jumbo will have three outlets in China, with total seating capacity of 600. FIGURE 26: WE EXPECT JUMBO’S ADJUSTED NET PROFIT TO BE DRIVEN FIGURE 27: JUMBO’S GROWING SEATING CAPACITY IN CHINA WITH ITS BY RISING CONTRIBUTIONS FROM ITS CHINA EXPANSION STORE EXPANSIONS

S$m Capacity (seatings) 18.0 16.4 1,400 16.0 15.4 1,300 1,300 13.7 14.0 14.0 1,200 1,100

12.0 1,000 950 10.0 9.5 800 8.0 600 600 6.0

4.0 400 250 250 2.0 200 - 2013 2014 2015F 2016F 2017F - 2014 2015F 2016F 2017F 2018F 2019F 2020F

*FY15F adjusted net profit derived after accounting for IPO expenses of S$1.4m Source: UOB Kay Hian Going forward, we have assumed four new store openings in China from FY17-20, and this would bring the total number of outlets in China to 7 by 2020. This is in line with management’s plan to open at least four new outlets in China and Singapore within the next 24 months. There may be room for further upside to our earnings forecasts should management open more outlets. We estimate each new outlet to contribute about S$0.6- 0.8m to profit in its steady state. FIGURE 28: MARGINS TO REMAIN RELATIVELY STABLE FIGURE 29: STABLE COST STRUCTURE

100% 16.0% 64.0% 90% 14.0% 63.0% 80% 12.0% 62.0% 70% 10.0% 61.0% 60% 8.0% 60.0% 50% 6.0% 40% 59.0% 4.0% 30% 2.0% 58.0% 20% 0.0% 57.0% 10% 2012 2013 2014 2015F 2016F 2017F 0% 2012 2013 2014 2015F 2016F 2017F adjusted PBT margin Adjusted Net margin GPM Rental Food costs Labour Others

Source: UOB Kay Hian

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Company Profile Jumbo Group is an F&B provider with 14 F&B outlets in Singapore and 2 F&B outlets in China currently operating under 5 restaurant brands. We estimate that revenue from Jumbo Seafood forms about 75% of total revenue, with the rest of sales being attributed to other brands. FIGURE 30: KEY CORPORATE MILESTONES

FIGURE 31: REVENUE SPLIT BY BRANDS FOR FY14

Others, 25%

Jumbo Seafood, 75%

Source: Jumbo Group

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FIGURE 32: BRANDS UNDER NETWORK Brand Location Cuisine Jumbo Seafood Singapore Seafood - East Coast Seafood Centre (Flagship outlet) Signature dishes - Riverside Point, Clarke Quay - Jumbo Chilli Crab - The Riverwalk, Clarke Quay - Jumbo Black pepper crab - National Service Resort and Country Club, Changi - Salted Egg golden prawns - Dempsey Hill, Dempsey - Crispy baby squids

PRC - IAPM Xuhui District, Shanghai (Flagship outlet) - Raffles City, Huangpu District, Shanghai - Shanghai IFC Tower, Pudong New area, Shanghai (Slated for opening in Jan 16)

*Of note, Jumbo Seafood at National Service Resort and Country Club also provides catering services for private functions such as wedding and birthday parties JPot Singapore Traditional Hotpot - Vivocity, Harbourfront (Flagship outlet) Range of Singapore-style hotpot soup bases such as - Tampines 1, Tampines - Laksa - Parkway Parade, Marine Parade - Silky Porridge - Tom Yum - Bak Kut Teh

Ng Ah Sio Bak Kut Teh Singapore “White pepper” Bak Kut Teh - Rangoon Road, Farrer Park (Flagship outlet) - (savoury pork based soup prepared with roasted white pepper - Tanjong Katong Road, Tanjong Katong and garlic) - Chui Huay Lim Club, Newton - Marina Bay Sands, Marina Bay

Chui Huay Lim Teochew Singapore Authentic Teochew Cuisine Cuisine - Chui Huay Lim Club, Newton Signature dishes - Teochew cold crab - Deep fried traditional teochew liver rolls - Teochew style Steamed promfret - Teochew ‘Puning’ Fermented Bean Chicken

J Café Singapore Serves popular Singapore Street Food - National Service Resort and Country Club, Changi Menu includes Hainanese Chicken Rice, Mee Rebus, Prawn Mee soup, and desserts such as Chendol

Singapore Seafood Japan Authentic Singapore style seafood, offering a variety of signature dishes Republic (SSR) - Shinagawa, Tokyo from Jumbo Seafood and 3 other Singapore brands - Ginza, Tokyo - Gotanda, Tokyo - Umeda, Osaka Singapore - Resorts World Sentosa, Sentosa

Yoshimaru Ramen Bar Singapore Traditional Hakata ramen - Holland Village, Bukit Timah Source: Jumbo Group

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Management Mr Ang Kiam Meng (CEO and Executive Chairman). Mr Ang has been with the group since 1993, and is responsible for the overall management, operations, strategic planning and business development of Jumbo. Mr Ang graduated from Singapore Institute of Management in 1991 with a Graduate Diploma in Business Administration and a Bachelor of Arts (Majoring in Computer Science) from the University of Texas at Austin (USA). Mr Tay Peng Huat (CFO). Mr Tay has over 27 years of experience in finance and accounting, and is responsible for the overall finance functions and accounting matters of Jumbo. He graduated with a Bachelor of Accountancy from the National University of Singapore in 1988 and is a Fellow Chartered Accountant of Singapore with the Institute of Singapore Chartered Accountants.

Risks Jumbo may be affected by disease outbreaks. An outbreak of diseases or food scares may affect the group’s business due to dampened consumer confidence or restriction of imports of certain ingredients resulting in higher food prices affecting profitability. Jumbo is dependent on its central kitchen for preparation of sauces and semi- finished food products. Any accidents such as fire or power failures may disrupt operations at its Central Kitchen and damage stored supplies, disrupting business continuity and profitability. Jumbo may be affected by seasonality and certain major events. Due to the nature of the group’s business, Jumbo’s business volumes fluctuate according to holiday seasons such as Chinese New Year and special occasions such as Mother’s Day. The group may also experience increased business volumes in certain months of the year, such as in July and August, due to higher tourist arrivals in Singapore.

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PROFIT & LOSS BALANCE SHEET Year to 30 Sep (S$m) 2014 2015F 2016F 2017F Year to 30 Sep (S$m) 2014 2015F 2016F 2017F Net turnover 112.4 126.8 138.0 153.3 Fixed assets 12.0 12.6 25.9 39.9 EBITDA 18.7 18.4 21.7 24.7 Other LT assets 1.5 1.5 1.6 1.7

Deprec. & amort. (3.1) (3.1) (2.6) (4.0) Cash 47.4 48.8 47.7 47.2 EBIT 15.5 15.3 19.1 20.7 Other current assets 10.2 11.1 11.7 12.6 Net interest (0.0) (0.0) (0.0) (0.0) Total assets 71.0 74.0 86.9 101.5 income/(expense) Share of results of 0.1 0.1 0.1 0.1 ST debt 0.2 0.2 0.2 0.2 associates

Pre-tax profit 15.6 15.3 19.1 20.7 Other current liabilities 17.8 20.4 21.9 23.9 Tax (1.8) (2.3) (3.2) (3.5) LT debt 0.9 0.9 1.1 1.3 Minorities (0.0) (0.2) (0.5) (0.8) Other LT liabilities 0.1 0.1 0.1 0.1 Net profit 13.7 12.8 15.4 16.4 Shareholders' equity 50.4 51.4 62.2 73.6 Net profit (adj.) 13.7 14.0 15.4 16.4 Minority interest 1.6 1.0 1.5 2.3 Total liabilities & equity 71.0 74.0 86.9 101.5

CASH FLOW KEY METRICS Year to 30 Sep (S$m) 2014 2015F 2016F 2017F Year to 30 Sep (%) 2014 2015F 2016F 2017F Operating 16.3 17.8 19.2 22.2 Profitability Pre-tax profit 15.6 15.3 19.1 20.7 EBITDA margin 16.6 14.5 15.7 16.1 Tax (0.8) (2.3) (3.2) (3.5) Pre-tax margin 13.9 12.1 13.8 13.5 Deprec. & amort. 3.1 3.1 2.6 4.0 Adj Net margin 12.2 11.0 11.2 10.7 Working capital changes (1.2) 1.7 0.8 1.1 Adj ROA 19.4 18.9 17.7 16.2 Other operating cashflows (0.4) (0.1) (0.1) (0.1) Adj ROE 26.4 26.7 24.2 21.6 Investing (4.7) (3.8) (15.9) (18.0) Capex (3.6) (3.8) (15.9) (18.0) Growth Interest and dividend 0.2 - - - Turnover 15.1 12.8 8.9 11.0 income Others (1.3) - - - EBITDA 46.4 (1.2) 17.4 14.0 Proceeds from sale of 0.0 - - - Pre-tax profit 55.6 (1.5) 24.5 8.5 assets Financing (1.7) (12.7) (4.4) (4.7) Net profit 44.3 (5.3) 22.0 8.5 Dividend payments (1.5) (51.7) (4.6) (4.9) Net profit (adj.) 44.0 1.7 10.3 6.5 Issue of shares - 38.9 - - EPS - - 10.3 6.5 Proceeds from borrowings (0.2) 0.0 0.2 0.2 Others - - - - Leverage Net cash inflow (outflow) 10.0 1.3 (1.1) (0.5) Debt to total capital 1.6 1.5 1.5 1.5 Beginning cash & cash 37.4 47.4 48.8 47.7 Debt to equity 2.1 2.1 2.0 2.0 equivalent Changes due to forex 0.0 - - - Net debt/(cash) to equity (89.1) (91.1) (72.9) (60.2) impact Ending cash & cash 47.4 48.8 47.7 47.2 Interest cover (x) 508.6 459.4 487.5 453.5 equivalent

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MONEY TALK

Bloomberg Consensus

Recommendation Buy Sell Hold Valuation Ratios 9/13 9/14 9/15E 9/16E 24/11/2015 - - - P/E - - - - Target Price - EV/EBIT - - - - Upside - EV/EBITDA - - - - P/S - - - - Income Statement 9/13 9/14 P/B - - - - Revenue 98 112 Div Yield - - - - Gross Income Operating Income 10 15 Profitability Ratios % Pretax Income 10 16 Gross Margin - - - - Net Income Adjusted* EBITDA Margin 12.7 16.3 - - EPS Adjusted Operating Margin 9.9 13.5 - - Dividends Per Share Profit Margin 8.7 10.2 - - Payout Ratio (%) Return on Assets 16.3 17.9 - - EBITDA 12 18 Return on Equity 25.4 27.4 - -

Peer Comparison Ticker Price @ Market -----PE------P/B----- Yield 24 Nov 15 Cap FY14 FY15F FY14 FY15F FY15F (US$m) (x) (x) (x) (x) (%) Neo Group Ltd NGL SP 0.65 67 14.6 n.a. 4.6 3.9 n.a. Breadtalk Group Ltd BREAD SP 1.125 224 26.0 28.8 3.1 2.9 1.6 Japan Foods Holding Ltd JFOOD SP 0.45 56 10.7 16.5 2.7 2.6 4.4 Cafe De Coral Holdings Ltd 341 HK 25.6 1,926 25.3 25.1 4.0 4.1 3.0 Tsui Wah Holdings Ltd 1314 HK 1.81 330 16.1 16.2 2.2 2.1 4.4 Average 18.6 21.7 3.3 3.1 3.4 Jumbo Group Ltd JUMBO SP 0.365 166 n.a. n.a. n.a. n.a. n.a.

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Disclosures/Disclaimers

This report is prepared by UOB Kay Hian Private Limited (“UOBKH”), which is a holder of a capital markets services licence and an exempt financial adviser in Singapore.

This report is provided for information only and is not an offer or a solicitation to deal in securities or to enter into any legal relations, nor an advice or a recommendation with respect to such securities.

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