Initiating Coverage , 8 September 2014

BreadTalk Group (BREAD SP) Buy Consumer Non -cyclical - Food & Beverage Products Target Price: SGD 2.00 Market Cap: US D299 m Price : SGD1.33

Macro  Treasure Bun Risks  Growth  Value 

Breadtalk Group (BREAD SP) BreadTalk , the most successful F&B retail er in Singapore, has its Price Close Relative to Straits Times Index (RHS) ubiquitous brands found in every corner of the island. It also owns one 1.60 of the largest bakery chains in , with a footprint in 57 cities. Over

1.50 171 the last decade, the company has built up scale and we believe it is now on the cusp of reaping this advantage to achieve profit growth. We 1.40 161 initiate coverage on this under-researched company with a BUY, with 1.30 151 our SGD2.00 TP implying a 50% upside. 1.20 141 ♦ Multiple dough for growth. BreadTalk Group (BreadTalk) operates a 1.10 131 multi-format food and beverage (F&B) business, which has created 1.00 121 various avenues of growth for the company . In our view, most of its 0.90 111 brands are well-known and are market leaders in their respective 0.80 101 categories. For example, t he company’s new JV with Minor International

0.70 91 (MINT TB, BUY, TP: THB40.00) would be a key driver for its expansion 5 5 in , especially for its franchise. 4 4 3 ♦ Regional footprint appeals to potential acquirers. BreadTalk has 3 2 more than 850 outlets under its umbrella. This includes more than 400 2 1 outlets in China, where it has presence in 57 cities. We believe this 1 Volm network is difficult to replicate and holds substantial appeal for potential 13 13 14 14 14 14 ------acquirers. Minor International’s 11% investment in the company is a Jul Jan Mar Sep Nov May testament to that – and any further corporate action would be a bonus for BreadTalk shareholders. Source: Bloomberg ♦ Substantial upside for margin improvements . Since listing in 2003, it Avg Turnover ( SGD/USD) 0.46m/0.37m has grown its number of outlets at an unprecedented pace to 850 from Cons. Upside (%) 15.8 28 in 11 years. We believe capex expenses and start-up costs have Upside (%) 50.4 weighed down on profitability and a moderation of these expenses, as 52-wk Price low/high (SGD) 0.85 - 1.49 well as greater business scale in China, would present substantial Free float (%) 36 upside for its net margin to improve from 2.5% currently. Share outstanding (m) 282 ♦ Time to roll in the dough, initiate with BUY. Our SGD2.00 TP is based Shareholders (%) on a 7.5x FY15F EV/ EBITDA, a methodology we believe better reflects George Quek 34.0 underlying cash earnings. Even then, this is almost a 50% discount to Katherine Lee 18.6 regional peers which are trading at an average of a 14.4x EV/ EBITDA. Primacy Investment 11.0 Our SOP cross-check, which leans heavily on the r eplacement cost for its retail network, derives a value of SGD1.76/share. Share Performance (%) Forecasts and Valuations Dec-12 Dec-13 Dec-14F Dec-15F Dec-16F YTD 1m 3m 6m 12m Total turnover (SGDm) 447 537 619 717 849 Absolute 47.8 (2.2) 0.8 41.5 56.5 Reported net profit (SGDm) 12.0 13.6 14.3 18.3 22.2 Relative 42.7 (1.7) (0.2) 33.7 47.5 Recurring net profit (SGDm) 12.0 13.6 14.3 18.3 22.2 Recurring net profit growth (%) 3.5 13.3 5.1 27.9 21.3 Shariah compliant Recurring EPS (SGD) 0.04 0.05 0.05 0.06 0.08 DPS (SGD) 0.01 0.02 0.02 0.02 0.03 James Koh +65 6232 3839 Recurring P/E (x) 31.1 27.5 26.2 20.5 16.9 [email protected] P/B (x) 4.53 3.99 3.63 3.25 2.88 P/CF (x) 6.87 5.20 6.10 4.29 3.83 Juliana Cai +65 6232 3871 Dividend Yield (%) 1.0 1.4 1.3 1.6 2.0 [email protected] om EV/EBITDA (x) 8.58 7.56 6.77 5.46 4.42 Return on average equity (%) 15.0 15.4 14.5 16.7 18.1 Net debt to equity (%) 35.3 85.7 93.4 63.1 40.8

Our vs consensus EPS (adjusted) (%) (9.4) (3.2) (11.6)

Source: Company data, OSK -DMG estimates

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BreadTalk Group (BREAD SP) 8 September 2014

Table of Contents

Investment Summary ...... 3 Regional Footprint Is Difficult To Replicate ...... 4 Substantial Upside for Margin Improvements ...... 9 Latent Value ...... 11 Valuation ...... 13 Industry Overview ...... 15 Financials ...... 18 Company Background...... 21 Appendix – Key Risks ...... 24 Appendix – Key Management ...... 25 Financial Exhibits ...... 26 Financial Exhibits ...... 27 SWOT Analysis ...... 28 Recommendation Chart ...... 29

See import ant disclosures at the end of this report 2

BreadTalk Group (BREAD SP) 8 September 2014

Investment Summary

Leading F&B retail player in Singapore and China. BreadTalk is a Singapore- based F&B retail company founded by its current chairman, Mr George Quek, in 2000. It owns and operates several brands including BreadTalk , Toast Box , Food Republic and Din Tai Fung (via a franchise agreement). Domestically, we believe the company has built itself up into a position of strength and would be difficult to dislodge, given its operational excellence, innovation and scale. It also owns one of the largest bakery chains in China.

Regional footprint is difficult to replicate. The company has more than 850 outlets across 15 countries, from Asia to the Middle East, including franchises. In China, it ♦ Minor International’s 11% investment could has a footprint of more than 400 outlets across 57 cities, putting it in a prime position lead to further corporate actions to benefit from rising disposable income – which drives artisan bread sales and people eating out. We believe this regional network and know-how is enviable, as evident from Thai-based F&B player Minor International’s 11% investment in the company. Further corporate action would be a bonus for BreadTalk shareholders.

Substantial upside from margin improvements. Since its listing in 2003, the ♦ Long-term target of a 8% net profit margin company has embarked on a remarkable store count expansion program, growing from 28 outlets initially. While this has driven topline growth, net profit growth has lagged behind, thanks to aggressive capex depreciation and start-up costs. We see significant scope for net margin improvements from the current 2.5% level (FY13) over the medium to longer term. This would come from: i) the moderation of its depreciation and amortization (D&A) expenses, ii) the greater scale of its business, especially in China.

♦ Its headquarters could be worth more than Latent value. BreadTalk has built up a valuable network of stores – which is difficult SGD124m in a potential sale-leaseback to replicate, including time-to-market needed. We estimate the replacement cost to transaction be worth SGD1.08/share to potential acquirers. It also holds strategic real estate stakes, as well as its own building headquarters in Singapore, which can be used in a sale-leaseback transaction to release cash. Our SOP cross-check values the company at SGD1.76/share conservatively.

♦ TP upside of 50% Initiate coverage with BUY. We initiate coverage on BreadTalk with a BUY recommendation and a TP of SGD2.00. Our TP is based on a 7.5x FY15F EV/EBITDA, a methodology to better reflect underlying cash earnings of the company. This is still a big discount to regional peers which are trading at an average of a 14.4x EV/ EBITDA, despite BreadTalk’s estimated 17.7% net profit CAGR over FY14F-16F. Key risks to our call include a higher operating cost environment in Singapore and asset write-offs from over-aggressive store expansions. Focus Charts

Figure 1: SOP value (from cross check) Figure 2: EBITDA track record – 18.2% CAGR over the last five years SGD m SOTP SGD m % 70 30 Replacement cost of stores 305.1 62.3 Singapore HQ 124.0 60 22.3 25 Real Estate Investments 119.4 49.6 25.5 50 19.8 Brand Value 77.0 41.4 20 38.2 20.0 Net Debt (129.0) 40 33.0 15 Total 496.5 30 27.0 15.8 Per share (SGD) 1.76 8.4 10 20

10 5

0 0 2008 2009 2010 2011 2012 2013

EBITDA % YoY growth

Source: Company data, OSK-DMG Source: Company data

See import ant disclosures at the end of this report 3

BreadTalk Group (BREAD SP) 8 September 2014

Regional Footprint Is Difficult To Replicate

Leading F&B retail player in Singapore. BreadTalk is a Singapore-based F&B company founded by its current chairman, Mr George Quek, in 2000. It was listed on the Singapore Exchange (SGX) in 2003. We believe the company is the largest F&B retail player in its home market, in terms of domestic sales.

♦ We believe the company is the largest F&B BreadTalk operates several F&B concepts besides its flagship BreadTalk bakery, retail player in Singapore including Food Republic (food courts), Toast Box (bakery and Nanyang-style coffee) and RamenPlay (Japanese Ramen ). It is also the most successful overseas franchisee for Taiwanese-based Din Tai Fung (Chinese mid-range restaurants). With the exception of RamenPlay , we believe BreadTalk is a market leader in each of these categories. Given that Singapore is now a mature market with limited avenues for new retail F&B spaces, we think it is now difficult to dislodge the company from its position of strength, which was built up over the last decade. Regional footprint stretches from Asia to the Middle East. Outside of its home market, the company has outlets across 15 countries, both through its own-operated ♦ Key markets: Singapore, China and Hong stores and franchisees. This is supported by its global staff of more than 7,000. This Kong regional footprint, which is still expanding, stretches across Asia to the Middle East, allowing the company to simultaneously tap into different growth markets. Outside of Singapore, its key markets are China and Hong Kong.

Figure 3: BreadTalk’s regional footprint ranges across Asia to the Middle-East

Source: Company

Into the dragon. Following its listing in 2003, the company started separate headquarters in China, which management deemed as the most important growth market for the company. For the last decade, it has focused on this market unwaveringly and now has a significant presence in the country through its chain of BreadTalk bakeries as well as Da Shi Dai (大時代) food courts.

♦ Estimated 400 outlets in China, spread BreadTalk is now one of the biggest and most well-known bakery chains in China, across 57 cities with an estimated 400 outlets across 57 cities. In particular, it has a strong footprint in key cities of Shanghai and Beijing where it mostly operates its own stores. Management targets to double group revenue to SGD1bn by FY16F from SGD537m in FY13, with China expected to contribute 50% of group revenue in the same year. This implies almost tripling its revenue from China in the same period, to SGD500m from SGD173m in FY13.

See import ant disclosures at the end of this report 4

BreadTalk Group (BREAD SP) 8 September 2014

Figure 4: Revenue from China has doubled in the last five Figure 5: Revenue breakdown by geography, FY13 years SGD m % 180 172.7 30 27.2 Rest of 160 the 143.1 25 World 140 8% 21.9 20.6 117.5 120 20 97.8 20.1 100 Mainland 13.2 85.5 15 China 80 75.3 14.4 32% Singapore 59.2 13.5 50% 60 10

40 5 20 Hong Kong 0 0 10% 2007 2008 2009 2010 2011 2012 2013

Source: Company data Source: Company data

Figure 6: BreadTalk – franchise vs owned bakeries in China

400 365

350 219 297 300 178 250 230

200 184 138 110 150 134 146 100 80 100 119 65 58 44 92 50 36 74 9 20 54 2 4 19 42 0 16 25 29 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

No. of owned stores No. of franchise

Source: Company data, OSK-DMG

Minor International harbors major ambitions. In our view, BreadTalk’s regional ♦ Thai-based hospitality and F&B group Minor footprint is attractive to potential acquirers, especially due to its presence in China, a International is now a substantial 11% market which still has huge growth potential. We believe Minor International’s stakeholder investment over the past two years in the company is testament to this – the former now owns a 11% stake, which was purchased through the open market since late- 2012. Minor International is a Thai-based hospitality and F&B group with a presence in more than 26 countries. It has businesses from hotels, serviced suites, spas, restaurants to retail distribution. Since 2005, it has embarked on an aggressive M&A expansion plan outside Thailand.

See import ant disclosures at the end of this report 5

BreadTalk Group (BREAD SP) 8 September 2014

Figure 7: Minor International’s investments in BreadTalk Figure 8: Minor International’s revenue breakdown by business SGD Up stake to 8.9% 1.6 Retail 1.5 Took initial Trading stake of Up stake to 10% 1.4 5.9% 10.0% Up stake to 1.3 11.0% 1.2 1.1 Hotels & Mixed Use 1 49% 0.9 Restaurants 0.8 41% 0.7 Up stake to 6.3% 0.6 Jul-13 Jul-14 Oct-13 Apr-13 Apr-14 Jan-13 Jun-13 Jan-14 Jun-14 Mar-13 Mar-14 Feb-13 Feb-14 Sep-13 Nov-13 Dec-13 Aug-13 Aug-14 May-13 May-14

Source: Bloomberg Source: Minor International

Figure 9: Minor International’s milestones – it has been on an aggressive M&A expansion plan since 2005

Source: Minor International

See import ant disclosures at the end of this report 6

BreadTalk Group (BREAD SP) 8 September 2014

Complementary portfolios are attractive to Minor International. Despite Minor International’s vast F&B empire, we believe BreadTalk’s business portfolio is very complementary to the former’s. Minor International mainly operates casual dining restaurants under brands like Swensen’s , Sizzler , , Thai Express and Riverside . BreadTalk, on the other hand, has a much bigger presence in bakeries and food atriums.

♦ BreadTalk would also benefit from Minor We believe bakeries in particular are an attractive segment for Minor International, International’s impressive efficiency in given the scalability of the business. Minor International would also benefit from procurement leveraging on BreadTalk’s presence and know-how in China, where it has been for the last 10 years and has more than 400 outlets across 57 cities. In comparison, Minor International currently has 42 outlets in China, through Riverside Beijing, Courtyard and Sizzler . BreadTalk would benefit from Minor International’s strong presence in Thailand and as well as its impressive procurement efficiency.

Figure 10: Minor International’s portfolio of restaurants

Source: Minor International

Figure 11: Minor International's number of restaurants in China

No. of stores 45 42 42 40 35 35

30 27 24 25 21 22 20

15

10

5

0 2008 2009 2010 2011 2012 2013 1H14

Source: Minor International

Partnership for now; further corporate actions would be a bonus. Minor International has made numerous acquisitions over the last decade and it typically holds 50-80% stakes in these businesses. Given the potential synergies and BreadTalk’s potential, we certainly think Minor International would be open to further investments. Such corporate actions, which may include the possibility of a takeover, would be a bonus for BreadTalk shareholders.

See import ant disclosures at the end of this report 7

BreadTalk Group (BREAD SP) 8 September 2014

Hurray to more Din Tai Fung outlets in Thailand. In the meantime, Minor ♦ BreadTalk holds Din Tai Fung franchises for International and BreadTalk have an official joint venture agreement to operate Singapore and Thailand BreadTalk Thailand through a 50-50 partnership. This JV currently includes 23 owned and operated bakery outlets, two franchised Din Tai Fung outlets and three Food Republic food atria. Given Minor International’s strong retail know-how and bargaining strength in Thailand, we think this will allow BreadTalk Thailand to expand more aggressively than before. In particular, we believe BreadTalk would be able to secure more locations for Din Tai Fung restaurants in this market, where it currently holds the franchise for the operations in the country. BreadTalk has achieved great success in Singapore with the Din Tai Fung franchise and we are optimistic it can replicate this in Thailand.

Figure 12: A recent visit to a Din Tai Fung in Figure 13: Number of Din Tai Fung outlets in Singapore Singapore

20 18 18

16

14 13

12 11 10 10

8 6 6 6 4 4 4 4 2 2

0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Source: OSK-DMG Source: Company data

Figure 14: A recent visit to a Food Republic in Bangkok, Figure 15: Recent tasting of Din Tai Fung's signature steamed Thailand dumplings - still fantastic!

Source: OSK-DMG Source: OSK-DMG

See import ant disclosures at the end of this report 8

BreadTalk Group (BREAD SP) 8 September 2014

Substantial Upside for Margin Improvements

♦ SGD2.2m asset write-offs in FY14 negatively Our profit growth expectations. We expect net profit to grow 17.7% CAGR over impacted profit FY14F-16F. Due to some asset-write offs (SGD2.2m) in FY14F, most of this growth will be back-loaded in the subsequent two years. Part of our profit growth expectations are dependent on an improvement in margins, which we expect will come from: i) a moderation of depreciation & amortisation (D&A) costs, and ii) increasing scale in its operations, especially in China.

Expansion trajectory has hurt margins. Over the past five years, BreadTalk’s revenue has grown at a 20.4% CAGR, but net profit growth has lagged behind, at a 11.8% CAGR. In our view, the trajectory of its store expansion has been a significant negative factor for its net profit margin. From 2008 to 2013, the company expanded its total store network to 836 from 278. Excluding franchisee stores, this number still grew at a remarkable pace to 368 from 137 in the same period.

♦ Capex for new stores are depreciated BreadTalk has spent a substantial amount on capex, which has resulted in significant aggressively, impacting the bottomline non-cash (D&A) costs, and start-up expenses denting profitability. This is not a fair reflection of its profit potential, in our view. The lease agreements in Singapore and China are typically short-term (3-5 years) in nature and the accounting treatment is to depreciate capex quickly during this period – even though BreadTalk is more likely to renew the leases subsequently.

Figure 16: BreadTalk – self-operated stores Figure 17: Revenue and net profit track record SGD m SGD m 400 600 30 368 Revenue CAGR 20.4% 536.5

350 500 25 447.3 302 300 400 365.9 20 244 250 302.9 220 300 13.6 15 246.5 11.6 12.0 200 212.2 11.1 11.3 160 200 7.8 10 150 137 100 5 100 PATMI CAGR 11.8%

50 0 0 2008 2009 2010 2011 2012 2013 0 2008 2009 2010 2011 2012 2013 Revenue - LHS PATMI - RHS

Source: Company, OSK-DMG Source: Company data

EBITDA growth a better reflection of underlying profit growth. Due to the unfavorable accounting treatment for depreciation, we believe EBITDA growth provides a better reflection of underlying profit growth as well as the intrinsic value of the company. From 2008 to 2013, EBITDA showed consistent growth at 18.2% CAGR. This is also in line with the very healthy operating cash flow generated in the same period, which is a good sign of the viability of its business. ♦ D&A cost could moderate going forward, in Going forward, while outlet expansion will continue, we believe the percentage our view increase will likely moderate in the next few years. This would actually aid a healthier bottomline due to a lower depreciation cost. We expect D&A to grow by 18.7% CAGR over the next three years vs a 23.4% CAGR in the previous five years.

See import ant disclosures at the end of this report 9

BreadTalk Group (BREAD SP) 8 September 2014

Figure 18: EBITDA track record – 18.2% CAGR over the last Figure 19: Operating cash flow has been consistently positive five years SGD m % SGD m 70 30 62.3 80 72.5 60 22.3 25 70 49.6 25.5 50 19.8 60 41.4 20 53.7 38.2 20.0 40 48.9 50 33.0 15 45.5 30 27.0 15.8 39.1 40 8.4 10 32.6 20 30 10 5 20 0 0 2008 2009 2010 2011 2012 2013 10

0 EBITDA % YoY growth 2008 2009 2010 2011 2012 2013

Source: Company data Source: Company data

Figure 20: D&A costs could moderate going forward Figure 21: The real drag on net profit was non-cash D&A costs

SGD m SGD m 70 65.8 120 CAGR 18.7% 105.9

60 55.5 100 92.6

48.3 50 80 66.9 39.3 60.3 40 CAGR 23.4% 60 55.2 31.0 36.9 39.3 30 40 24.4 31.0 21.6 21.6 24.4 16.7 20 16.7 20 13.7 13.7

10 0 2008 2009 2010 2011 2012 2013 0 FY08 FY09 FY10 FY11 FY12 FY13 FY14F FY15F FY16F CAPEX Dep & Amort.

Source: Company data, OSK-DMG Source: Company data

Increasing scale in China will benefit margins. We believe for the F&B business, scale is an important factor to achieve better margins. This comes in the form of negotiation for rental space, central kitchen utilization, procurement of raw materials and staff training. In Singapore, where BreadTalk is a significant player, the company is able to achieve an estimated 3.5% net profit margin, compared to an estimated 1.5% net profit margin in China. Going forward, management is of the view that with the current estimated 400 stores ♦ Its long-term target is to achieve overall 8% in China, the company is at an inflection point in terms of business scale in the net margin for the group vs 2.5% in FY13 country and expansion in the next few years would allow it to achieve much better profit margins. Management’s long-term target is to achieve a net profit margin of 8% for the whole group vs 2.5% in FY13.

See import ant disclosures at the end of this report 10

BreadTalk Group (BREAD SP) 8 September 2014

Latent Value Replacement cost of replicating its retail outlets. BreadTalk has built up a ♦ We estimate the replacement cost of sizeable network of retail outlets across the region, which is not easy to replicate BreadTalk’s retail outlets is at least immediately, with time-to-market needed. Furthermore, while most of these outlets SGD305m or SGD1.08/share are leased, there is still value in the retail fit-out, furniture and kitchen equipment. We estimate that the total replacement cost of replicating BreadTalk’s self-operated outlets is at least SGD305m at this moment. Any potential acquirer that wants to build up this network would consider such a replacement cost.

Figure 22: Breakdown of replacement costs Number of Outlets Cost per Outlet (SGD) Total Cost (SGD) Owned Bakery (Local) 125 250,000 31,250,000 Owned Bakery (Foreign) 179 150,000 26,791,260 Restaurants (Local) 29 2,500,000 72,500,000 Restaurants (Foreign) 7 1,000,000 7,000,000 Food Atrium (Sg, HK) 20 4,000,000 80,000,000 Food Atrium (China) 36 2,000,000 71,600,000 Food Atrium (M'sia, TW) 8 2,000,000 16,000,000 Total 403 305,141,260

Source: OSK-DMG

♦ Real estate investments worth SGD0.42/share. BreadTalk’s business model favors Strategic benefit to owning a stake in operating several F&B concepts in one location, which gives it bargaining power over selective malls. A good example is Katong mall owners. For example, it is common to find a BreadTalk bakery, Din Tai Fung 112 restaurant, Food Republic food atrium and Toastbox outlet all within the same shopping mall. Over the past few years, BreadTalk has invested in some real estate in Singapore ♦ Real estate investments worth SGD119.4m and China. These assets are deemed non-core, but we believe there is a strategic or SGD0.42/ share benefit to owning a stake in selective malls. It secures good retail locations, serves as a hedge against rising rental costs and enables the company to ride the real estate value uplift which it helped generate through its F&B outlets. These assets are at book value in its balance sheet, but based on its latest independent valuation – which we estimate is worth SGD0.42/share.

Figure 23: Real estate investments Date Investment Gross Asset Debt Net Equity Value Stake Stake Value Cost Geography GFA (sq ft) NLA (Sq ft) Value (SGD m) (SGD m) (SGD m) (SGD m) (SGD m)

9-Jan-14 TripleOne Somerset 983 650 333 5.3% 17.6 17.5 Singapore 766,549 564,786 4-Nov-11 Chijimes 260 150 110 29.0% 31.9 18.0 Singapore 159,368 115,367 18-Nov-09 Katong 112 439 235 204 7.0% 14.3 14.0 Singapore 282,099 207,161 15-Apr-13 Phase 2 of Beijing 1,194 0 1,194 4.0% 47.8 14.5 Beijing, China 3,265,000 N/A Tongzhou District 1-Oct-12 Phase 1 of Beijing 1,189 0 1,189 4.0% 47.6 20.1 Beijing, China 3,753,000 N/A Tongzhou District Total 159.1 84.1 25% discount 119.4 Per share (SGD) 0.42

Source: Company, St James Holdings, OSK-DMG estimates

See import ant disclosures at the end of this report 11

BreadTalk Group (BREAD SP) 8 September 2014

IHQ potential for sale-leaseback. BreadTalk completed and moved into its new Singapore headquarters, dubbed the “IHQ” in Tai Seng in mid-2013. This ten-storey ♦ IHQ is worth SGD124m or SGD0.44/share in building has an approximate GFA of 248,902 sq ft and houses offices, warehousing a sale-leaseback transaction facilities, training academies, production lines, central kitchens and flagship retail stores. We believe the headquarters could serve as an important base and platform for international expansion as it will allow BreadTalk to achieve some economies of scale. The first floor is used almost exclusively for its own F&B outlets, while about 25% of the space is rented out to related third-party businesses. Similar to other buildings in Singapore, we think there is latent value in this building, and it could also be a potential sale-leaseback asset should the company require capital injection for business expansion. The company spent SGD64.1m for the building. Based on our estimates, the building is worth SGD124m, using a value of SGD500 psf which is comparable against similar property transactions.

Figure 24: IHQ

Source: Company

Figure 25: SOP value SOTP SGD m Replacement cost of stores 305.1 Singapore HQ 124.0 Real Estate Investments 119.4 Brand Value 77.0 Net Debt (129.0) Total 496.5 Per share (SGD) 1.76

Source: Company

See import ant disclosures at the end of this report 12

BreadTalk Group (BREAD SP) 8 September 2014

Valuation

♦ TP implies a 50% upside from current price. Initiate coverage with BUY. We initiate coverage on BreadTalk with a BUY recommendation and a TP of SGD2.00. Our TP is based on 7.5x FY15F EV/EBITDA, which is similar to our SOP-based cross-check – which derived a per share value of SGD1.76. This implies a 50% upside from its current share price. We expect BreadTalk’s net profit to expand at a 17.7% CAGR over FY14F-16F, driven by continued sales growth from expansion and margin improvements arising from its greater scale.

EV/EBITDA-based TP. We believe EV/EBITDA is a better methodology to value BreadTalk, given the unfavorable accounting treatment for D&A costs for a fast- expanding retail F&B company. This also provides a better gauge of real cash flow generated by the business in its current state and ignores the accounting sunk-cost of capex.

Figure 26: Peer Comparison Div Share Target MarketPE 3-yr EPS EV/ EBITDA P/BV ROE Yield BB Code Rating price Price cap FY14F FY15F FY16F CAGR FY14F FY14F FY14F FY15F FY16F FY14F (lcl ccy) (lcl ccy) (USD m) (x) (x) (x) (%) (x) (x) (%) (%) (%) (%) Food Retail ASEAN BREADTALK BREAD SP BUY 1.33 2.00 298 26.1 20.4 16.8 22.6 6.8 3.9 13.9 15.8 17.1 1.3 JOLLIBEE FOODS JFC PM N/A 191.3 N/A 4,519 37.5 32.4 28.1 15.2 18.6 8.3 22.8 25.1 27.1 1.5 MINOR INTL MINT TB BUY 35.75 40.00 4,351 32.2 26.7 22.3 15.4 22.7 5.5 16.5 17.4 18.3 N/A CENTEL TB CENTEL TB BUY 41.00 38.00 1,690 37.3 29.3 25.0 18.8 15.2 5.4 14.5 15.9 16.8 N/A MK RESTAURANTS M TB NEUTRAL 60.50 63.00 1,730 23.3 20.4 19.5 6.4 16.0 4.4 32.7 20.1 19.7 3.9 Average 32.6 27.2 23.7 14.0 18.1 5.9 21.6 19.6 20.5 2.7

Food Retail North Asia AJISEN (CHINA) 538 HK N/A 6.16 N/A 891 23.5 18.1 15.0 18.0 8.5 2.1 9.5 10.5 11.8 3.1 CAFÉ De CORAL 341 HK N/A 28.5 N/A 2,094 24.3 21.7 19.1 16.6 13.9 4.4 18.2 18.2 19.5 3.0 GOURMET MASTER 2723 TT N/A 248.5 N/A 1,140 47.5 26.2 18.9 47.7 15.2 5.7 12.6 19.6 22.9 1.8 XIAO NAN GUO* 3666 HK N/A 1.05 N/A 187 118.8 14.6 8.8 412.1 7.6 1.6 2.2 10.0 14.8 2.4 Average 31.8 22.0 17.7 27.4 12.5 4.1 13.4 16.1 18.1 2.6

Average 32.2 25.0 21.1 19.7 15.7 5.1 18.1 18.1 19.4 2.7

Source: Bloomberg, OSK-DMG estimates ^ Data as at 4 September 2014. *Xiao Nan Guo is excluded from the average. Bloomberg consensus figures are used when OSK-DMG estimates are unavailable.

Trading at a significant discount to peers. Our TP of SGD2.00 is pegged to 7.5x ♦ 7.5x FY15F EV/ EBITDA is probably fair for now FY15F EV/EBITDA, which is already a significant discount to regional peers. We believe this discount is fair for now given the smaller market cap size, liquidity and the lack of investor relations efforts made by its management.

See import ant disclosures at the end of this report 13

BreadTalk Group (BREAD SP) 8 September 2014

Figure 27: 12-month Forward P/E band Figure 28: P/BV band (x) (x) 28 4.5

26 4.0 24 +1SD: 22.1x 3.5 22

20 AVG: 18.8x 3.0 +1SD: 3.1x

18 2.5 AVG: 2.5x -1SD: 15.5x 16 2.0 -1SD: 1.3x 14 1.5 12

1.0 Jul-13 Jul-14 Oct-13 Apr-13 Apr-14 Jun-13 Jan-14 Jun-14 Mar-13 Mar-14 Feb-13 Feb-14 Sep-13 Nov-13 Dec-13 Aug-13 May-13 May-14 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14

Source: Bloomberg Source: Bloomberg

Figure 29: EV/EBITDA band (x) 7.0

6.5

6.0 +1SD: 5.7x 5.5

5.0 4.5 AVG: 4.3x 4.0

3.5 -1SD: 2.9x 3.0

2.5

2.0 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13

Source: Bloomberg

See import ant disclosures at the end of this report 14

BreadTalk Group (BREAD SP) 8 September 2014

Industry Overview Singapore Mature market for bakeries. Singapore is a mature market for the bakery industry even though we believe there are still growth opportunities within the artisan bread category. Overall bread consumption in the country is at about 8.1kg per capita annually – which is relatively higher than countries such as Hong Kong, and is unlikely to see significant growth. Packaged bread continues to dominate, with manufacturers such as Sunshine and Gardenia enjoying a large market share. Artisan bread is a highly fragmented industry, with several notable chains such as, ♦ BreadTalk is a leading player, with namesake Crystal Jade , Four Leaves and Paris Baguette . We believe BreadTalk is amongst the brand and Toast Box largest players and has opportunities to grow its market share at the expense of smaller players which do not have the same scale. For its coffee-shop bakery concept under Toast Box , notable competitors are Killiney Kopitiam and Ya Kun Kaya Toast.

Figure 30: Expect moderate growth for Singapore’s bread market SGD m 350

300 107.0 101.5 250 96.2 91.2 86.1 80.8 200

176.8 183.7 150 164.0 170.3 149.8 157.5 100

50

0 2013 2014 2015 2016 2017 2018

Packaged Bread Artisan Bread

Source: Euromonitor

♦ Most competitors in Singapore are unlisted Fragmented market for foodcourts and Chinese restaurants . BreadTalk operates companies Food Republic (foodcourts) and Din Tai Fung (Chinese restaurant) which are both amongst the leading brands within their respective categories. However we believe the markets are highly fragmented, with a few more notable players such as Food Junction , Kopitiam , Banquet and Koufu for food courts and Soup Restaurant and Crystal Jade for Chinese restaurants. As most of the competitors are unlisted, there is no concrete market data.

Figure 31: Food Junction Figure 32: Kopitiam

Source: Food Junction Source: KOPITIAM

See import ant disclosures at the end of this report 15

BreadTalk Group (BREAD SP) 8 September 2014

China Most important growth market for BreadTalk. After Singapore, China is the ♦ second largest revenue contributor by geography for the company, making up 32% of Management expects China to make up 50% FY13 sales. More importantly, management has set its sights on China as a key of revenue in FY16F driver of growth, with the explicit target of achieving 50% of its revenue from this market by FY16. This would mainly be from the bakery business, as the company currently has more than 365 outlets (owned and franchisees) in the country. BreadTalk also has around 32 Da Shi Dai (大時代) food courts there currently. Bread consumption in China is low compared to other nations. We believe there ♦ Average per capita consumption of bread in is a strong correlation between urbanization and the per capita consumption of bread, China is only 1.3kg a year because bread is a convenient food that meets the daily dietary demand amid the faster pace of everyday life. The average per capita consumption of bread in China is currently 1.3kg a year, which is low compared with other developed Chinese nations such as Hong Kong, and Singapore.

Figure 33: China – per capita annual consumption of bread set Figure 34: China – value of bread market is growing rapidly to pick up on rapid urbanization Kg 100 100 % CNY b 10 91 100 2,500

8.1 2,000 CAGR 7.2% 8 7.2 80 6.8 1,500 6 51 60

1,000 4 40

500 2 1.3 20

0 0 0 China Hong Kong Japan Singapore

Per capita consumption of bread - LHS Urbanisation - RHS Artisan Bread Packaged Bread

Source: Euromonitor Source: Euromonitor

Artisan bread a growing trend. Compared against factory mass-produced bread, artisan bread is generally defined by higher quality bread made by a skilled baker and is made with greater innovation and healthier ingredients. Price points also tend to be higher. We believe this is a growing trend in China, due to rising affluence and an increase in discretionary income. According to Euromonitor, demand growth for artisan bread would be higher than for packaged bread over the next five years, rising at a CAGR of 10.1%.

Major competitors. We believe for bakeries in China, the company’s main ♦ BreadTalk has the widest coverage in terms of bakery network in China in our view competitors include 85° Café , Holiland , Christine and Paris Baguette . We believe BreadTalk is amongst the leading players here by virtue of the number of stores in the country and its estimated revenue. In our view, most of its competitors are more entrenched in particular regions or cities whereas BreadTalk has a more diversified presence across 47 cities including Tier-2 and Tier-3 ones.

See import ant disclosures at the end of this report 16

BreadTalk Group (BREAD SP) 8 September 2014

Figure 35: Key competitors for bakeries in China Companies BreadTalk 85°Cafe Christine Holiland Paris Baguette Number of stores in China 365 417 1,052 >1,000 123 Main bakery product Artisanal bread Artisanal bread Cake Cake Cake

Main operating provinces Beijing, Zhejiang, Zhejiang, Jiangsu, Zhejiang, Jiangsu, Beijing Beijing, Shanghai Jiangsu, Shanghai, Shanghai, Guangdong, Shanghai Guangdong Fujian Business model - Existing presence in - Existing footprint in south- - Focus on the Yangtze - Largest bakery chain - Shifting focus to large 2nd the cities along the eastern region Delta region operator in China tier cities East China Sea coast

- Plans to extend - Was operating directly but - Operate all retail outlets - Strong footprint in north- - Target to increase store footprint into the began consolidating outlets directly eastern region and large count to 500 by 2015 and suburb of 1st tier cities and started franchise model sized cities extend footprint to north- and into 2nd tier cities in 2013 due to rising costs eastern, western and southern regions

- Around 70% of the - Stores are usually opened - Multi-channel retail - Operate all retail - Flagship stores are stores are franchised outside of shopping malls or network consists of outlets directly operated directly while the in the neighbourhood to neighbour stores, rest are franchised reduce rental costs stores, flagship stores and European-style fresh bake stores

- Stores are usually - Target lower-middle class - Target lower-middle - Stores are usually opened found in shopping and young customers class customers in city centers, shopping malls malls or departmental stores to target rising middle class

Source: OSK-DMG

See import ant disclosures at the end of this report 17

BreadTalk Group (BREAD SP) 8 September 2014

Financials

♦ Revenue CAGR of 16.5% over next three Topline growth to continue on store count expansion. Currently, BreadTalk has a years total of 844 outlets, across all its business segments, including about 470 franchise bakeries. Management targets to have 1,000 outlets by FY14F and 2,000 outlets by FY20F. While we expect it to continue growing its network of stores, we are also less aggressive on our estimates. This expansion may drive revenue growth, which we have projected at a CAGR of 16.5% for FY14-FY16F.

Figure 36: Total store count growth assumptions Figure 37: Revenue growth SGD m % 1,600 900 849 30

1,400 800 717 25 1,195 22.3 700 20.8 1,200 19.9 619 1,023 172 600 18.3 20 1,000 895 128 15.4 15.9 836 500 447 59 537 800 686 150 15 400 366 600 534 152 300 10 400 200 5 200 100

0 0 0 FY11 FY12 FY13 FY14F FY15F FY16F FY11 FY12 FY13 FY14F FY15F FY16F

Store count Addition Revenue y-o-y growth

Source: Company data, OSK-DMG Source: Company data, OSK-DMG

Various engines of growth. We expect revenue growth to be driven across all business segments. Since 2008, BreadTalk has expanded its non-bakery business significantly as part of its efforts to diversify and create new engines of growth. Outside of bakeries, we believe Din Tai Fung restaurants in Thailand and Da Shi Dai foodcourts in China could be major drivers of revenue growth.

Figure 38: Estimated breakdown of outlets by type Figure 39: Estimated breakdown of group revenue (by FY16F) FY11 FY12 FY13 FY14F FY15F FY16F Owned bakeries 181 225 269 304 355 416 Franchise 290 384 468 492 553 647 Restaurants 26 30 41 36 41 48 Food atriums 37 47 58 64 73 84 Total 534 686 836 895 1,023 1,195 Food atriums 28% Owned bakeries 43%

Restaurants 22%

Franchise 7% Source: Company data, OSK-DMG Source: Company data, OSK-DMG

See import ant disclosures at the end of this report 18

BreadTalk Group (BREAD SP) 8 September 2014

China to be a key growth driver. A significant portion of growth going forward should come from China, the company’s second largest market currently. Singapore is a mature market, and BreadTalk already has a dominant position in the country. It has operated in China for more than 10 years, and management believes that the company’s experience in F&B retail has increased significantly since then. BreadTalk is one of the biggest and most well-known bakery chains in China. In ♦ Revenue from China to make up 50% of particular, it has a strong footprint in the key cities of Shanghai and Beijing. group turnover by FY16F Management plans to penetrate deeper into Tier-2 and Tier-3 cities, as well as the outer-ring areas of Tier-1 cities, where a large captive market beckons. We expect China’s revenue contribution to overtake Singapore within the next three years.

Small margin improvements, big profit gains. Gross margins for BreadTalk have historically been stable, which we believe reflects the company’s scale and ability to procure raw materials efficiently. We expect net margins to improve incrementally going forward, to 2.6% in FY16F from 2.3% in FY14F, driven by: i) moderation of D&A expenses, and ii) better scale in its business, especially in China.

♦ FY14F profit negatively impacted by asset- Earnings growth of 17.7% CAGR over FY14F-FY16F. We expect net profit to write offs for RamenPlay increase at a CAGR of 17.7% over this period, driven by revenue CAGR of 16.5% and incremental margin improvements. FY14F could be a weaker period, with only a 5.1% y-o-y net profit growth, mainly reflecting asset write-offs related to its RamenPlay business. This is a small part of its business. We believe underlying activities for the group remain healthy and a better profit trajectory will resume in FY15F, with RamenPlay itself having a good chance of a turnaround following some recent changes in its menu.

Figure 40: Margin trends Figure 41: Net profit and y-o-y growth % SGD m % 60 25 42.8 45 54.7 54.4 54.6 54.0 53.0 53.0 53.0 53.0 22.2 40 50 20 18.3 35 27.9 40 30 14.3 15 13.6 12.0 21.3 25 30 11.1 11.3 11.6 20 10 13.3 20 15

10 5 5.1 10 6.6 3.5 4.5 5.5 4.6 4.2 4.3 4.0 4.3 4.3 2.9 3.7 3.2 2.7 2.5 2.3 2.5 2.6 1.6 5 0 0 0 FY09 FY10 FY11 FY12 FY13 FY14F FY15F FY16F FY09 FY10 FY11 FY12 FY13 FY14F FY15F FY16F

Gross Operating Net Net profit - LHS y-o-y growth - RHS

Source: Company data, OSK-DMG Source: Company data, OSK-DMG

♦ Self-funding capex plans Positive cash cycle to fund capex. As BreadTalk sells fresh food, its inventory days are generally very low – between 14 and 17 days in the last five years. As most customers make cash payments, receivables are low and mainly due from franchisees. Given its scale, BreadTalk is able to receive favorable payment terms. These result in a consistently positive working capital cycle and, consequently, operating cash flow. We believe the strong operating cash flow could be sufficient to pay for its aggressive capex plans for FY14F-16F.

♦ Expect net gearing to subside to 46% by Gearing level has gone up, but no risk in our view. Although it has historically FY16F been in a net cash position, the company went into a net debt position in FY12. By FY14F, we estimate net gearing will be 103.8%. Nonetheless, this does not point to a deteriorating business mode but rather, is a reflection of exceptionally high capex during this period. Other than investments in strategic real estate, the company also spent an estimated SGD64.1m building its new headquarters in Singapore. With strong cash generation, we expect net gearing to subside to 46% in FY16F.

See import ant disclosures at the end of this report 19

BreadTalk Group (BREAD SP) 8 September 2014

Furthermore, we think the risk is low as the company has many saleable assets, which it can choose to divest. For instance, the IHQ can also be used in a sale- leaseback transaction to release cash if necessary.

Figure 42: Operating cash flow and working capital Figure 43: Net gearing levels SGD m % 120 120 103.8 99.8 100 94.8 100 89.8 80 70.5 80 72.5 60 46.0 63.5 39.0 60 53.7 40 45.5 48.9 39.1 20 40 32.6 0 16.9 20 11.7 12.3 FY09 FY10 FY11 FY12 FY13 FY14F FY15F FY16F 7.9 7.7 10.5 7.4 8.1 -20 0 -40 -2.0 -60 -20 -61.2 FY08 FY09 FY10 FY11 FY12 FY13 FY14F FY15F FY16F -80 -70.4 -76.0 Operating cash flow Working capital -100

Source: Company data, OSK-DMG Source: Company data, OSK-DMG

Figure 44: Net capex Figure 45: Dividend/share and payout ratios SGD m SGD cents %

120 3.0 35.9 40 105.9 31.6 32.0 35 2.5 30.0 30.0 100 92.6 27.0 30 25.2 2.0 80 25 68.9 20.1 60.5 1.5 20 60 55.3 15 1.0 40 36.9 10 25.5 27.4 0.5 21.6 5 20 1.0 1.0 1.5 1.5 1.8 1.8 2.2 2.7 0.0 0 FY09 FY10 FY11 FY12 FY13 FY14F FY15F FY16F 0 FY08 FY09 FY10 FY11 FY12 FY13 FY14F FY15F FY16F Dividend /share Payout ratio

Source: Company data, OSK-DMG Source: Company data, OSK-DMG

♦ We assume a dividend payout ratio of c.30% Dividend payout ratio likely to be maintained. The company has no official going forward dividend policy, although its dividend payout ratio has been between 25% and 36% in the last five years. Our model assumes the company will maintain a payout ratio of around 30% in FY14F-16F – although any upside is limited by the company’s net gearing position and the need for further capex in order to fund its store expansion plans.

See import ant disclosures at the end of this report 20

BreadTalk Group (BREAD SP) 8 September 2014

Company Background More than just bread. BreadTalk is a Singapore-based F&B company founded by its current chairman, Mr George Quek, in 2000 and listed on SGX in 2003. The company started off with its BreadTalk bakery chain, which popularized artisan bread as well as an open kitchen retail concept in Singapore.

♦ F&B brand creator and strong operator On the back of this success, BreadTalk went on to create several other brands in house, including Food Republic (food courts), Toast Box (bakery and coffee) and RamenPlay (Japanese ramen restaurants). It is also the most successful overseas franchisee for Taiwan-based Din Tai Fung (Chinese restaurants).

Figure 46: Recent visit to a BreadTalk store in Singapore Figure 47: Recent visit to a Toast Box outlet in Singapore

Source: OSK-DMG Source: OSK-DMG

Figure 48: Recent visit to a RamenPlay in Singapore Figure 49: Recent visit to a Food Republic in Singapore

Source: OSK-DMG Source: OSK-DMG

Tapping into different growth markets. After listing in 2003, BreadTalk opened its first overseas outlets in Jakarta, and Shanghai, China. We believe BreadTalk is now one of the most successful F&B retail groups in Singapore and one of the biggest bakery chains in China. In line with the company’s focus on growth in China, BreadTalk also opened separate China headquarters in Shanghai the same year. Today, the company has outlets across 15 countries and a staff count of more than 7,000. Its regional footprint, which stretches from Asia to the Middle East, is invaluable, as it enables the company to simultaneously tap into different growth markets.

See import ant disclosures at the end of this report 21

BreadTalk Group (BREAD SP) 8 September 2014

Staying on top through constant innovations. One of BreadTalk’s core company ♦ A proven company in the fast-changing F&B landscape philosophies is its commitment to creativity and innovation. We believe this is important for an F&B retail company given the fast-changing environment and competitive landscape. A good example is BreadTalk bakery’s brand image, which has not stopped evolving since its creation. In a short span of 14 years since 2000, this bakery concept has undergone three distinct generations and is now heading into its fourth, which combines a rustic retail concept with healthy recipes. The company has even launched a “Get Talking” multimedia campaign to promote this change.

♦ Brand Finance values BreadTalk’s brands at Willingness to try. The company has also exhibited a willingness to create and SGD77m as of April 2012 promote new brands across different food genres from fast food to Japanese ramen. As a further testament, it has won many international and local branding awards. Most recently, World Brand Laboratory, an international branding consultancy, ranked BreadTalk among the 3,000 leading brands in the world.

Figure 50: Generation One – boutique bakery (2000-2004) Figure 51: Generation Two – eye on elegance (2004-2008)

Source: Company Source: Company

Figure 52: Generation Three – jewelry casing (2008-2011) Figure 53: Generation Four – rustic feel (2012-present day)

Source: Company Source: Company

♦ Ambitious target to double the number of Footprint to grow even larger. Since its inception in 2000, BreadTalk has expanded stores to 2,000 by 2020 at breakneck pace, which we believe is almost unprecedented in the industry. The company now has more than 850 retail stores in 15 countries under its umbrella and is targeting to grow this to 1,000 stores by 2014, and 2,000 stores by 2020. With established brands facilitating franchising and improving economies of scale, we believe its brand footprint could expand significantly from here.

See import ant disclosures at the end of this report 22

BreadTalk Group (BREAD SP) 8 September 2014

Figure 54: BreadTalk’s business at a glance Owned Bakery Franchise Restaurant Food Court Brands BreadTalk BreadTalk Din Tai Fung Food Republic Icing Room Carl's Junior (China) Da Shi Dai Toast Box Station Kitchen Da Zhi Thye Moh Chan RamenPlay Bread Society Main Brands BreadTalk BreadTalk Din Tai Fung Da Shi Dai Toast Box Countries China Indonesia India Singapore China Singapore Philippines Oman China Singapore Thailand China Jordan Thailand Hong Kong Hong Kong Kuwait Vietnam Taiwan Malaysia Bahrain Malaysia Thailand Main Countries China China Singapore China Singapore Indonesia Main region of store growth in last 5 years China China Singapore Singapore Singapore Indonesia Hong Kong

Source: OSK-DMG

See import ant disclosures at the end of this report 23

BreadTalk Group (BREAD SP) 8 September 2014

Appendix – Key Risks

More intense competition in the F&B space. The F&B industry is characterized by keen competition and a fragmented market with many players. Barriers to entry are ♦ F&B retail is an inherently competitive relatively low for new entrants. Customer preferences can also shift quickly and industry, although we argue size and scale do sometimes be temporal in nature. BreadTalk has a strong track record of staying present a barrier of entry ahead of customer trends, but a failure to innovate and understand demand preferences could result in brand equity diminishing quickly. In turn, revenue and profit would decline.

Rising costs, especially in Singapore. Food retailers are constantly grappling with ♦ Foreign worker quotas make manpower a rising cost inputs, including rental, labor and the prices of raw materials. Due to the challenge competitive nature of the industry, companies may not be able to immediately pass on price increases to consumers. Retailers in Singapore are currently experiencing cost pressure from high rental and labor shortages. Another major aspect of cost for BreadTalk is renovations and fit-outs, given the company’s expansion and ongoing store refurbishments. An inability to manage such costs could result in profit falling short of our expectations.

Food safety scandals could harm reputation. Food companies in general face the risk of food safety scandals. This is especially so for a company like BreadTalk which ♦ Food safety is a concern due to franchisees operates across several geographies and adopts a variety of business formats. Food safety issues can originate from a variety of sources and a minor oversight may have significant repercussions on the group’s brand equity and reputation. For example, in Dec 2013, there were reports that elevated levels of aluminium were found in the raisin muffins in Hong Kong, as the amount of baking powder used was higher than the stipulated volume. In serious cases, the company may have to pay fines and/or compensation to victims, which would adversely affect its bottomline.

Overly aggressive expansion. BreadTalk’s 2Q14 net gearing is 137%, partly because the company is holding several real estate assets on its balance sheet. We ♦ Management will have to watch out for the expect net gearing to trend downwards as the company continues to generate bottomline healthy operating cash flow. However, if it is more aggressive than we expect in new store openings, this could put pressure on its balance sheet. It will also result in higher depreciation charges, which would dampen the company’s bottomline.

See import ant disclosures at the end of this report 24

BreadTalk Group (BREAD SP) 8 September 2014

Appendix – Key Management

George Quek Meng Tong, Chairman. Mr Quek is the founder of BreadTalk Group and continues to drive the group’s strategic direction and development. He started his food and beverage business in Taiwan in 1982 and returned to Singapore in 1992. In 2000, he started the bakery business and listed it on the SGX in 2003. Among other awards, he was named the Ernst & Young Entrepreneur of the Year 2006.

Katherine Lee Lih Leng, Deputy Chairman. Ms Lee oversees the group’s research and development, as well as pioneers new ideas and concepts. She also formulates product training and technical skill upgrade programmes to ensure proper transfer of knowledge and skills to the franchisees. In addition, she spearheads product costing. Ms Lee has more than 15 years of experience in the industry.

Oh Eng Lock, Group CEO. Mr Oh was appointed as the group’s CEO on 1 Jan 2011. He oversees the group’s global operations, focusing on strategic planning and business development. He joined BreadTalk in 2010 as group managing director. Prior to this, he was regional managing director with Merrill Lynch in Hong Kong, overseeing its North Asia business.

Lawrence Yeo, Group CFO. Mr Yeo was appointed as Group CFO on 10 Oct 2011. He oversees the group's global financial matters, including corporate finance, treasury, capital management, investments, risk management and investor relations. He has extensive experience in various roles and capacities including Group CFO of two other SGX-listed companies. Mr Yeo holds an MBA from the University of Strathclyde and a Bachelor of Accountancy degree from the National University of Singapore.

See import ant disclosures at the end of this report 25

BreadTalk Group (BREAD SP) 8 September 2014

Financial Exhibits

Profit & Loss (SGDm) Dec-12 Dec-13 Dec-14F Dec-15F Dec-16F Total turnover 447 537 619 717 849 Cost of sales (206) (252) (291) (337) (399) Gross profit 241 285 328 380 450 Gen & admin expenses (53) (64) (73) (81) (93) Selling expenses (181) (210) (246) (286) (338) Other operating costs 10 12 16 17 18 Operating profit 19 23 25 31 37 Operating EBITDA 50 62 73 86 103 Depreciation of fixed assets (30) (39) (48) (55) (65) Amortisation of intangible assets (1) (0) (1) (1) (1) Operating EBIT 19 23 25 31 37 Net income from investments 0 1 0 1 1 Interest income 2 1 1 1 1 Interest expense (1) (3) (3) (4) (3) Pre-tax profit 19 22 23 29 36 Taxation (6) (6) (7) (9) (11) Minority interests (2) (3) (2) (2) (3) Profit after tax & minorities 12 14 14 18 22 Reported net profit 12 14 14 18 22 Recurring net profit 12 14 14 18 22

Source: Company data, OSK-DMG Cash flow (SGDm) Dec-12 Dec-13 Dec-14F Dec-15F Dec-16F Operating profit 19 23 25 31 37 Depreciation & amortisation 31 39 48 56 66 Change in working capital 7 17 (2) 12 8 Other operating cash flow 2 2 - - - Operating cash flow 59 81 71 98 111 Interest received 2 1 1 1 1 Interest paid (1) (3) (3) (4) (3) Tax paid (5) (8) (7) (9) (11) Cash flow from operations 54 72 61 87 98 Capex (93) (106) (55) (60) (69) Other new investments (0) (0) (1) (1) (1) Other investing cash flow (36) (18) (18) 5 - Cash flow from investing activities (129) (125) (74) (56) (69) Dividends paid (6) (4) (5) (6) (8) Shares repurchased (0) - - - - Proceeds from issue of shares (4) 3 - - - Increase in debt 79 57 1 (20) (25) Other financing cash flow (0) (1) (1) 1 1 Cash flow from financing activities 70 55 (4) (26) (32) Cash at beginning of period 87 64 79 63 69 Total cash generated (5) 3 (17) 6 (3) Implied cash at end of period 82 67 63 69 65

Source: Company data, OSK-DMG

See import ant disclosures at the end of this report 26

BreadTalk Group (BREAD SP) 8 September 2014

Financial Exhibits

Balance Sheet (SGDm) Dec-12 Dec-13 Dec-14F Dec-15F Dec-16F Total cash and equivalents 64 79 63 69 65 Inventories 9 10 11 12 15 Accounts receivable 44 51 58 67 79 Other current assets 9 10 8 8 10 Total current assets 126 150 140 156 169 Total investments 4 8 8 9 10 Tangible fixed assets 157 226 233 239 243 Intangible assets 9 8 8 8 8 Total other assets 60 77 95 90 90 Total non-current assets 230 318 344 345 350 Total assets 356 468 484 502 519 Short-term debt 46 30 40 40 25 Accounts payable 91 103 112 130 154 Other current liabilities 69 80 75 80 81 Total current liabilities 206 213 227 250 260 Total long-term debt 51 138 130 110 100 Other liabilities 9 13 12 13 13 Total non-current liabilities 59 151 142 123 113 Total liabilities 265 364 369 373 373 Other reserves 83 94 103 115 130 Shareholders' equity 83 94 103 115 130 Minority interests 8 10 12 14 17 Total equity 91 104 115 129 147 Total liabilities & equity 356 468 484 502 519

Source: Company data,OSK-DMG

Key Ratios (SGD) Dec-12 Dec-13 Dec-14F Dec-15F Dec-16F Revenue growth (%) 22.3 19.9 15.4 15.9 18.3 Operating profit growth (%) 9.6 23.1 6.9 25.0 20.1 Net profit growth (%) 3.5 13.3 5.1 27.9 21.3 EPS growth (%) 3.6 13.2 5.0 27.8 21.3 Bv per share growth (%) 5.7 13.6 9.7 11.8 12.7 Operating margin (%) 4.2 4.3 4.0 4.3 4.3 Net profit margin (%) 2.7 2.5 2.3 2.5 2.6 Return on average assets (%) 3.9 3.3 3.0 3.7 4.3 Return on average equity (%) 15.0 15.4 14.5 16.7 18.1 Net debt to equity (%) 35.3 85.7 93.4 63.1 40.8 DPS 0.01 0.02 0.02 0.02 0.03 Recurrent cash flow per share 0.19 0.26 0.22 0.31 0.35

Source: Company data, OSK-DMG

See import ant disclosures at the end of this report 27

BreadTalk Group (BREAD SP) 8 September 2014

SWOT Analysis

• Strong brand equity and has first-mover advantage • F&B is a highly for several concepts competitive industry • Multiple business formats enable it to have bargaining power over landlords • New retail concepts by • Invaluable experience in F&B retail competitors may change consumer preferences • Artisan bread • Food safety concept scandals may catching on in damage its Asean and reputation China • Food retail is a fast-growing industry in China • Franchisee model allows it to grow its presence faster • Highly dependent on creative drive of key personnel, founder George Quek • Constant capex investments to expand its presence • Subject to rental cost increases

P/E (x) vs EPS growth P/BV (x) vs ROAE

35 30% 6 20%

30 26% 5 17%

25 21% 4 13% 20 17% 3 10% 15 13% 2 7% 10 9%

5 4% 1 3%

0 0% 0 0% 12 13 14 15 16 12 13 14 15 16 ------Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan

P/E (x) (lhs) EPS growth (rhs) P/B (x) (lhs) Return on average equity (rhs)

Source: Company data, OSK-DMG estimates Source: Company data, OSK-DMG estimates

Company Profile BreadTalk Group Limited manufactures and retails a variety of food, bakery, and confectionery products. The company also operates food and drink sale outlets, eating houses, and restaurants. The company was founded in 2000.

See import ant disclosures at the end of this report 28

BreadTalk Group (BREAD SP) 8 September 2014

Recommendation Chart

Price Close 1.69

1.49

1.29

1.09

0.89

0.69

0.49

0.29 Sep-09 Dec-10 Mar-12 Jun-13

Source: OSK-DMG estimates, Bloomberg

See import ant disclosures at the end of this report 29

RHB Guide to Investment Ratings DMG & Partners Research Guide to Investment Ratings

Buy: Share price may exceed 10% over the next 12 months Trading Buy: Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain Neutral: Share price may fall within the range of +/- 10% over the next 12 months Take Profit: Target price has been attained. Look to accumulate at lower levels Sell: Share price may fall by more than 10% over the next 12 months Not Rated: Stock is not within regular research coverage

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The information contained herein has been obtained from sources we believed to be reliable but we do not make any representation or warranty nor accept any responsibility or liability as to its accuracy, completeness or correctness. Opinions and views expressed in this report are subject to change without notice.

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Kuala Lumpur Hong Kong Singapore

Malaysia Research Office RHB OSK Securities Hong Kong Ltd. (formerly known DMG & Partners RHB Research Institute Sdn Bhd as OSK Securities Securities Pte. Ltd. Level 11, Tower One, RHB Centre Hong Kong Ltd.) 10 Collyer Quay Jalan Tun Razak 12 th Floor #09-08 Ocean Financial Centre Kuala Lumpur World-Wide House Singapore 049315 Malaysia 19 Des Voeux Road Tel : +(65) 6533 1818 Tel : +(60) 3 9280 2185 Central, Hong Kong Fax : +(65) 6532 6211 Fax : +(60) 3 9284 8693 Tel : +(852) 2525 1118 Fax : +(852) 2810 0908 Jakarta Shanghai Phnom Penh

PT RHB OSK Securities Indonesia (formerly known as RHB OSK (China) Investment Advisory Co. Ltd. RHB OSK Indochina Securities Limited (formerly PT OSK Nusadana (formerly known as OSK (China) Investment known as OSK Indochina Securities Limited) Securities Indonesia) Advisory Co. Ltd.) No. 1-3, Street 271 Plaza CIMB Niaga Suite 4005, CITIC Square Sangkat Toeuk Thla, Khan Sen Sok 14th Floor 1168 Nanjing West Road Phnom Penh Jl. Jend. Sudirman Kav.25 Shanghai 20041 Cambodia Jakarta Selatan 12920, Indonesia China Tel: +(855) 23 969 161 Tel : +(6221) 2598 6888 Tel : +(8621) 6288 9611 Fax: +(855) 23 969 171 Fax : +(6221) 2598 6777 Fax : +(8621) 6288 9633 Bangkok

RHB OSK Securities (Thailand) PCL (formerly known as OSK Securities (Thailand) PCL) 10th Floor, Sathorn Square Office Tower 98, North Sathorn Road,Silom Bangrak, Bangkok 10500 Thailand Tel: +(66) 2 862 9999 Fax : +(66) 2 108 0999

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