17 Feb 2020

CMB International Securities | Equity Research

Jiumaojiu (9922 HK) BUY (Initiation) Excellence and minimalism to unlock scalability Target Price HK$10.82 Up/Downside +20.2%  Jiu Mao Jiu/ Tai Er are the No. 2/ 1 restaurant brand in the Northwestern Current Price HK$9.00 Chinese/ Sauerkraut fish cuisine. Jiumaojiu International (“JMJ Int”) has 147/ 65/ 29 Jiu Mao Jiu/ Tai Er/ other restaurants (241 in total) in FY18. Jiu

Mao Jiu/ Tai Er brand have 0.8%/ 4.4% market shares in the Northwestern Chinese/ Sauerkraut fish cuisine industry in 2018, by Frost & Sullivan. Noted China Catering Sector that impressive sales/ NP att. CAGR of 34%/ 20% were achieved in FY13-18. Walter Woo  Active pursuit of excellence: food, service and dining ambience. We (852) 3761 8776 believe Tai Er’s dedication on 1) quality supply chain, 2) customer experience and 3) unique dining ambience are reasons for its superior popularity. Its seat [email protected] turnover was 4.9x (vs peers’ avg. of 3.9x) and its customer rating on Dianping.com was 4.6 (out of 5, peers’ avg. of 4.0). Numbers are stunning if Stock Data we adjust for shorter opening hours and no delivery/ takeaway allowed. Mkt Cap (HK$ mn) 12,451 Avg 3 mths t/o (HK$ mn) 206.80  Advanced SKU optimization can drive efficiency and scalability. 52w High/Low (HK$) 11.00/7.60 Competition for minimal SKUs restaurant is intense, and is hard to differentiate Total Issued Shares (mn) 1,383.4 from other brands. However, once the brand has become successful, its first Source: Bloomberg mover advantage and highly standardized nature could fuel exponential growth and induce remarkable profit margin. We estimate the potential market Shareholding Structure size for Tai Er restaurants to be ~810 in FY19E, referencing to five different Mr. Guan Yi Hong 44.42% parameters. We forecast Tai Er stores to reach 314 by FY21E. Shanghai Ling Yu 10.84% MT BVI 6.59%  Open, innovative and co-wining culture to unlock staff potential. We MX BVI 6.60% believe JMJ Int’l can maintain its competitiveness, thanks to 1) its corporate Others 3.83% structure that maximizes focus on consumer trends (free up brand divisions’ Free Float 27.71% energy by setting up headquarters’ functional departments), 2) emphasis on Source: HKEx restaurant staff quality and 3) clear equity incentives for its top management (management ownership for Jiu Mao Jiu/ Tai Er are 15%/ 15%). Share Performance  15/ 30/ 45 days of restaurants’ suspension may lead to 17%/ 28%/ 41% Absolute Relative 1-mth -12.8% -9.8% cut in FY20E NP, due to the coronavirus. According to our scenario analysis, 3-mth n/a n/a 15/ 30/ 45 days of suspension could lead to 4%/ 7%/ 10% cut in FY20E sales 6-mth n/a n/a and 17%/ 28%/ 41% cut in FY20E NP. We used a 30-day case in our model. 12-mth n/a n/a  We forecast 44%/ 94% sales/ net profit att. CAGR in FY18-21E. We project Source: Bloomberg 44% sales CAGR to be driven by: 8% Jiu Mao Jiu sales CAGR (1% sales per store and 7% number of restaurants) and 91% Tai Er sales CAGR (13% sales 12-mth Price Performance (HK$) per store and 69% number of restaurants) and 127% other brands’ sales 11.0 Stock HSI CAGR. We also expect net profit to grow at 94% CAGR, due to 1) greater sales from higher OP margin Tai Er brand and 2) ramp up of Tai Er’s store 9.5 productivity and 3) absence of one-off inventory losses in FY18. 8.0

 Initiate BUY with TP of HK$ 10.82. We valued JMJ Int’l using the STOP 6.5

method. We applied 17x for Jiu Mao Jiu (~25% discounts to peers) and a 5.0 0.65x 3 years PEG for Tai Er (leaders’ median of 1.8x, equal to 71.1x FY20E 14/1/20 23/1/20 1/2/20 10/2/20 P/E) to derive the TP, which also implied a 55x FY20E P/E and a 0.84x 3-year PEG for the group. JMJ Int’l is now trading at 46x FY20E P/E and 0.70x PEG. Source: Bloomberg We believe premium (in P/E) for Tai Er can be justified by :1) leading position in Sauerkraut fish and superior popularity, 2) huge growth potential (both sales Auditor: KPMG and profit margin) and 3) much faster than peers’ sales/ net profit growth.

Earnings Summary (YE 31 Dec) FY16A FY17A FY18A FY19E FY20E FY21E Revenue (RMB mn) 1,164 1,469 1,893 2,836 3,733 5,657 YoY growth (%) n.a. 26.2 28.8 49.8 31.6 51.6 NP att. (RMB mn) 52 67 70 200 244 509 EPS (RMB) n.a. n.a. n.a. 0.144 0.176 0.368 YoY growth (%) n.a. n.a. n.a. 186.7 22.3 108.4 P/E (x) n.a. n.a. n.a. 55.9 45.8 22.0 P/B (x) n.a. n.a. n.a. 4.2 4.0 3.4 ROE (%) n.a. n.a. n.a. 14.1 8.9 16.7 Net gearing (%) 80.0 44.5 70.8 Net cash Net cash Net cash Source: Company data, CMBIS estimates

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE ACCESS KEY TO OUR REPORTS ON BLOOMBERG: CMBR 1 17 Feb 2020

Contents

Investment Thesis ...... 3 Focus Charts and Tables ...... 5 Company Background ...... 6 JMJ Int is a leading and fast growing restaurant group in China ...... 6 Jiu Mao Jiu/ Tai Er are the No. 2/ 1 restaurant brand in the Northwestern Chinese / sauerkraut fish cuisine industry ...... 6 Company’s key positives and growth drivers ...... 8 1) Active pursuit of excellence: food, service and dining ambience ...... 8 2) Advanced SKU optimization can drive efficiency and scalability ...... 15 3) Open, innovative and co-winning culture to unlock staff potential ...... 25 Industry Analysis ...... 27 1) Chinese sauerkraut fish industry is rapidly growing ...... 27 2) Rising affordability will drive premium and dining out demand ...... 29 3) Chain restaurant has room and edges to consolidate the market ...... 30 Peers’ Comparision ...... 31 Assumptions ...... 33 Financial Analysis ...... 34 We forecast sales growth of 50%/ 32%/ 52% YoY in FY19E/ 20E/ 21E...... 34 We forecast NP att. growth of 187%/ 22%/ 108% YoY in FY19E/ 20E/ 21E ...... 37 Scenario analysis: impact on financials of the coronavirus ...... 43 Balance sheet and Cash flow ...... 45 Valuation ...... 47 Initiate BUY on JMJ Int’l with TP of HK$ 10.82 using SOTP method ...... 48 Shareholding Structure ...... 50 Management Profile ...... 51 Key Risks ...... 52 Financial Summary ...... 53 Appendix ...... 54

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE ACCESS KEY TO OUR REPORTS ON BLOOMBERG: CMBR 2 17 Feb 2020

Investment Thesis

 Jiu Mao Jiu/ Tai Er are the No. 2/ 1 restaurant group in the Northwestern Chinese/ sauerkraut fish cuisine industry. Jiumaojiu International (“JMJ Int”) has 147/ 65/ 15/ 14 Jiu Mao Jiu/ Tai Er/ Other brands/ franchised restaurants (241 stores in total) in FY18, where the “Jiu Mao Jiu” and “Tai Er” brand were ranked No.2 and No.1 with 0.8% and 4.4% market shares in the Northwestern Chinese cuisine and Sauerkraut fish restaurant industry in 2018. Noted that impressive sales and net profit att. CAGR of 34% and 20% were achieved during FY13-18.

 Active pursuit of excellence: food, service and dining ambience. We believe the Company’s dedication on 1) quality supply chain, ingredient and dishes, 2) comfortable and entertaining customer experience and 3) unique dining ambience are drivers behind Tai Er superior popularity, where its seat turnover was 4.9x (vs peers’ avg. of 3.9x) and its customer rating on Dianping.com was 4.6 (out of 5, peers’ avg. at 4.0). If we adjust for factors like shorter opening hours and no delivery/ takeaway allowed, its operating numbers could be far more stunning.

 Advanced SKU optimization can drive efficiency and scalability. Competition for minimal SKUs restaurant is intense, as it is hard to differentiate from other brands. However, once the brand has become successful, its first mover advantage and highly standardized nature could fuel exponential growth and induce remarkable profit margin. We estimate the market potential for Tai Er restaurants could be at ~810 in FY19E, referencing to five different parameters, namely: 1) Peers comparison, 2) Penetration in shopping malls, 3) City penetration and store density per city, 4) Region penetration in China and 5) GDP and population.

 Open, innovative and co-winning culture to unlock staff potential. We believe JMJ Int to remain highly competitive in the industry, thanks to 1) its corporate structure that maximize focus on consumer trends (free up brand divisions’ energy by setting up headquarters’ functional departments), 2) emphasis on restaurant staff quality and 3) clear equity incentives for its top management (management ownership for Jiu Mao Jiu/ Tai Er/ Double Eggs/ Cooking Spicy Kebab/ Uncle Chef are 15%/ 15%/ 20%/ 20%/ 25%).

 Chinese sauerkraut fish industry is growing at 34% CAGR in 2018-2024E. Chinese sauerkraut fish industry sales was RMB 12.3bn in 2018 and is estimated to grow by 34% CAGR to RMB 70.5bn in 2024E, according to Frost & Sullivan, driven by 1) its highly popular and addictive spicy sichuan flavor, 2) rising appetite of fishery product, which is traditionally considered as protein rich and healthy, and 3) increasingly fashionable and standardized supply.

 Rising affordability will drive premium and dining out demand. We expect consumption for fishery product, and demand for dining out will continue to grow as the Chinese’s overall income increases. According to NBS, ministry of Agriculture of PRC China, the CAGR for prices of bass per KG and Tai Er’s ASP had increased by 3.7% and 5.3%, which is still way below that for rural and urban income of 9.2% and 8.2% during 2013 to 2018, implying a rising affordability. Similarly, according to data from HK statistic and census, income spent on dining out is greater for the higher income group in HK, we believe this consumption pattern will also apply to China.

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE ACCESS KEY TO OUR REPORTS ON BLOOMBERG: CMBR 3 17 Feb 2020

 Chain restaurant has room and edges to consolidate the market. Compared to other more developed regions, such as US (31%), Hong Kong (27%), Taiwan (20%), etc., percentage of stores owned by chain brand is still very low at only 2% in China, according to Euromonitor. Also, according to Frost & Sullivan, revenue from the chain restaurants in China, would grow at a faster than industry CAGR of 9.6% in 2018 to 2024E, and mix of sales will rise from 19.5% in 2018 to 20.1% in 2024.

 15/ 30/ 45 days of restaurants’ suspension may lead to 17%/ 28%/ 41% cut in FY20E net profit, due to the coronavirus. According to our scenario analysis, 15/ 30/ 45 days of suspension could lead to 4%/ 7%/ 10% cut in FY20E sales (assumed daily sales of RMB 9.5mn in 1Q20E), and 17%/ 28%/ 41% cut in FY20E net profit (we estimate the fixed /variable costs account for 64%/36% of FY20E opex). We have factored in a 30-day case in our model. Please refer to appendix for more calculations.

 We forecast a 44% / 94% sales/ net profit att. CAGR in FY18E-21E. We project 44% sales CAGR to be driven by: 8% Jiu Mao Jiu sales CAGR (1% sales per store and 7% number of restaurants) and 91% Tai Er sales CAGR (13% sales per stores and 69% number of restaurants) and 127% other brands’ sales CAGR. We also expect the net profit to grow at 94% CAGR, due to 1) greater sales from higher OP margin Tai Er brand and 2) ramp up of Tai Er’s store productivity and 3) absence of one-off inventory losses in FY18.

 Initiate BUY with TP of HK$ 10.82 (using SOTP and implied a 55x FY20E P/E). We value JMJ Int’l using the STOP method. We applied a 17x for Jiu Mao Jiu (~25% discounts to peers) and a 0.65x 3 years PEG for Tai Er (~64% discounts to leaders’ 1.8x PEG, equal to a 71.1x FY20E P/E) to derive the TP, which also implied a 55x FY20E P/E and a 0.84x 3 years PEG for the group. JMJ Int’l is now trading at 46x FY20E P/E and 0.70x adjusted PEG (based on adjusted NP CAGR of 80.4% during FY18-21E). We believe premium for Tai Er can be justified by: 1) leading position in Sauerkraut fish and superior popularity, 2) huge growth potential (both sales and profit margin) and 3) much faster than peers’ sales/ net profit growth.

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE ACCESS KEY TO OUR REPORTS ON BLOOMBERG: CMBR 4 17 Feb 2020

Focus Charts and Tables

Figure 1: Sales CAGR, FY18-21E Figure 2: GP, EBIT, NP att. margin

6,000 (RMB mn) 5,657 70% FY18A-21E Sales CAGR 218 5,000 60% 67.0% 65.1% Jiumaojiu 8% 64.5% 63.0% 62.6% 62.1% Tai Er 91% 3,733 50% 4,000 Others 127% 128 3,776 Total 44% 2,836 40% 3,000 43 30% 1,893 2,213 2,000 1,469 19 1,377 15.4% 1,164 22 20% 11.3% 12.6% 11.8% 4 540 10.4% 8.6% 68 244 1,000 1,664 10% 1,204 1,334 1,416 1,392 9.0% 1,092 4.5% 4.6% 3.7% 7.0% 6.5% 0 0% FY16A FY17A FY18A FY19E FY20E FY21E FY16A FY17A FY18A FY19E FY20E FY21E Jiu Mao Jiu Tai Er Other brands GP margin EBIT margin NP att. margin

Source: Company data, CMBIS estimates Source: Company data, CMBIS estimates, EBIT = revenue - raw materials and consumables used + other income - staff costs - depreciation of right-of-use assets - other rentals expenses - D & A of other assets - utilities expenses - travelling expenses - professional services fees - A & P expenses - delivery service fees - other expenses

Figure 3: Store CAGR, FY18-21E Figure 4: Tai Er’s sales per store is underestimated FY18A-21E Stores CAGR 583 (Sales (Annuali 600 18.0 (RMB mn) Jiumaojiu 7% 91 (sales per store) per avg. zed 500 Tai Er 69% store) sales 428 16.0 Others 82% per 13.6 400 Total 37% 55 14.0 store) 312 12.0 314 11.6 300 31 12.0 227 214 10.3 9.5 9.2 9.3 9.4 175 15 134 10.0 9.0 200 141 65 8.3 13 28 8.0 100 147 147 159 178 128 139 6.0 0 FY16A FY17A FY18A FY19E FY20E FY21E 4.0 FY18 FY19E FY21E FY18 FY18 Jiu Mao Jiu Tai Er Other brands Total Jiu Mao Jiu Tai Er

Source: Company data, CMBIS estimates Source: Company data, CMBIS estimates, annualized sales per stores = average sales per day x 365

Figure 5: Restaurant level OP margin, by brand Figure 6: Peers comparison – FY20E P/E

35% (x) 30% 60.0 47.5 30% 45.8 45.0 41.7 24% 25% 22% 22% 29.8 20% 30.0 20.4 22.5 22.5 20% 18% 20% 15.5 15.1 19% 15.0 17% 17% 17% 16% 15% 17% 17% 17% 16% 17% 0.0 10% 13% FY16A FY17A FY18A FY19E FY20E FY21E

Jiu Mao Jiu Tai Er Total

Source: Company data, CMBIS estimates, restaurant level operating profit = Source: Bloomberg, CMBIS estimates, as at 14 Feb 2020, FY3/21E revenue - raw materials and consumables used - staff costs - depreciation of P/E was applied for CDC as its year end is at Mar right-of-use assets - other rentals and related expenses - depreciation and amortization of other assets - utilities expenses - delivery service fees.

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE ACCESS KEY TO OUR REPORTS ON BLOOMBERG: CMBR 5 17 Feb 2020

Company Background JMJ Int is a leading and fast growing restaurant group in China Jiumaojiu International (“JMJ Int”)’s history can be traced back to 1995, when the founder, Mr. Guan Yihong, started his first noodle restaurant in HaiKou, Hainan. In 2005, the Company adopted brand name “Jiu Mao Jiu” for all its original Traditional Shanxi Noodles brand restaurants. Rapid growth was achieved since 2010, after the Company’s transformation into a fast casual restaurant operator and expanded into shopping malls. In 2015, based on the experience and knowledge accumulated during the course of JMJ Int’s development, it began multi-brand and multi-concept strategy and introduced several new brands, including Tai Er, which subsequently become a highly popular brand. Noted that impressive sales and net profit att. CAGR of 34% and 20% were achieved during FY13-18.

Figure 7: Group revenue by brand, FY18 Figure 8: Group sales and net profit, FY13-18

Other 2,400 (RMB mn) brands, 1.0% 1,893 Tai Er, 2,000 28.5% 1,600 1,469 1,164 1,200 1,034 735 800 440 400 28 43 31 52 67 70 Jiu Mao 0 Jiu, 70.5% FY13A FY14A FY15A FY16A FY17A FY18A Sales Net profit att.

Source: Company data, CMBIS estimates Source: JMJ Int’s A-shares prospectus, Company data, CMBIS estimates

Jiu Mao Jiu/ Tai Er are the No. 2/ 1 restaurant brand in the Northwestern Chinese / sauerkraut fish cuisine industry The Company generated RMB 1.893bn sales and RMB 70mn net profit att. in FY18, from 147 “Jiu Mao Jiu”, 65 “Tai Er”, 15 other brands and 14 franchised restaurants (241 stores in total). “Jiu Mao Jiu” and “Tai Er” brand was ranked No.2 and No.1 with 0.8% and 4.4% market shares in the Northwestern Chinese and Sauerkraut fish restaurant industry in 2018.

Figure 9: Northwestern Chinese Restaurant Market Figure 10: Sauerkraut Fish Restaurant Market (China), by revenue and shares, in 2018 (China), by revenue and shares, in 2018 (RMB bn) (%) (RMB mn) (%) 6 5.3 3.5% 600 5.0% 3.2% 540 5 3.0% 4.4% 2.5% 500 474 4 4.0% 2.0% 3.9% 3 400 1.5% 363 2 1.3 1.0% 3.0% 3.0% 0.8% 300 1 0.7 0.4% 0.5% 0 0.0% 200 2.0% Co. A (1988) Jiu Mao Jiu Co. F (1998) Tai Er (2015) Co. G (2015) Co. D (2010) (1994) Retail Sales Value (L.H.S.) Market Shares (R.H.S.) Retail Sales Value (L.H.S.) Market Shares (R.H.S.)

Source: Frost & Sullivan, CMBIS estimates, year found in the bracket Source: Frost & Sullivan, CMBIS estimates, year found in the bracket

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE ACCESS KEY TO OUR REPORTS ON BLOOMBERG: CMBR 6 17 Feb 2020

Figure 11: Brands details Double Eggs/ Cooking Spicy Kebab/ Brands Jiu Mao Jiu Tai Er Uncle Chef/ 那未大叔 2颗鸡蛋煎饼 怂

Logo(s)

Pickled Chinese Sichuan cold pot Northwestern China & Chinese style Theme cuisines/ dishes sauerkraut fish/ 老 skewers/ 冷鍋 Delicate Cantonese others crepes/ 煎餅 罎子酸菜魚 串串 Reliable and Healthy, convenient Stylish gathering Brand orientation hygienic dining/ Unique and amusing Your classy chef and fast place 放心餐桌 Young Medium to highend Target customers Families and groups Young customers Young customers customers customers Average spending per RMB 50-70 RMB 70-90 RMB 20-30 RMB 50-70 RMB 120-150 customer

GFA per restaurants 250-400 sq.m 200-300 sq.m 10-40 sq.m 120-200 sq.m 300-500 sq.m

Self-operated: 22 Number of restaurants* Self-operated: 147 Self-operated: 98 Self-operated: 1 Self-operated: 1 Franchised: 41 FY18 Revenue RMB 1,334mn RMB 540mn RMB 16mn Minimal Minimal FY18 SSSG 4.40% 7.70% n/a n/a n/a

Source: Company data, CMBIS estimates

Figure 12: Store image of Jiu Mao Jiu Figure 13: Signature dishes of Jiu Mao Jiu

Source: www.dianping.com, Company data, CMBIS Source: www.dianping.com, Company data, CMBIS

Figure 14: Store image of Tai Er Figure 15: Signature dishes of Tai Er

Source: www.dianping.com, Company data, CMBIS Source: www.dianping.com, Company data, CMBIS

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE ACCESS KEY TO OUR REPORTS ON BLOOMBERG: CMBR 7 17 Feb 2020

Company’s key positives and growth drivers 1) Active pursuit of excellence: food, service and dining ambience Tai Er brand is indeed a success with such a superior popularity, and Jiu Mao Jiu is also industry leading. In our view, it is the result of JMJ Int dedication on 1) high quality ingredients and dishes, 2) customer-oriented services and 3) unique dining ambience.

 1.1 Superior popularity even with short opening hours & no delivery business. JMJ Int. has proved that it is a highly competitive leader in the catering industry in China, thanks to its superior customer review scores on Dianping.com and seat/table turnover ratio. We have gathered data from the Dianping.com/大众点评, where Tai Er and Jiu Mao Jiu have scores of 4.6 and 4.1, which are both higher than peers’ average of 4.0. Tai Er demonstrates very impressive seat/ table turnover rate of 4.9x, while Jiu Mao Jiu records low number at only 2.4x, compared to peers’ average of 3.9x in FY18. Noted that for the same number, seat turnover would indicate a higher traffic vs table turnover.

If we adjust for opening hours, Tai Er’s seat turnover per hour will be much higher than others, staying at 0.49x per hour (since it usually opens for only 10 hours a day, vs Haidilao’s 20 hours). Considering no delivery business is allowed, it is simply stunning.

Figure 16: DianPing customer ratings, by brand Figure 17: Seat/ table turnover ratio, by brand

5.5 (Out of 5) (Hot pot & fast (Fast food) (x) 5.5 5.0 4.9 (Hot pot & fast (Fast food) 4.9 causal dining) causal dining) 4.7 4.5 4.5 5.0 4.6 4.5 4.0 4.0 4.3 4.5 4.1 3.5 3.4 4.1 3.9 3.5 3.9 3.8 3.8 3.8 2.8 4.0 3.6 3.7 2.5 2.4 3.5 2.5 3.0 1.5

Source: www.dianping.com, Average score of restaurants in BJ, SH, Source: Table turn ratio used for Haidilao and Ajisen (Seat turn SZ and GZ (max 45 restaurants counted per city, ranked by numbers otherwise), data extracted from FY18 (last filing otherwise), Company of comment), Company data, CMBIS estimates, as at Sep2019 data, CMBIS estimates Figure 18: Seat/ table turn - opening hours adjusted Figure 19: Opening hours, by brand 0.60 (x per hour) 0.49 (opening hours) 1135.00 am 8 (next 0.45 0.36 day) 0.30 0.28 0.25 0.25 0.28 0.25 325.00 am 21.5 22 21.5 22 22 21 22 21 22 22 0.30 0.23 0.23 0.20 0.15 315.00 pm

- 55.00am 10 10.5 11 10 10 11 10 7.5 6 7.5 8

Source: www.dianping.com, Company data, CMBIS estimates, as at Source: www.dianping.com, Company data, CMBIS estimates, as at Sep2019 Sep2019

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE ACCESS KEY TO OUR REPORTS ON BLOOMBERG: CMBR 8 17 Feb 2020

Moreover, both Jiu Mao Jiu/ Tai Er’s operating income breakeven and cash investment payback period are very short at ~1 month and ~7/ 22 months, vs Haidilao’s 1-3 and 6-13 months, XBXB’s 3 and 17.9 months and other major Chinese brands’ average of 3-6 and 15-20 months. This superb popularity is a solid evidence that Tai Er/ Jiu Mao Jiu can attract lots of customers in a relatively short time when it opens new stores, hence effectively indicating a better brand popularity.

Figure 20: Operational breakeven and Cash investment payback period, by brand Yum Yum Cafe de Other major JMJ Int./ JMJ Int./ Haidilao/ XBXB/ Tai Hing/ Tai Hing/ Tsui Wah/ China/ China/ Ajisen/ Coral/ chinese 九毛九 太二 海底捞 呷哺呷哺 太兴 茶木 翠华 肯德基 必胜客 味千 大家乐 brands P&L breakeven period (Month) ~ 1 ~ 1 ~ 1 - 3 ~ 3 ~ 2 - 6 ~ 2 ~ 1 - 3 n/a n/a ~ 4 - 6 n/a ~ 3 - 6 Cash payback period (Month) ~ 22 ~ 7 ~ 6 - 13 ~ 17.9 ~ 17 - 32 ~ 9 - 16 ~ 12 - 36 ~ 12 -24 ~ 24 -48 ~ 24 - 36 ~ 12 - 24 ~ 15 - 20 Source: Company data - last filings, Haidilao’s IPO prospectus, Tai Hing’s IPO prospectus, CMBIS estimates

 1.2 Tai Er: High quality ingredients, delicate and exquisite dishes. We concur with the Company’s pursuit of its philosophy of servicing delicacies at affordable prices (好吃不貴), because its costs of goods sold (mainly foods) is rather high at 35%, vs peers’ average of 31%. We estimate that the costs of goods sold to be higher at 42% for Tai Er in FY18, but is similar to Haidilao’s 41% and XBXB’s 38%, which are known for high quality ingredients. Noted that JMJ Int only procures bass from Foshan and custom-made gourmet sauerkraut, and source rice from Heilongjiang. Also, according to data from Dianping.com, customer ratings (taste) is high for Tai Er, at around 8.9-9.1, which is 1) the highest or jointly the highest vs peers and 2) the only one which managed to be popular across all tier 1 cities (only regional for other brands).

Figure 21: DianPing customer ratings - taste, by Figure 22: COGS, by group, FY18 brand (SZ) (GZ) (SH) (BJ) (Oth (as % of total sales) Avg. is at 31.6 9.2 9.0 9.0 9.1 9.1 ers) 9.0 8.9 8.9 45 40.9 8.8 40 37.9 37.7 36.8 8.8 8.6 35.5 8.6 8.6 8.5 35 8.4 28.4 27.8 27.6 8.4 30 27.5 24.6 23.5 25 8.0 20

Source: www.dianping.com, average score from top 5 restaurants with Source: Company data, CMBIS estimates the highest number of comments, CMBIS estimates, as at Sep2019

Figure 23: Group’s food production/ Central kitchen capacity expansions Production capacity (mn tons) Production volume (mn tons) Utilization rate FY16A FY17A FY18A 1H19 FY16A FY17A FY18A 1H19 FY16A FY17A FY18A 1H19 Guangdong 3.9 14.6 14.6 7.3 3.2 5.6 10.3 6.6 82.5% 38.6% 70.9% 90.4% Hainan 0.7 1.8 1.8 0.9 0.2 1.2 1.5 0.8 25.9% 68.1% 83.9% 86.8% Hubei 2.2 2.2 2.2 1.1 0.3 0.8 0.9 0.4 15.0% 35.6% 40.9% 34.9%

Total 6.8 18.6 18.6 9.3 3.7 7.6 12.7 7.8 54.4% 40.9% 68.3% 83.5% Source: Company data, CMBIS estimates

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE ACCESS KEY TO OUR REPORTS ON BLOOMBERG: CMBR 9 17 Feb 2020

Moreover, excellent quality and food safety control can be ensured for both Jiu Mao Jiu and Tai Er, thanks to 1) centralized kitchen and 2) top class supply chain.

By making use of central kitchen, economies of scale can be enjoyed, hence costs saved can be used to purchase better quality raw materials. Also, it is more cost and time efficient to do quality check and ensure product consistency. The Company has three central kitchens in Guangdong, Hainan and Hubei, which had production capacity of 14.6, 1.8 and 2.2 million tones in FY18, while the utilization rate were 70.9%, 83.9% and 42.8% respectively. In fact, according to data from China Federation of Logistics & Purchasing (CFLP), only 2% of the restaurant companies in China has three or more central kitchens.

In terms of supply chain, even though JMJ Int had 336 authorized suppliers in 1H19, the Company usually selects a few key raw material supply chain managers to handle, which include industry leading company. According to Shuhai supply chain solutions’ website, Jiu Mao Jiu is a customer, where it can enjoy a more favorable input price for different kind of raw materials due to bulk purchase.

We believe there is ample room for further market shares gain, from those standalone restaurants, with the assistance of central kitchen and sophisticated supply chain. Going forward in FY19E-21E, we expect the Company to further upgrade its existing equipment and facilities as well as opening new central kitchens, in order to enhance the supply chain capabilities to support further business expansion.

Figure 24: mix of restaurant companies that have (or Figure 25: mix of restaurant companies that have (or do not have) central kitchen (s), 2018 do not have) raw material production base (s), 2018 4 or more, 3 or more, 3, 1% 2, 3% 1% 2, 6% 4%

only 1, 15%

only 1, 35% none, 57%

none, 78%

Source: China Federation of Logistics & Purchasing (CFLP), CMBIS Source: China Federation of Logistics & Purchasing (CFLP), CMBIS estimates estimates

 1.3 Tai Er: Customer-oriented and superior services. In our view, core values of Tai Er are: 1) tasty food, 2) comfortable and entertaining customer experience and 3) stylish store appearance and unique dining ambience.

In order to provide comfortable services, the Company 1) provides phone charging services, and 2) provides digital one-stop services, which range from placing order, making payment to issuing receipts, with their mobile phones. This is good for those customers who want a moment of tranquility and prefer not to be disturbed. Also, in order to be entertaining, the Company 1) pursues unique culture and interesting marketing method which involves building rapport with customers through eye-catching and off-the-rail slogans such as “Enjoy the fish, not your phone/ 好好吃魚，莫玩手機” and “Cook the second most delicious sauerkraut fish in the universe/ 做宇宙第二好吃的酸菜魚”, 2) lists out some controversial

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE ACCESS KEY TO OUR REPORTS ON BLOOMBERG: CMBR 10 17 Feb 2020 rules for customers under the list “words from the store manager/ 店長説”, where except the typical points 1-3 (not accepting more than four clients at once, not combing tables and adding extra seats, not allowing takeaways), points 4 & 5 are basically anything else that the store managers like to add, 3) launches various online advertising, for examples, the Tai Er style wechat sticker can be downloaded from its wechat official account and O2O promotion (mostly on wechat platform), like events that provide limited edition of sauerkraut ice cream in some of the stores for a short period of time to attract traffic; as well as letting customers to draw a Tai Er figure, in order to get an one-time discounts for their bills.

Thanks to all of these innovative services and promotion mentioned above, we are not surprised to see Tai Er brand getting a very industry leading score on the Dianping.com regarding its service quality, which is at around 9.0.

Also, as at 20 Aug 2019, the number of subscribers of Jiu Mao Jiu and Tai Er WeChat Official Account reached 3.4 million and 4.3 million respectively, while the average number of views for each Tai Er’s posting was more than 100,000, and Tai Er had more than 200 WeChat fans groups with more than 100,000 core fans.

Figure 26: DianPing ratings - service, by brand Figure 27: Innovative marketing – wechat stickers (SZ) (GZ) (SH) (BJ) (Oth 9.1 9.2 9.0 9.0 9.0 9.0 ers) 8.9 8.9 8.8 8.8 8.6 8.5 8.5 8.4 8.4 8.2

8.0

Source: www.dianping.com, average score from top 5 restaurants Source: Company data, CMBIS with the highest number of comments, CMBIS estimates, as at Sep2019

Figure 28: Phone charging and words from manager Figure 29: Different O2O promotion events

Source: Company data, CMBIS Source: Company data, CMBIS

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE ACCESS KEY TO OUR REPORTS ON BLOOMBERG: CMBR 11 17 Feb 2020

 1.4 Tai Er: Unique dining ambience by stylish store and product appearance. We believe the Company is fully devoted to providing a unique dining ambience, in various areas, such as 1) style store decorations, 2) open kitchen design and 3) artistic dish layouts.

According to data from dianping.com, Tai Er has a way better-than-peers score in terms of store environment.

Figure 30: Customer review scores - environment, by Figure 31: Stylish decorations brand (SZ) (GZ) (SH) (BJ) (Oth 9.2 9.1 ers) 9.0 9.0 9.0 8.9 8.8 8.8 8.9 8.8 8.7 8.5 8.4 8.4 8.3 8.1 8.0

Source: www.dianping.com, average score from top 5 restaurants Source: www.dianping.com, Company data, CMBIS with the highest number of comments, CMBIS estimates

We also believe a clean and good-looking kitchen is a critical factor for customers to choose their right restaurants to dine. In this case, Tai Er is very devoted in rolling out more restaurants with “Open Kitchen”. We estimate the ratio of open kitchen in China is not high, hence Tai Er should be able to benefit from it.

Figure 32: Open kitchen image 1 Figure 33: Open kitchen image 2

Source: www.dianping.com, Company data, CMBIS Source: www.dianping.com, Company data, CMBIS

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE ACCESS KEY TO OUR REPORTS ON BLOOMBERG: CMBR 12 17 Feb 2020

In the same vein, the good-looking factor also play well in terms of product appearance. According to our research, Tai Er is the only brand that would put Chrysanthemums on top of its famous sauerkraut fish dish, which could beautify the dish and help differentiate the Tai Er’s product from other brand’s.

Figure 34: Tai Er/ 太二 with Chrysanthemums on top Figure 35: Yao/ 姚酸菜鱼

Source: www.dianping.com, Company data, CMBIS Source: www.dianping.com, Company data, CMBIS

Figure 36: A Qiang Home/ 阿强家招牌酸菜鱼 Figure 37: Luk Show/ 禄鼎记

Source: www.dianping.com, Company data, CMBIS Source: www.dianping.com, Company data, CMBIS

Figure 38: Customer rating on Dianping.com, by different sauerkraut fish brands, reflecting price to quality Region Brand name Price (RMB) Flavor Services Enviroment Shenzhen Tai Er/ 太二酸菜鱼 108.0 9.0 9.0 9.0 Yao/ 姚酸菜鱼 108.0 8.6 8.9 8.6 Guangzhou Tai Er/ 太二酸菜鱼 108.0 8.9 9.0 8.9 Luk Show/ 禄鼎记 96.0 8.9 8.8 9.0 A Qiang Home/ 阿强家酸菜鱼 116.0 8.6 8.4 8.2 Shanghai Tai Er/ 太二酸菜鱼 118.0 9.0 9.0 9.1 Qing Hua Jiao/ 青花椒砂锅鱼 128.0 9.0 8.8 9.0 Centenarians Private/ 百岁我家酸菜鱼 168.0 8.8 8.3 8.5 Beijing Tai Er/ 太二酸菜鱼 118.0 9.1 9.1 9.0 Yu Ni Zai Yi Qi/ 鱼你在一起 28.0 9.1 8.9 8.8 Yushoo/ 渝是乎酸菜小鱼 33.0 8.6 8.1 8.4 Suzhou Master Yan/ 严厨老坛 130.0 8.5 8.5 8.5 Chengdu Jiu Guo Yi Tang/ 九锅一堂 98.0 8.4 8.7 8.9 Source: www.dianping.com, Company data, CMBIS estimates

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE ACCESS KEY TO OUR REPORTS ON BLOOMBERG: CMBR 13 17 Feb 2020

 1.5 Jiu Mao Jiu: focus on providing reliable and hygienic dining. Jiu Mao Jiu is frankly not as great as Tai Er, in terms of operating numbers (e.g. seat turnover and ASP), as well as restaurant level profit margins (at about 16-17% vs Tai Er’s 18-30%) during FY16-18. However, we can tell from their customer review score at Dianping.com was 4.1 (vs peers’ average of 3.9), which means that the brand is still industry leading.

Jiu Mao Jiu provides reliable and “hygienic dining/ 放心餐桌” to families and groups with a warm and attentive dining experience. Jiu Mao Jiu is also actively interacting with its customers, such as 1) giving out free gifts to children and the elderly and providing birthday noodles at a discounted price, and 2) organizing “parents - children DIY workshop/ 親子課 堂” in 21 Jiu Mao Jiu’s restaurants, which was highly popular and attracted a large number of families to participate (can register through its official wechat account). Through this kind of events, the Company believes it can provide customers with the opportunity of joyful family interaction and enjoying the fun of cooking and dining, which is a vivid demonstration of its strict criteria for food safety and food quality, enhancing and promoting its brand image.

Jiu Mao Jiu currently has around 60-80 dishes on the menu, which could be split into three categories: Shanxi noodles/ 山西麵, signature dishes / 招牌菜 such as its best-selling main courses and stir-fried specials, and side dishes/ 搭配菜 such as appetizers and desserts. Going forward, we believe Jiu Mao Jiu’s operating number is still far from satisfying and the Company aims to further improve its quality by the following reforms:

1) optimizing as well as upgrading its menu; SKUs may be cut from around 60-80 to 50 and quality of each dish would improve, 2) adjusting and upgrading the interior designs and format of the stores, 3) potentially raising average salary and hiring better quality staff.

The Company also started to provide more incentives and flexibility for the brand’s senior management, in order to retain talents and maximize their creativity. By creating a direct connection between brand performance and rewards, interest of brand teams and the Company can be aligned, and members of each brand are deeply motivated to collaborate and work together towards a common goal to uplift the performance of their own brand.

Figure 39: Jiu Mao Jiu’s menu Figure 40: Parents-children DIY workshop/ 親子課堂

Source: Company data, CMBIS Source: Company data, CMBIS

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE ACCESS KEY TO OUR REPORTS ON BLOOMBERG: CMBR 14 17 Feb 2020

2) Advanced SKU optimization can drive efficiency and scalability Being successful with just a handful of SKUs is genuinely difficult. However, if it is achieved, then the growth potential, in terms of market share, would be huge and its highly standardized nature could fuel exponential growth and induce remarkable profit margin. We estimate that potential market size for Tai Er’s store expansion is at 580-1,078 in China in FY19E.

 2.1 To succeed with minimal SKUs requires a lot of skills but is hard to mimic Since Tai Er is more of a minimal SKUs restaurant (vs a comprehensive menu restaurant), it would face a greater level of competition. It is easy for customers to compare within different brands (selling price or taste and favour) as there are only one or two key SKUs, therefore it is hard for brands to differentiate from others. Also, due to more concentrated SKUs, the raw material risk is higher. If the price of one kind of raw material surges, it is hard to diversify from that or shift customers’ demand to another SKU.

However, there are still a lot of successful cases, and those brands somehow tend to be fast food restaurants, such as burger shops – McDonald's, ramen – Ajisen, Beef Bowl/ Gyudon (with rice) – Yoshinoya (Hop Hing), etc. The good thing is that a greater level of standardization can generally open more stores and hence capturing higher market shares (the market of comprehensive menu is much more fragmented, except Hot pot) and higher profit margin (thanks to its less back kitchen work and staff required).

We believe the key to be successful with minimal SKUs is to make one’s key SKU unbeatable and have an industry leading brand name and Tai Er fits well in that. Tai Er’s food quality, as mentioned in previous sessions, is protected by excellent price to quality ratio (serving top quality raw material at a fairly affordable price), centralized kitchen and top class supply chain. Tai Er’s brand name is now national, where we see limited competitors reaching that level. We also believe its unique and innovative marketing can continue to ensure the unrivaled edge Tai Er enjoys, in our view.

Figure 41: Number of SKUs, by brand Figure 42: Sales per restaurant per SKU per year, by brand, FY18 120120 120 105 400 (RMB K) 361 100 329 88 90 73 300 63 58 209 212 216 60 51 200 165 38 129 35 103 114 120 121 25 23 95 30 100 46

0 0

Source: www.dianping.com, Company data, CMBIS estimates, as at Source: www.dianping.com, Company data, CMBIS estimates, as at Sep 2019 Sep 2019

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE ACCESS KEY TO OUR REPORTS ON BLOOMBERG: CMBR 15 17 Feb 2020

 2.2 A simple menu can drive efficiency and profit margin Hot pot and fast food are generally more profitable. Reasons behind, in our view, are the ability to 1) minimize the back kitchen staff and expenses and to 2) standardize operations at the restaurant, hence creating greater economies of scale and reducing staff training and retaining costs. Also, 3) having a higher sales per store and 4) being at the more premium price position (ASP ~ RMB 100) would drive a higher margin level. Both Tsui Wah and Tai Hing have seemingly higher than peers sales per store but low margin was, in our view, mostly due to their higher HK sales contribution. Figure 43: Sales per restaurant, by brand, FY18 Figure 44: Sales per sq m per year, by brand, FY18 (RMB mn) Avg. is at RMB 11 mn (RMB K) Avg. is at RMB 31 K 40 39 60 54 49 47 30 50 36 17 40 33 20 14 29 28 27 13 11 9 9 8 8 30 24 22 7 19 19 17 10 5 4 3 20 0 10

Source: Company data, CMBIS estimates Source: Company data, CMBIS estimates

The Tai Er brand, in our view, thanks to its very simple menu (minimal number of SKUs, merely at 23 now, comparing to Jiu Mao Jiu’s 88 and peers’ average of 70), the brand is already enjoying minimal back kitchen staff (most of its products are pre-made in the central kitchen, except for a few and the sauerkraut fish) and the ease to scale up quick (thanks to high level of standardization and economies of scale), hence Tai Er restaurant level OP margin is already higher at 18% in FY18, even higher than Jiu Mao Jiu’s 17.3%.

And on top of that, 1) its higher sales per store, due to superior popularity and 2) more high- end pricing (at ~RMB 80), vs mid-end (at ~RMB 30-50) also provided grounds for an even higher restaurant level OP margins. We believe Tai Er’s restaurant level OP margin, for a relatively matured store (which had opened for 2+ years) can be around 25-30%. Figure 45: Jiu Mao Jiu’s sales per store and Figure 46: Tai Er’s sales per store and restaurant restaurant level OP margin level OP margin 9.5 9.6 (RMB mn) 19.0% 13.0 (RMB mn) 12.0 35% 9.2 17% 30% 9.2 17% 17% 17% 11.0 10.3 10.3 31% 16% 9.0 17.0% 8.7 8.8 8.6 8.6 9.0 8.3 27% 8.5 24% 15.0% 22% 22% 8.4 13% 7.0 20% 23% 5.2 13.0% 18% 8.0 5.0 19%

7.6 11.0% 3.0 15% FY16A FY17A FY18A FY19E FY20E FY21E FY16A FY17A FY18A FY19E FY20E FY21E

Sales per store Operating margin Sales per store Operating margin

Source: Company data, CMBIS estimates Source: Company data, CMBIS estimates

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE ACCESS KEY TO OUR REPORTS ON BLOOMBERG: CMBR 16 17 Feb 2020

Since most of the stores for Tai Er are still immature (57% and 25% of total stores were opened for less than 1-2 years), due to its quick store expansion pace (from 13 in FY16 to 65 in FY18, implied 124% CAGR), we believe the sales per store can improve, presumably to go up from RMB 8.3mn in FY18 to RMB 12.0mn in FY21E.

Noted that this sales per store of RMB 8.3mn is indeed understated while the sales per average stores was actually RMB 11.6mn or annualized sales per store was RMB 13.4mn in FY18.

We believe, in the future, as the new store ratio gradually drops, and overall number of store continues to go up, operating leverage and economies of scale would occur and bring down labour, rental, D&A and other expenses. All in all, we forecast the pre-tax margin to surge from 5.5% in FY18 to 13.8% in FY21E.

Figure 47: Labour costs, by group, FY18 Figure 48: Rental costs, by group, FY18 (as % of total sales) Avg. is at 27.7 (as % of total sales) Avg. is at 12.4 35 33.1 32.4 17.6 32.2 31.4 20 17.0 16.0 29.6 14.5 13.4 30 27.7 15 12.2 12.0 25.6 24.7 24.7 10.1 9.9 9.7 25 23.0 10 20.4 4.0 20 5 15 0

Source: Company data, CMBIS estimates Source: www.kanzhun.com, Company data, CMBIS estimates

Figure 49: D&A expenses, by group, FY18 Figure 50: Pre-tax margin, by group, FY18 (as % of total sales) Avg. is at 4.6 (as % of total sales) Avg. is at 9.4 8 18 16.1 13.8 6.6 15 13.3 12.9 5.8 11.3 12 6 5.3 8.5 4.7 4.7 7.6 7.2 4.3 4.2 4.2 4.1 9 6.2 5.5 4 3.6 3.5 6 3 1.2 2 0

Source: Company data, CMBIS estimates Source: Company data, CMBIS estimates

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE ACCESS KEY TO OUR REPORTS ON BLOOMBERG: CMBR 17 17 Feb 2020

 2.3 plenty of room for expansion, we expect 312/ 428/ 583 self-operated stores in FY19E/ 20E/ 21E The Company has plans to open more stores for both Jiu Mao Jiu and Tai Er.

For Jiu Mao Jiu, the Company expects to have 16/ 18/ 20 gross openings in FY19E/ 20E/ 21E, on top of the 147 existing stores in FY18, together with our forecast of 16/ 6/ 1 stores closures, we estimate the total number of Jiu Mao Jiu stores to be 147/ 159/ 178 by FY19E/ 20E/ 21E, implying a 6.6% CAGR during FY18-21E.

For Tai Er, the Company expects to have 69/ 80/ 100 gross openings in FY19E/ 20E/ 21E, on top of the 65 stores in FY18, we do not expect any closures, hence we foresee the total number of Tai Er stores to be 134/ 214/ 314 by FY19E/ 20E/ 21E, implying a 69% CAGR during FY18-21E.

Figure 51: Jiu Mao Jiu’s number of stores and growth Figure 52: Tai Er’s number of stores and growth

200 178 15.0% 350 314 250% 159 11.9% 225% 128 139 147 147 19 300 150 0 12 10.0% 200% 8.6%8 100 11 8.2% 250 214 5.8% 100 5.0% 200 150% 159 132% 80 138 128 139 147 147 115% 134 50 0.0% 0.0% 150 106% 100% 100 65 69 214 0 -5.0% 60% 50% -10 28 134 47% -7.2% 50 13 37 15 65 -50 -10.0% 0 49 13 28 0% FY16A FY17A FY18A FY19E FY20E FY21E FY16A FY17A FY18A FY19E FY20E FY21E

Old stores New stores Growth (%) Old store New stores Growth (%)

Source: Company data, CMBIS estimates Source: Company data, CMBIS estimates

In terms of potential market size, we believe Tai Er could have around 810 stores in FY19E (ranges from 580 to 1,078 stores), derived by five different methods: 1) Peers comparison, 2) Penetration in shopping malls, 3) City penetration and store density per city, 4) Region penetration in China and 5) GDP and population.

Figure 53: 811 restaurants – Our estimates for market capacity of Tai Er in China in FY19E Est. number of Method Basis for calculation restaurants Using more established peers as reference, and adjusting for price 1 By Peers comparison 1,078 point By penetration in shopping Using existing number of shopping malls as reference, and plug in a 2 580 mall reasonable ratio for the entire China By City penetration and Using number of city penetrated by peers as reference as well as its 3 690 store density store density per city, and apply a reasonable ratio for the brand Using peers' % of stores from their core market as reference, and 4 By Region penetration 900 apply a reasonable ratio for the brand Using GDP per store of Tier cities and population per store of Tier By GDP, purchasing 5 675 - 943 cities as reference, then adjusting for income per capita of different power and population cities and plug in a reasonable ratio for the entire China

Average 811 Source: Company data, CMBIS estimates

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE ACCESS KEY TO OUR REPORTS ON BLOOMBERG: CMBR 18 17 Feb 2020

Method 1: 1,078 stores based on industry average thru peers comparison

If we look at the peers with the same price range (RMB 70-90), the most relevant one could be Yum China/ 必胜客, which has 2,240 stores in FY18. Also, other brands in the same price range, such as Xiaolo ngkan/ 小龙坎, Simmer Huang/ 黄记煌, Haidilao/ 海底捞 and Xibei/ 西贝莜面村, which have 710, 640, 430 and 352 stores in FY18, can also be good reference. We believe the low-end could be ~350 stores (close to Xibei/ 西贝莜面村) while the more conservative high-end could be ~2,200 (close to Yum China/ 必胜客) , and the average is 1,078 in FY19E. We forecast Jiu Mao Jiu and Tai Er’s stores will expand from 147 and 65 in FY18 to 178 and 305 in FY21E. Figure 54: Number of stores, by brand

6,000 (Hot pot and fast causal) 5,910 (Fast food) Avg. at 1,078 5,000 3,521 4,000 3,023 3,000 2,240 2,000 886 710 1,000 735 640 430 352 559 1,000 147 65 53 48 35 107 11 -

Source: Company data (annual reports and websites), CMBIS estimates

Method 2: 580 based on a 10% shopping malls penetration (out of 5,800) There are ~5,800 shopping malls in China in 2018, according to Frost & Sullivan, much greater than JMJ Int’l’s current number of shopping mall stores of 261 (at 4.5% penetration). Even if we assume an only 10% (vs 11.4% and 7.3% penetration rate for McDonald's and KFC China in FY18) of malls are considered well managed, have decent customer traffic and suitable for Tai Er, that would already be 580. Thus, with more malls to be opened, we find it reasonable to expect the room for Tai Er to exceed 600 plus in the future. Figure 55: Jiu Mao Jiu and Tai Er, number of stores Figure 56: Number of shopping malls in China

600 FY18A-21E Stores CAGR 583 12,000 (JMJ Int) (Other (Shopping Jiumaojiu 7% 9,600 91 10,000 brands) malls) 500 Tai Er 69% 428 8,000 Others 82% 5,800 400 Total 37% 55 6,000 312 3,900 314 300 31 4,000 227 214 175 2,000 261 269 303 574 422 660 200 15 134 141 65 - 13 28 100 178 128 139 147 147 159 0 FY16A FY17A FY18A FY19E FY20E FY21E

Jiu Mao Jiu Tai Er Other brands Total

Source: Company data, CMBIS estimates Source: Frost & Sullivan, www.winshang.com, Company data, CMBIS estimates

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE ACCESS KEY TO OUR REPORTS ON BLOOMBERG: CMBR 19 17 Feb 2020

Method 3: 690 based on city penetration (150) and store density per city (4.6)

Firstly, we believe Tai Er store is underpenetrated, in terms of number of cities, JMJ Int’l only opened stores in just 31 cities by FY18, way below other brands. For example, KFC, Pizza Hut and McDonalds have penetrated 1,000-1,200 cities while Ajisen, XBXB and Haidilao have entered 100-200 cities. Therefore, just for Tai Er to catch up with other domestic names, it can at least enter ~150 cities, at least 5x larger. Secondly, Tai Er is also underpenetrated, in terms of stores per city, which is only at 2.2x, much lower than XBXB, Xibei and KFC’s 7.3x, 6.0x and 4.9x, or even Jiu Mao Jiu’s 4.7x.If we plug in both a more matured city penetrations (150 cities) and stores per city penetration (4.6 stores per cities, peers’ median), then the optimum number of Tai Er restaurants could be 690 stores.

Figure 57: No. of cities penetrated, by brand, FY18 Figure 58: Jiu Mao Jiu &Tai Er, stores per city, FY18 23.5 1,400 1,200 Avg. is at 403 25.0 Avg. is at 6.0 1,200 1,1181,100 20.0 1,000 800 15.0 600 7.3 10.0 6.0 400 4.9 4.7 4.6 4.4 3.9 161 150 121 109 5.0 2.7 2.2 2.0 200 59 31 29 12 - -

Source: Company data, CMBIS estimates, *as at 20 Aug 2019 for Jiu Source: Company data, CMBIS estimates Mao Jiu and Tai Er, as at 25 Oct 2019 for Xibei

Figure 59: Number of stores, by region

Source: Company data, CMBIS

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE ACCESS KEY TO OUR REPORTS ON BLOOMBERG: CMBR 20 17 Feb 2020

Method 4: 900 based on region penetration in China

The more national the brand is, the more diversified its stores by region can be. We believe Tai Er has good potential for more regional store expansion, thanks to its nation-wide reception, where its stores in all tier one cities (BJ, SH, GZ and SZ) had all recorded a relatively high customer rating at 4.6 out of 5, ranked No. 1 in all peers (after Haidilao).

According to Dianping.com, number of restaurants which are offering sauerkraut fish are many, there are ~20,000 in Tier 1 cities and ~29,000 in new Tier 1 cities, while currently there are only 62 and 23 of those are Tai Er restaurants respectively, accounted for only 0.3% and 0.1% of total, as at Oct 2019. This does pose significant room for expansion, as we believe number of restaurant can still grow a lot more even in more established cities like Shenzhen and Guangzhou. Figure 60: Number of restaurants offering sauerkraut fish and number of Tai Er restaurants, Sep 2019

9,000 (Tier 1 cities) (New Tier 1 cities) 50 7,500 6,630 6,029 40 6,000 4,511 3,976 30 4,500 3,838 3,537 3,842 23 2,547 20 3,000 19 2,173 14 1,825 1,786 1,451 1,621 1,650 529 1,149 902 1,061 765 10 1,500 6 5 3 3 - 1 1 1 2 2 2 1 1 1 0 0 0 0

Number of restaurants offering sauerkraut fish Number of Tai Er restaurants

Source: www.dianping.com, Company data, CMBIS estimates

Noted that, solely in the southern China region, Jiu Mao Jiu already has 122 stores. We find it highly likely for Tai Er to exceed this level given its popularity, hence we would not be surprised to see store numbers to triple from 57 as at 20 Aug 2019 to 171 in the future. Moreover, from the regional expansion perspective, the % of stores from its core market for a national brand name would be 19% on average, referring to 32%, 16% and 9% for XBXB, Ajisen and Haidilao. So, if we apply this 19% to Tai Er’s 171 stores, then the ideal level of stores can actually be 900. Figure 61: Number of stores across regions, by brand Figure 62: % of stores from key regions, by brand

83.0% 800 692 90% 75% 600 58.2% 431 60% 400 45% 202 31.8% 173 160 164 200 122 30% 81 57 79 16.1% 16 11 12 28 45 0 5 0 8 13 9.1% 0 15% Western Northern Central and Southern 0% China China Eastern China JMJ- Tai Er - XBXB - Ajisen - Haidilao - China Southern Southern Beijing Shanghai Beijing JMJ Tai Er Ajisen XBXB Haidilao China China

Source: Company data, CMBIS estimates Source: Company data, CMBIS estimates

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE ACCESS KEY TO OUR REPORTS ON BLOOMBERG: CMBR 21 17 Feb 2020

Method 5: 675 - 943 by GDP and purchasing power, based on population and wages

Despite the fact that Tai Er is serving Sichuan Cuisines, its headquarters is actually in Guangzhou, therefore the number of stores in Guangzhou is the highest with 23 stores there, as at 20 Aug 2019.

Based on these 23 stores and Guangzhou’s GDP in FY18, we can calculate a ratio of RMB 100bn GDP per one Tai Er restaurant. If we apply this ratio to other tier 1 cities (Beijing, Shanghai and Shenzhen), then we can have 117 stores in all tier 1 cities. Also, by applying a more conservative ratio, at RMB 150 bn per Tai Er restaurant for all other areas in China (except tier 1 cities), then we can deduce the potential number to be 558. All in all, the potential number could be 675.

According to Haidilao’s penetration by tier cities, the number of restaurants in tier 2 is the highest while that of tier 3 and below is equal to that of tier 1. Therefore, from this perspective, Tai Er’s penetration in the lower tier cities (T2 and below) is still very low. We would not be surprised to see a network greater than Haidilao in the future, since it has a small store size, slightly lower ticket price and higher seat turnover.

Figure 63: Potential of Tai Er stores based on GDP Figure 64: Number of stores, by tier city and brand

300 GDP (Rmb bn) 257 Number of per Tai Er 250 GDP (Rmb bn) stores restaurant 200 146 147 Current number, in 2018 and as at Dec18 150 Beijing City 3,032 6 505.33 Shanghai City 3,268 14 233.42 100 78 Guangzhou City 2,300 23 100.00 40 42 50 27 Shenzhen City 2,400 19 126.32 15 10 Total Tier 1 11,000 62 177.42 0 Tier 1 cities Tier 2 cities Tier 3 cities and China 90,031 98 918.68 below JMJ Tai Er Haidilao Potential number - 2019E Beijing 3,214 32 100.00 Source: Company data, CMBIS estimates Shanghai 3,464 35 100.00 Guangzhou City 2,438 24 100.00 Shenzhen 2,544 25 100.00

All Tier 1 11,660 117 100.00 Rest of China 83,773 558 150.00 Total China 95,433 675 141.36

Sensitivity test 95,433 545 175.00 China - 2019E 95,433 636 150.00 (Assumed 6% YoY 95,433 763 125.00 GDP growth in 95,433 954 100.00 2019E) 95,433 1,272 75.00 95,433 1,909 50.00 Source: NBS, Company data, CMBIS estimates

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE ACCESS KEY TO OUR REPORTS ON BLOOMBERG: CMBR 22 17 Feb 2020

We can also calculate the potential of Tai Er’s number of restaurants base on population, wages and purchasing power. Due to historical reason, the penetration of Tai Er store is the highest in Guangzhou, where the ratio of population per Tai Er restaurant is at 650K people, much lower than 3.6mn, 1.7mn and 1.2mn people per restaurant for Beijing, Shanghai and Shenzhen.

If we apply the ratio of Guangzhou to other tier 1 cities (Beijing, Shanghai and Shenzhen), then we can have 129 stores in all tier 1 cities. Also, by applying a more conservative ratio, at 1.3mn people per Tai Er restaurant for all other areas in China (except tier 1 cities), then we can deduce the potential number to be 1,019. In total, the potential number could be 1,149.

But on the other hand, we can also adjust the number by purchasing power (i.e. based on wages by different area). So, by plugging in the average wages for Guangzhou (RMB 7,358 (according to NBS, which is the average of the average wages from both private and non- private enterprises), we can calculate that the purchasing power per store to be RMB 4.8bn. If we apply this ratio to all other tier cities, then potential store number would be 142 stores in all tier cities. Also, by applying a more conservative ratio, at RMB 9.6bn purchasing power per Tai Er restaurant for all other areas in China (except tier 1 cities) , then we can deduce the potential numbers to be 802. In total, the potential number could be 943.

Figure 65: Potential number of Tai Er stores based on population, wage and purchasing power Purchasing Population Monthly Purchasing power per Number of (mn) per Tai Purchasing wage per power (RMB Number of store (RMB Population (mn) stores Er restaurant power capita (RMB) mn) stores mn)

Current number, in 2018 and as at Dec18 Current number, in 2018 and as at Dec18 Beijing City 22 6 3.59 Beijing City 9,278 199,850 6 33,308 Shanghai City 24 14 1.73 Shanghai City 8,222 199,299 14 14,236 Guangzhou City 15 23 0.65 Guangzhou City 7,358 109,670 23 4,768 Shenzhen City 22 19 1.18 Shenzhen City 7,247 163,037 19 8,581 Total Tier 1 83 62 1.34 Total Tier 1 8,077 671,856 62 10,836

China 1,395 98 14.24 China 5,502 7,676,683 98 78,334

Potential number - 2019E Potential number - 2019E Beijing City 22 34 0.65 Beijing City 9,278 202,048 42 4,800 Shanghai City 25 38 0.65 Shanghai City 8,222 201,492 42 4,800 Guangzhou City 15 23 0.65 Guangzhou City 7,358 110,877 23 4,800 Shenzhen City 23 35 0.65 Shenzhen City 7,247 164,830 34 4,800

All Tier 1 84 129 0.65 All Tier 1 8,077 679,246 142 4,800 Rest of China 1,325 1,019 1.30 Rest of China 5,806 7,694,479 802 9,600 Total China 1,409 1,149 1.23 Total China 5,942 8,373,726 943 8,880

Sensitivity test Sensitivity test 1,409 1,174 1.20 5,942 8,373,726 1,021 8,200 China - 2019E 1,409 1,281 1.10 China - 2019E 5,942 8,373,726 1,087 7,700 (Assumed 1.1% YoY 1,409 1,409 1.00 (Assumed 8.0% 5,942 8,373,726 1,163 7,200 population growth in 1,409 1,566 0.90 YoY wage growth 5,942 8,373,726 1,250 6,700 2019E) 1,409 1,762 0.80 in 2019E) 5,942 8,373,726 1,351 6,200 1,409 2,013 0.70 5,942 8,373,726 1,469 5,700 Source: NBS, Company data, CMBIS estimates

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE ACCESS KEY TO OUR REPORTS ON BLOOMBERG: CMBR 23 17 Feb 2020

Definition of Tier 1, New Tier 1, Tier 2 and Tier 3 or below cities:

T1: Beijing, Shanghai, Guangzhou and Shenzhen (4 cities in total).

New T1: Changsha, Chengdu, Chongqing, Dongguan, Hangzhou, Kunming, Nanjing, Ningbo, Qingdao, Shenyang, Suzhou, Tianjin, Wuhan, Xi’an and Zhengzhou (15 cities in total).

T2: Changchun, Changzhou, Dalian, Foshan, Fuzhou, Guiyang, Haikou, Harbin, Hefei, Huizhou, Jiaxing, Jinan, Jinhua, Lanzhou, Nanchang, Nanning, Nantong, Quanzhou, Shaoxing, Shijiazhuang, Taiyuan, Taizhou, Wenzhou, Wuxi, Xiamen, Xuzhou, Yangzhou, Yantai, Zhongshan and Zhuhai (30 cities in total).

T3 and below : all the cities and regions excluding tier one cities, new tier one cities and tier two cities.

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE ACCESS KEY TO OUR REPORTS ON BLOOMBERG: CMBR 24 17 Feb 2020

3) Open, innovative and co-winning culture to unlock staff potential We believe JMJ Int’l knows very well that: 1) full focus on catching up with market trends, 2) investments in staff and employees and 3) aligning both the Company and employees’ interests are the keys to remain competitive and hopefully outperform the industry.

 3.1 Corporate structure that enables maximum focus on market demand In order to amplify the Company’s capability of providing products and services that can meet the market demand in a timely manner, it has adopted an organizational structure that can facilitates brand-specific innovation, extensive coordination and sharing of expertise among brands within the Company. The Company can be separated into two major groups: 1) brand divisions and 2) function departments.

There are five brand divisions and everyone has a supervising brand manager. Each brand division will have five departments, namely: i) operations, ii) product development, iii) brand marketing, iv) human resource and v) customer research.

There are seven function departments in the headquarters, which are responsible for: i) brand development and expansion, ii) engineering, iii) procurement, iv) central kitchens & production, v) information technology, vi) finance and vii) organizational affairs.

We believe the brand divisions can focus their energy on understanding and predicting the consumer trend, rolling out the best fit product and service, and engaging in the corresponding marketing because there are function departments to provide them the full support on other technical issues.

Going forward, we also expect more internal KPI adjustments or incentive systems to better guide and encourage the employees to work harder, be more efficient and target oriented, this would effectively reduce costs for the Company and the time of other colleagues.

Figure 66: Organizational Structure

Source: Company data, CMBIS

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE ACCESS KEY TO OUR REPORTS ON BLOOMBERG: CMBR 25 17 Feb 2020

 3.2 Emphasis on staff quality The Company does value its staff quality a lot, because one of its major business philosophies is to provide comfortable customer experience. In order to arrive at good services, we believe the Company is willing to pay a premium salary (vs peers), at least for Tai Er at the moment, which, according to kanzhun.com, the average monthly salary is RMB 5,300 per head, is way higher than the industry average of RMB 3,800. For Jiu Mao Jiu, the average salary is RMB 3,200, which is still below the industry average, we believe that is a chance for the Company to raise this in the future, in order to improve the staff quality and hence the overall competitiveness of the Jiu Mao Jiu restaurants.

On the other hand, the Company also provides comprehensive online and offline training programs to all its employees. Offline trainings include trainings at its headquarters (open to staff at all levels) and online trainings consist of online courses on operation procedures, guidelines and standards, information technology and corporate culture. Employees can access these online courses thru e-learning platform.

 3.3 Well-placed management incentives We believe one of the key factors that JMJ Int’l can achieve the current success (perhaps future successes) is its dedication on motivating its employees, allowing them to unlock their potential and creativity, as well as aligning the interests of the employees with the Company’s. The Company will grant brand managers and their team members certain equity interest in the brand that they manage. The current management ownership are 15% in Jiu Mao Jiu/ 15% in Tai Er/ 20% in Double Eggs/ 20% in Cooling Spicy Kebab and 25% in Uncle Chef.

Figure 67: Monthly wage per employee (China), by Figure 68: Management ownership over each brand brand, as at Oct 2019

(RMB K) Avg. is at RMB 3,800 30% 7.0 6.4 25% 25% 6.0 5.3 20% 20% 5.0 4.3 4.3 4.3 20% 3.7 4.0 3.5 15% 15% 3.2 3.2 3.0 15% 2.9 2.7 3.0 2.6 2.0 10% 5%

0% Jiumaojiu* Tai Er Double Cooking Uncle Chef Eggs Spicy Kebab

Source: www.kanzhun.com, Company data, CMBIS estimates Source: Company data, CMBIS estimates

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE ACCESS KEY TO OUR REPORTS ON BLOOMBERG: CMBR 26 17 Feb 2020

Industry Analysis 1) Chinese sauerkraut fish industry is rapidly growing We are confident that Chinese sauerkraut fish industry growth will remain fast, supported by greater supply of tasty and stylish product as well as rising health awareness and income.

 1.1 Sauerkraut fish is blooming in China The Chinese sauerkraut fish is a signature and traditional dish, which has spicy and sour soup of small curls of fish fillet in a broth laden with Sichuan chili pepper and sauerkraut. Such dish has become increasingly popular in China in recent years. According to data from the Baidu Index, popularity of “Sauerkraut fish/ 酸菜鱼” has been growing since 2012. Referencing to Frost & Sullivan’s estimates, the entire industry sales surged from RMB 4.0bn in 2014 to RMB 12.3bn in 2018, registering a CAGR of 32.3%. Figure 69: Chinese sauerkraut fish industry sales, growth and market shares

80 (RMB bn) 41.5% 45% 38.8% 39.7% 70.5 70 40% 30.3% 32.3% 32.5% 35% 60 30.0% 28.8% 30.1% 54.6 29.1% 30% 50 41.9 25% 40 32.2 20% 30 24.3 15% 17.4 20 12.3 10% 9.3 6.7 10 4 5.2 5% 0 0.1% 0.2% 0.2% 0.2% 0.3% 0.4% 0.5% 0.6% 0.7% 0.8% 1.0%0% 2014 2015 2016 2017 2018 2019E 2020E 2021E 2022E 2023E 2024E Chinese Sauerkraut Fish Industry Revenue (China) Growth (%) As % of total catering services

Source: Frost & Sullivan, CMBIS estimates

Going forward, we expect industry growth to remain fast at 33.7% CAGR during 2018-24E, driven by: 1) its highly popular sichuan and spicy favour, 2) additivity, because consumers may not easily change their tastes once got used to this dish, and 3) rising supply of more standardized but also fashionable dining experience, e.g. Tai Er’s restaurants.

Figure 70: Baidu Index trend for the key word “Sauerkraut fish/ 酸菜鱼”

Source: Baidu Index, CMBIS, as at Nov 2019

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE ACCESS KEY TO OUR REPORTS ON BLOOMBERG: CMBR 27 17 Feb 2020

 1.2 Customers are looking for healthy dishes and fish is getting more popular. We believe fishery product consumption will increase in a medium term of future, because awareness of healthy lifestyle is increasing and will drive greater demand on fish, since this ingredient is traditionally considered as protein rich and healthy.

Figure 71: Annual bass production in China Figure 72: Nutrition by food types per 100g serving

170,000 (tons) 166,581 20% Calories Protein Carbohy 13.8% Food (kcal) (g) Fat (g) drate (g) 160,000 156,595 15% 12.3% Spicy chicken wings 337.0 19.4 23.6 12.8 150,000 7.7% 10% Double cheeseburger 266.5 15.2 13.9 20.6 139,464 6.4% Pizza 275.0 13.8 11.9 28.7 140,000 5% 128,086 Pickled fish 98.0 13.1 4.4 1.6 130,000 122,542 0% Beef egg sandwich 243.0 12.0 8.3 28.8 120,000 113,803 -5% Old Beijing chicken roll 266.9 11.8 13.7 23.7 Pork bone-broth ramen 297.0 10.2 1.0 62.8 110,000 -11.2% -10% Chicken fried noodles 137.5 9.4 6.8 10.0 100,000 -15% Claypot rice 151.7 7.8 4.9 18.6 2013 2014 2015 2016 2017 2018 Baked pork chop rice 190.0 7.4 8.8 20.0 Cheese and Meat Pasta 188.0 5.8 6.9 25.0 Production: marine aquaculture: bass: national Beef rice 124.0 5.4 4.9 14.7 Growth (%) Hash brown 267.0 1.8 16.1 26.8 Source: China Fishery Statistics Yearbook, CMBIS estimates Source: https://www.fatsecret.cn, CMBIS estimates

 1.3 Fish is a superior good, therefore likely to ride with consumer upgrades. If we look at the fish consumption volume per capita by countries, both China and India have been rising since the 1980s, while that from United States and United Kingdom were steady, and Japan has been falling since the late 2000s, according to data from UN Food and Agriculture Organization (FAO).

Figure 73: Fish and seafood consumption per capita, by countries

Source: UN Food and Agriculture Organization (FAO), CMBIS

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE ACCESS KEY TO OUR REPORTS ON BLOOMBERG: CMBR 28 17 Feb 2020

2) Rising affordability will drive premium and dining out demand We expect the Chinese to upgrade their consumption pattern, such as eat more fish and dine out more, as average income continues to grow.

 2.1 Rising income will bring consumer upgrades as food are more affordable now. During 2013 to 2018, rural and urban income had registered CAGR of 9.2% and 8.2% respectively, while the price of one KG of bass only went up by 3.7%. Also, during FY16 to FY18, the ASP of Tai Er only went up by 5.3%. This, in our view, is a good example of rising affordability of general Chinese consumers. In the near future, we expect the demand and consumption volume over fishery product to go up.

Figure 74: Fishery product price and average income Figure 75: Annual income over Tai Er’s ASP (x) (RMB) 1,531 1,508 50,000 69.1 72.3 80 1600 (x) 1,448 1,465 65.2 1,216 40,000 39,251 60 1200 30,000 26,462 800 40 530 563 527 541 543 562 26.02 442 516 20,000 21.7 400 190 194 202 20 10,000 14,617 9,432 0 0 0 2014 2015 2016 2017 2018 2013 2014 2015 2016 2017 2018 Rural income/ Tai Er's ASP Rural income per year Urban income per year Urban income/ Tai Er's ASP Rural income/ price of 1KG bass Tai Er's ASP Bass price (RMB/ KG) Urban income/ price of 1KG bass

Source: Ministry of Agriculture of the People's Republic of China, Source: NBS, Company data, CMBIS estimates Company data, CMBIS estimates

 2.2 Dining out is now more affordable, thus more common and frequent According to HK statistic and census, higher income households tend to have a greater desire on dining out, where the group of 25% lowest income spent only 55.7% of their total food spent on dining out but those from the highest 25% income spent around 69.0%. Therefore, we believe such behavior would also apply to the Chinese customers in the mainland China.

Figure 76: HK food spent at home vs away from home Figure 77: HK food spent at home vs away from over time home by different income group, in 2016

70.0% 65.5% 100% 61.9% 63.3% 63.1% 60.0% 80% 50.0% 55.7% 62.7% 67.1% 69.0% 60% 40.0%

38.1% 36.9% 30.0% 36.7% 34.5% 40% 44.3% 20.0% 37.3% 32.9% 31.0% 2000 2006 2011 2016 20% The lowest The second The third The highest Food at home 25% 25% 25% 25% Meals bought away from home Food at home Meals bought away from home

Source: HK Census and Statistics Department, CMBIS estimates Source: HK Census and Statistics Department, CMBIS estimates

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE ACCESS KEY TO OUR REPORTS ON BLOOMBERG: CMBR 29 17 Feb 2020

3) Chain restaurant has room and edges to consolidate the market We believe chain/ branded restaurant to benefit from its capital, branding, quality and technology backing, and therefore can outperform and gain market shares in China.

 3.1 Chain/ branded restaurants will continue to gain shares We believe the chain/ branded restaurants are more competitive, because of: 1) stronger capital backing, 2) better brand awareness and reputation, 3) ability to provide consistent food and services quality, over smaller brands / standalone restaurants. As a result, we expect the chain/ branded restaurants to outperform and to consolidate the industry. According to Frost & Sullivan, chain restaurants will experience a faster growth of 9.6% CAGR than non-chain restaurants’ 8.8% during 2018-24E.

Figure 78: China catering sales, by chain and non-chain restaurants

8,000 (RMB bn) Revenue CAGR 2014-18 2018-24E 7,158 7,000 Total 10.2% 9.0% 6,613 Chain restaurants 11.2% 9.6% 6,098 1,441 6,000 Non-chain restaurants 10.0% 8.8% 5,624 1,325 5,176 1,217 5,000 4,749 1,117 4,272 1,023 3,964 933 4,000 3,580 833 3,231 769 2,893 688 3,000 615 5,718 544 5,288 4,507 4,881 2,000 3,816 4,153 3,196 3,439 2,616 2,892 1,000 2,349

- 2014 2015 2016 2017 2018 2019E 2020E 2021E 2022E 2023E 2024E Non-chained restaurants Chained Restaurants

Source: Frost & Sullivan, CMBIS estimates

 3.2 Chain restaurants still have huge room for growth Compared to other more developed regions, number of chain stores in China accounted for only 1.8% in FY18, which was highly underpenetrated compared to Taiwan’s 20.2%, Hong Kong’s 27.1% and USA’s 36.4%.

Figure 79: Chain restaurants market shares, by Figure 80: China market share split by chain/ non- region, 2018 chain restaurants

45 (chain restaurants %) Avg. is at 18.0 100.0% 40 36 18.8% 19.5% 20.1% 35 31 80.0% 30 27 26 24 24 25 20 60.0% 20 17 15 40.0% 81.2% 80.5% 79.9% 10 7 5 2 2 1 20.0% 0 0.0% 2014 2018 2024E

Non-chain restaurants Chain restaurants

Source: Euromonitor, CMBIS estimates Source: Frost & Sullivan, CMBIS estimates

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE ACCESS KEY TO OUR REPORTS ON BLOOMBERG: CMBR 30 17 Feb 2020

Peers’ Comparision

Figure 81: Peers Comparison 1 Jiumaojiu International/ Haidilao/ XBXB/ Yum China/ Hop Hing/ Cafe de Coral/ Fairwood/ Name 九毛九 海底捞 呷哺呷哺 肯德基+必胜客 Ajisen/ 味千 吉野家 Tai Hing/ 太兴 Tsui Wah/ 翠华 大家乐 大快活 Ticker 6862 HK 520 HK YUMC US 538 HK 47 HK 6811 HK 1314 HK 341 HK 52 HK Fiscal Year end FY18 FY18 FY18 FY18 FY18 FY18 FY18 FY19 FY19 FY19 Year end Dec Dec Dec Dec Dec Dec Dec Mar Mar Mar Market Cap (HK$mn) at 14 12,451 172,780 9,377 130,988 2,336 1,210 1,370 564 10,379 2,495 Feb 2020 Year founded 1995 1994 1998 1987 1996 2007 1989 1967 1968 1972

Major brand (s)

Northwestern/ Major cuisine Sichuan Taiwan American Japanese Japanese Hong Kong Hong Kong Hong Kong Hong Kong Sichuan Shanxi Fast food - Fast causal - Fast food - Fast food - Fast Casual Fast Casual Major products noodles/ Hot pot Fried Chicken/ Fast food Fast food Hot pot Ramen Beef rice dining dining Sauerkraut Pizza Primary market Southern China China Beijing China Shanghai Northern China Hong Kong HK/ Shanghai Hong Kong Hong Kong Headquarters Guangzhou Singapore Beijing Shanghai Shanghai Beijing Hong Kong Hong Kong Hong Kong Hong Kong China Tier 1 Tai Hing (65%) (24%) Hong Kong Beijing (47%) TeaWood China Tier 2 QSR (74%) Jiu Mao Jiu Shanghai (5%) Hong Kong Yoshinoya (18%) Hong Kong Hong Kong (46%) KFC (68%) Hong Kong (70%) Tianjin (8%) (7%) (85%) Trusty Congee (65%) (95%) China Tier 3 Pizza Hut Casual Dining Sales mix breakdown Tai Er (29%) Hebei (17%) Mainland Dairy Queen King (7%) Mainland Mainland and below (25%) (11%) Other brands Northeast China (86%) (11%) Men Wah Bing China (34%) China (4%) (20%) Others (7%) Mainland (1%) China (9%) Others (7%) Others (4%) Teng (4%) Others (1%) Others (1%) Outside PRC China (14%) Others (14%) Pho Le (3%) (8%) Other (1%) Others (3%) Others (2%) Number of restaurants 357 - self-operated 227 466 886 (XBXB) 4,597 (KFC) 766 110 (Tai Hing) 83 465 159 (Yoshinoya) 2,188 (Pizza 173 (Dairy 48 (Cou Cou) 32 (TeaWood) Hut) Queen) 47 (LS & 29 (Others) 36 (Others) Others) - franchised 14 0 0 1,313 (KFC) 0 0 7 0 0 0 52 (Pizza Hut) 287 (LS & Others) Mainland China 241 430 886 (XBXB) 8,484 735 559 62 35 107 11 48 (Couc Cou) Overseas/ HK 0 36 0 0 31 0 123 48 358 148 Total 241 466 934 8,484 766 559 185 83 465 159

Est. Number of seats/ store ~ 100 - 200 ~ 300 - 500 ~ 100 - 200 ~ 100 - 200 ~ 50 - 100 ~ 50 - 100 ~ 80 - 150 ~ 100 - 200 ~ 100 - 200 ~ 100 - 200

Est. Avg floor area/ store 305 800 285 300 160 180 281 320 300 300 (Sq m) Est. Sales / store/ sqm/ year 27,384 45,518 17,785 22,742 19,401 20,719 52,755 59,078 53,472 54,690 (Rmb)

Number of employees 9,766 69,056 26,219 450,000 11,609 8,459 6,904 4,227 19,110 5,600 Number of employees/ store 40.5 148.2 28.1 53.0 15.2 15.1 37.3 50.9 41.1 35.2 Number of seats/ employee/ 3.7 2.7 4.3 2.8 4.9 5.0 3.1 2.9 3.6 4.3 store

Sales per employee (RMB) 193,817 245,730 180,559 128,628 204,819 246,459 397,636 371,213 390,334 465,839 Salary per employee (RMB) 4,467 6,053 3,712 2,183 4,368 5,379 12,472 11,345 11,637 14,334

Salary per employee (RMB, 3,200 (JMJ) 6,400 3,700 (XBXB) 3,000 (KFC) 3,200 4,300 3,500 4,300 2,670 2,900 Mainland China) 4,300 (Cou 2,610 (Pizza 5,300 (TE) Cou) Hut) Source: Bloomberg, Company data, CMBIS estimates

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE ACCESS KEY TO OUR REPORTS ON BLOOMBERG: CMBR 31 17 Feb 2020

Figure 82: Peers Comparison 2 Jiumaojiu International/ Haidilao/ XBXB/ Yum China/ Hop Hing/ Cafe de Coral/ Fairwood/ Name 九毛九 海底捞 呷哺呷哺 肯德基+必胜客 Ajisen/ 味千 吉野家 Tai Hing/ 太兴 Tsui Wah/ 翠华 大家乐 大快活 Ticker 6862 HK 520 HK YUMC US 538 HK 47 HK 6811 HK 1314 HK 341 HK 52 HK Fiscal Year end FY18 FY18 FY18 FY18 FY18 FY18 FY18 FY19 FY19 FY19 Year end Dec Dec Dec Dec Dec Dec Dec Mar Mar Mar Operating numbers FY18 Sales (mn) 1,893 16,969 4,734 8,415 2,378 2,374 3,126 1,787 8,494 2,971 Sales (RMB mn) 1,893 16,969 4,734 57,883 2,378 2,085 2,745 1,569 7,459 2,609 Sales per store/ year* (RMB 8.3 36.4 5.1 6.8 3.1 3.7 14.8 18.9 16.0 16.4 mn) Sales per store/ day* (RMB) 22,845 99,765 13,887 18,692 8,504 10,218 40,656 51,795 43,949 44,950

SSS growth (Mainland 1.0% 4.4% (JMJ) 7.4% 2.3% 2.0% (KFC) -2.6% 2.1% n/a 2.0% -6.0% China) (Yoshinoya) -5.0% (Pizza -1.2% (Dairy 7.7% (TE) Hut) Queen) SSS growth (Overseas/ HK) n/a -8.5% n/a n/a -6.9% n/a 4.2% ~0% 0.0% (CDC) 0.0%

Seat turn Table turn Seat turn Seat turn Table turn Seat turn Seat turn Seat turn Seat turn Seat turn Table/ seat turnover 2.4 (JMJ) 5.0 2.8 ~ 4.0 - 4.5 3.4 ~ 4.5 - 5.0 2.5 ~ 3.0 - 4.0 ~ 4.0 - 5.0 n/a (Mainland China) 4.9 (TE) Table/ seat turnover 3.8 n/a n/a 4.1 n/a 7.8 ~ 6.5 - 7.5 9.9 8.6 (Overseas/ HK)

ASP (RMB, Mainland 53.0 (JMJ) 96.9 53.3 ~ 30 - 40 (KFC) 48.0 ~30 - 40 82.4 ~ 70 - 80 ~ 30 - 40 n/a China) 72.0 (TE) ~ 70 - 80 (Pizza Hut) ASP (HKD, Overseas/ HK) n/a 199.3 n/a n/a 65.8 n/a 69.9 ~ 60 - 70 38.5 35.5

P&L breakeven period ~ 2 - 6 (Tai ~ 1 ~ 1 - 3 ~ 3 n/a ~ 4 - 6 n/a ~ 1 - 2 n/a n/a (Month) Hing) Cash payback period ~ 7 (TE), ~ 22 ~ 17 - 32 (Tai ~ 6 - 13 ~ 17.9 ~ 12 - 48 ~ 24 - 36 n/a ~ 12 ~ 12 - 24 n/a (Month) (JMJ) Hing) Investment per store (RMB ~ 2.0 - 2.5 ~ 10.0 ~ 1.2 ~ 3.5 - 4.5 ~ 1.3 ~ 1.5 ~ 3.7 - 4.2 ~ 3.0 - 5.0 ~ 5.0 - 6.0 ~ 5.0 - 6.0 mn)

OPEX as % of sales COGS (mainly food) -35.5% -40.9% -37.7% -27.6% -24.6% -36.8% -28.4% -27.8% -27.5% -23.5% Labour -27.7% -29.6% -24.7% -20.4% -25.6% -23.0% -33.1% -32.2% -31.4% -32.4% Rental -9.7% -4.0% -12.2% -10.1% -17.0% -13.4% -14.5% -17.6% -12.0% -16.0% D&A -4.3% -4.1% -4.7% -5.3% -6.6% -4.2% -4.7% -5.8% -4.2% -3.5% Fuel and utilities -5.0% -3.5% -3.6% n/a n/a n/a n/a -4.8% -4.7% n/a Others -9.2% -4.7% -5.2% -25.4% -12.4% -15.7% -12.1% -10.3% -11.9% -17.4% Total -91.4% -86.8% -88.1% -88.8% -86.2% -93.1% -92.7% -98.6% -91.7% -92.8%

GP margin 64.5% 59.1% 62.3% 72.4% 75.4% 63.2% 71.6% 72.2% 72.5% 76.5% EBIT margin 8.6% 13.2% 11.9% 11.2% 13.8% 7.6% 7.3% 1.4% 8.3% 7.2% Pre-tax margin 5.5% 13.3% 12.9% 11.3% 16.1% 7.6% 6.2% 1.2% 8.5% 7.2% NP att. margin 3.7% 9.7% 9.8% 8.4% 10.9% 5.2% 4.6% 0.3% 6.9% 6.1%

Growth (Last FY) Sales growth 28.8% 59.5% 29.2% 8.3% 1.9% 7.0% 12.8% -2.9% 0.8% 4.6% Pre-tax profit growth 4.9% 39.2% 12.3% 18.3% -4.7% -25.1% -27.9% -79.7% 24.2% -15.6% Net profit att. growth 4.2% 60.2% 9.9% 77.9% -42.2% -26.7% 23.0% -94.1% 28.9% -16.7%

Net debt to equity 70.80 (43.00) (59.65) (45.78) (34.39) (95.86) 80.36 (36.38) (23.06) (67.98) ROA 6.2 21.0 15.2 15.9 14.1 9.9 19.5 5.3 10.1 17.3 ROE 33.9 33.9 21.9 25.1 18.5 18.3 108.2 6.8 13.0 29.2

Inventory days 18.9 14.5 73.3 17.0 46.7 46.6 19.7 14.1 11.8 5.2 Receivable days 2.7 3.5 2.0 3.5 5.4 3.0 2.2 1.5 3.0 1.1 Payable days 34.3 22.5 55.8 29.1 62.5 59.3 45.2 58.6 10.6 15.7 Cash Conversion Cycle (12.8) (4.5) 19.6 (8.7) (10.4) (9.8) (23.2) (43.0) 4.2 (9.4) (days) Source: Bloomberg, Company data, CMBIS estimates

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE ACCESS KEY TO OUR REPORTS ON BLOOMBERG: CMBR 32 17 Feb 2020

Assumptions

Figure 83: CMBI’s assumptions Major assumptions FY16A FY17A FY18A FY19E FY20E FY21E Sales by brand (RMB mn) Jiu Mao Jiu 1,092 1,204 1,334 1,416 1,392 1,664 Tai Er 68 244 540 1,377 2,213 3,776 Other brands 4 22 19 43 128 218 Total 1,164 1,469 1,893 2,836 3,733 5,657

Sales growth by brand (%) Jiu Mao Jiu - 10.2% 10.8% 6.2% -1.7% 19.5% Tai Er - 259.9% 121.4% 154.9% 60.7% 70.7% Other brands - 424.5% -14.1% 130.0% 200.0% 70.0% Total - 26.2% 28.8% 49.8% 31.6% 51.6%

Sales by segment growth (%) Restaurant operations - 19.3% 24.9% 52.8% 33.8% 53.9% Delivery business - 329.4% 80.3% 21.2% 4.4% 23.0% Sales of specialties - 13.5% -44.5% 60.0% 40.0% 20.0% Others - 106.2% 40.5% 80.0% 50.0% 25.0%

Sales by region growth (%) Tier 1 cities - 27.9% 31.3% 35.3% 22.9% 40.7% New tier 1 cities - 12.4% 37.4% 114.5% 51.3% 82.7% Tier 2 cities - 2.6% 26.5% 113.5% 48.3% 71.0% Tier 3 cities and below - 37.2% 20.5% 23.6% 11.6% 25.1%

GP margins by segment Jiu Mao Jiu - - - 67.0% 67.0% 67.0% Tai Er - - - 59.0% 60.0% 60.0% Other brands - - - 58.0% 60.0% 62.0% Total 67.0% 65.1% 64.5% 63.0% 62.6% 62.1%

Opex breakdown Staff costs -28.1% -27.2% -27.7% -25.8% -27.0% -24.7% Depreciation of right-of-use assets -9.4% -8.8% -8.2% -7.7% -8.5% -7.7% Other rentals & related expenses -0.5% -0.6% -1.5% -1.8% -2.0% -2.2% D & A of other assets -5.6% -5.2% -4.3% -3.9% -4.0% -3.6% Utilities expenses -6.3% -5.4% -5.0% -4.0% -3.8% -3.2% Others -5.8% -7.7% -9.4% -7.5% -6.5% -6.2%

EBIT margins 11.3% 10.4% 8.6% 12.6% 11.8% 15.4% Effective tax rate 31.8% 27.8% 28.7% 26.0% 26.0% 26.0%

NP att. margins 4.5% 4.6% 3.7% 7.0% 6.5% 9.0% NP att. growth (%) - 28.9% 4.2% 186.7% 22.3% 108.4% Source: Company data, CMBIS estimates

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE ACCESS KEY TO OUR REPORTS ON BLOOMBERG: CMBR 33 17 Feb 2020

Financial Analysis We forecast sales growth of 50%/ 32%/ 52% YoY in FY19E/ 20E/ 21E

 We believe sales growth to be 50% in FY19E, mainly driven by Tai Er’s store expansion and sales per store ramp up.

We project JMJ Int’l sales to reach RMB 2,836mn in FY19E, driven by:

1) 6% growth for Jiu Mao Jiu (6% increase in sales per store and no change in net number of restaurants), 2) 155% growth for Tai Er (24% increases in sales per store and 106% growth in number of restaurants) and 3) 130% growth for other brands (including Double Eggs, Cooking Spicy Kebab and Uncle Chef), OR

1) 53% growth for restaurant operations, 2) 21% growth for delivery business (all from Jiu Mao Jiu), 60% growth for sales of specialities and 3) 80% growth for others, OR

1) 35% growth for T1 cities, 2) 119% growth for new tier 1 cities, 3) 109% growth for T2 cities, 4) 24% growth for T3 and below cities and 5) 89% growth for others.

Figure 84: Sales CAGR , by brand and segment Figure 85: Sales mix, by brand 5,657 6,000 (RMB mn) 100% 6%0% 1% 1% 2% 3% 4% 218 17% FY18A-21E Sales CAGR 29% 5,000 Jiumaojiu 8% 80% Tai Er 91% 49% 4,000 3,733 59% Others 127% 60% 67% 128 3,776 Total 44% 2,836 3,000 94% 43 40% 82% 1,893 2,213 70% 2,000 1,469 19 1,377 1,164 22 540 50% 4 244 20% 37% 1,000 68 29% 1,334 1,416 1,392 1,664 1,092 1,204 0% 0 FY16A FY17A FY18A FY19E FY20E FY21E FY16A FY17A FY18A FY19E FY20E FY21E Jiu Mao Jiu Tai Er Other brands Jiu Mao Jiu Tai Er Other brands

Source: Company data, CMBIS estimates Source: Company data, CMBIS estimates

Figure 86: Jiu Mai Jiu sales, by eat-in and delivery Figure 87: Store CAGR, by brand and segment FY18A-21E Stores CAGR 583 1,800 1,664 30% 600 Jiumaojiu 7% 91 500 Tai Er 69% 25% 428 1,500 1,416 1,392 294 Others 82% 1,334 20% 400 Total 37% 55 1,204 229 312 189 239 314 1,200 1,092 15% 300 31 105 227 214 24 175 15 134 1,370 10% 200 141 65 900 28 1,099 1,145 1,187 1,153 13 1,068 5% 100 178 128 139 147 147 159 600 0% 0 FY16A FY17A FY18A FY19E FY20E FY21E FY16A FY17A FY18A FY19E FY20E FY21E Delivery sales As % of total JMJ sales Jiu Mao Jiu Tai Er Other brands Total

Source: Company data, CMBIS estimates Source: Company data, CMBIS estimates We project JMJ Int’l sales to grow at 45% CAGR in FY18-21E, assuming:

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE ACCESS KEY TO OUR REPORTS ON BLOOMBERG: CMBR 34 17 Feb 2020

1) 9% CAGR for Jiu Mao Jiu (2% CAGR in sales per store and 7% CAGR in net number of restaurants), 2) 93% CAGR for Tai Er (14% CAGR in sales per store and 69% CAGR in net number of restaurants, and 3) 127% CAGR for other brands, OR

1) 48% CAGR for restaurant operations, 2) 17% CAGR for delivery business, 3) 39% CAGR for sales of specialities and 4) 50% CAGR for others, OR

1) 34% CAGR for T1 cities, 2) 93% CAGR for new tier 1 cities, 3) 73% CAGR for T2 cities, 4) 14% CAGR for T3 and below cities and 5) 93% CAGR for other brands.

Figure 88: Sales CAGR, by tier city Figure 89: Sales mix, by tier city 5,657 6,000 (RMB mn) 100% 0% 1% 1% 2% 3% 4% FY18A-21E Sales CAGR 17% 18% 17% 14% 12% 10% 5,000 T1 33% 80% 12% 10% 9% 13% 15% 17% New T1 81% 3,733 4,000 11% 10% 10% T2 76% 60% 15% 17% 2,836 1,162 21% 3,000 T3 & below 20% 1,893 636 40% 2,000 1,469 61% 62% 1,164 421 60% 56% 53% 196 2,765 49% 1,000 20% 127 143 1,599 1,966 703 899 1,181 0 0% FY16A FY17A FY18A FY19E FY20E FY21E FY16A FY17A FY18A FY19E FY20E FY21E Tier 1 cities New tier 1 cities Tier 1 cities New tier 1 cities Tier 2 cities Tier 3 cities and below Tier 2 cities Tier 3 cities and below Other brands Other brands

Source: Company data, CMBIS estimates Source: Company data, CMBIS estimates

Figure 90: Average spending per head, by brand Figure 91: Seat turnover, by brand

90.0 (RMB) 6.0 (x) 81.7 4.9 5.1 4.9 4.9 78.5 5.0 4.5 80.0 74.6 72.3 69.1 4.0 3.6 70.0 65.2 3.0 2.5 58.6 2.4 2.4 2.4 56.5 2.2 2.2 60.0 54.4 51.9 53.2 2.0 48.2 50.0 1.0

40.0 - FY16A FY17A FY18A FY19E FY20E FY21E FY16A FY17A FY18A FY19E FY20E FY21E

Jiu Mao Jiu Tai Er Jiu Mao Jiu Tai Er

Source: Company data, CMBIS estimates Source: Company data, CMBIS estimates

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE ACCESS KEY TO OUR REPORTS ON BLOOMBERG: CMBR 35 17 Feb 2020

Figure 92: Sales per store, by brand Figure 93: SSSG by brand (%) 14.0 (RMB mn) 40.0 34.3 12.0 12.0 30.0 10.3 10.3 9.5 10.0 9.0 9.2 8.5 8.6 8.7 8.3 8.6 20.0 8.0 8.2 7.7 7.9 10.0 4.4 4.5 4.6 2.6 2.1 2.9 6.0 5.2 1.7 1.0 0.0 4.0 -1.8 -10.0 -5.1 2.0 FY17A FY18A 1H19 2H19E FY19E FY20E FY21E FY16A FY17A FY18A FY19E FY20E FY21E Jiu Mao Jiu Tai Er Jiu Mao Jiu Tai Er

Source: Company data, CMBIS estimates Source: Company data, CMBIS estimates

Our forecasts are also assuming a low-single-digit SSSG for Jiu Mao Jiu in FY19E and 21E, mainly driven by low-single-digit ASP increase and flattish seat turnover in FY19E and FY21E but a mid-single-digit SSSG decline in FY20E, mainly due to seat turnover decline.

On the other hand, we are assuming a mid-single digit SSSG for Tai Er in FY19E and FY21E, due to ASP hike but a more volatile traffic (seat turnover to first increase in FY19E and flattish in FY21E because of rapid store expansion) and a low-single-digit decline SSSG in FY20E due to ASP hike but a more aggressive drop in traffic (due to coronavirus outbreak in 1H20E).

Figure 94: Jiu Mao Jiu’s SSSG by tier city Figure 95: Tai Er’s SSSG by tier city

16 (%) 60 (%) 11 43 12 45 8 8 7 8 8 34 8 6 4 30 3 4 1 2 2 2 2 0 1 0 1 11 15 4 8 5 5 5 8 5 0 3 0 0 3 0 0 2 1 1 3 3 0 -4 -2 -3 -4 -3 -2 -2 -8 -5 -5 -5 -15 -5 -7 Tier 1 New tier 1 Tier 2 Tier 3 Overall Tier 1 New tier 1 Tier 2 Tier 3 Overall cities cities cities cities and cities cities cities cities and below below

FY17A FY18A FY19E FY20E FY21E FY17A FY18A FY19E FY20E FY21E

Source: Company data, CMBIS estimates Source: Company data, CMBIS estimates

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE ACCESS KEY TO OUR REPORTS ON BLOOMBERG: CMBR 36 17 Feb 2020

We forecast NP att. growth of 187%/ 22%/ 108% YoY in FY19E/ 20E/ 21E

 GP margin could decline in FY19E. We expect GP margin to fall to 63.0% in FY19E (vs 64.5% in FY18). The major reason behind the decline, in our view, is the faster growth of lower margin Tai Er. For Jiu Mao Jiu and Tai Er, we estimate their GP margins to be 67% and 59% in FY19E respectively.

 GP margin may continue to fall in FY19E-21E. We expect GP margin to continue its drop and decline to 62.6% in FY20E and 62.1% in FY21E, due to greater sales contribution from the lower margin Tai Er brand. Figure 96: Sales and Net profit att. growth Figure 97: GP, EBIT, NP att. margin

200% 187% 70%

60% 67.0% 65.1% 160% 64.5% 63.0% 62.6% 62.1% 50% 108% 120% 40% 80% 67% 30% 50% 52% 15.4% 32% 20% 11.3% 12.6% 11.8% 40% 26% 29% 29% 22% 10.4% 8.6% 13% 4% 10% 0% 4.5% 9.0% 0% 4.6% 3.7% 7.0% 6.5% FY16A FY17A FY18A FY19E FY20E FY21E FY16A FY17A FY18A FY19E FY20E FY21E Sales growth NP att. growth GP margin EBIT margin NP att. margin

Source: JMJ Int.’s A-share prospectus (2016), Company data, CMBIS Source: Company data, CMBIS estimates estimates

 EBIT margin should rebound strongly in FY19E. We expect EBIT margin to jump in FY19E to 12.6% (vs 8.6% in FY18), due to 1) greater sales from Tai Er brand, 2) ramp up of Tai Er sales per store and better economies of scales, hence staff costs, D&A and utility expenses can fall as % of sales, and 3) lower other operating expenses, thanks to the absence of inventory losses of RMB 22.1mn in FY18, due to an incident relating to a former employee. Figure 98: Restaurant level OP margins, by brand Figure 99: Number of staff, by function

35% Management and Others, 125 Central kitchens 30% administrative staff, and production, 30% 82 459 24% Food 25% 22% 22% Safety and Operation 20% quality management, 20% 18% 20% control, 33 118 19% 17% 17% 17% 16% 15% 17% Research and 16% 17% 17% 17% Finance and development, 28 compliance, 66 10% 13% FY16A FY17A FY18A FY19E FY20E FY21E Marketing and Restaurant Procurement, promotion, 41 Jiu Mao Jiu Tai Er Total staff, 11,357 34

Source: Company data, CMBIS estimates, restaurant level operating Source: Company data, CMBIS estimates, as at 20 Aug 2019 profit = revenue - raw materials and consumables used - staff costs - depreciation of right-of-use assets - other rentals and related expenses - depreciation and amortization of other assets - utilities expenses - delivery service fees.

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE ACCESS KEY TO OUR REPORTS ON BLOOMBERG: CMBR 37 17 Feb 2020

 EBIT margin should drop in FY20E first before rebounding in FY21E We expect EBIT margin to drop to 11.8% in FY20E and rebound to 15.4% in FY21E, again, thanks to greater sales from the Tai Er brand and rising ratio of old Tai Er stores (opened for more than one year), as well as its corresponding economies of scales. Hence, staff costs, D&A and Utility and other opex will continue to fall.

Figure 100: Opex breakdown 1 Figure 101: Opex breakdown 2

30% (as % of total sales) 12% (as % of total sales) 9.4% 25% 28.1% 27.7% 10% 27.2% 27.0% 7.7% 7.5% 25.8% 24.7% 20% 8% 6.3% 6.5% 6.2% 5.4% 15% 6% 5.8% 5.0% 9.4% 4.0% 3.8% 8.8% 8.2% 7.7% 8.5% 7.7% 3.2% 10% 4% 5.6% 5.2% 2.0% 2.2% 4.3% 3.9% 4.0% 5% 0.5% 0.6% 1.5% 1.8% 2% 3.6% 0% 0% FY16A FY17A FY18A FY19E FY20E FY21E FY16A FY17A FY18A FY19E FY20E FY21E Staff costs/ sales D & A of other assets/ sales Depreciation of ROU assets/ sales Utilities expenses/ sales Other rentals & related / sales Others/ sales

Source: Company data, CMBIS estimates Source: Company data, CMBIS estimates

 Net profit att. will surge by 187% in FY19E and grow by 94% CAGR in FY18-21E As a result of significant ramp up of Tai Er’s sales per store, absence of one-off inventory losses, lower tax rate as more stores are turning to profit making, the net profit att. in FY19E could go up by 187%. Driven by rapid sales growth and operating leverage, net profit att. can also increase by 22% in FY20E and 108% in FY21E, implying a 94% CAGR during FY18-21E.

Noted that, if we adjust for these items: 1) equity-settled share based payment expenses, 2) other inventories losses and 3) professional services expenses, then our adjusted NP att. growth would be 165% in FY19E, 37% in FY20E, 68% in FY21E and 82% CAGR for FY18-21E.

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE ACCESS KEY TO OUR REPORTS ON BLOOMBERG: CMBR 38 17 Feb 2020

Figure 102: Income Statement, full year Fiscal Year, Dec YE (RMB mn) FY16A FY17A FY18A FY19E FY20E FY21E Sales 1,164 1,469 1,893 2,836 3,733 5,657 Raw materials and consumables used (384) (513) (672) (1,050) (1,396) (2,142) Gross profit 780 957 1,221 1,786 2,337 3,515 Other income 1 2 3 9 40 46 Staff costs (328) (400) (523) (732) (1,006) (1,397) Depreciation of right-of-use assets (110) (129) (155) (218) (319) (437) Other rentals & related expenses (6) (9) (29) (52) (75) (124) D & A of other assets (65) (76) (81) (110) (151) (201) Utilities expenses (73) (80) (94) (113) (143) (183) Travelling & related expenses (7) (10) (14) (14) (15) (23) Professional services expenses 0 0 0 (45) 0 0 Advertising & promotion expenses (15) (15) (20) (17) (32) (61) Delivery service fees (3) (11) (21) (31) (37) (50) Other expenses (43) (76) (123) (105) (160) (215) EBIT 132 153 163 358 439 871 Share of (losses)/profits of associates (1) (1) (2) 2 3 5 Other net (losses)/income (5) (1) 1 (3) (4) (6) Finance costs (49) (52) (58) (65) (75) (89) Pre-tax income 76 99 104 293 363 781 Income tax (24) (28) (31) (76) (94) (202) Net profit 51 72 74 217 270 579 Minority interest (1) 5 4 18 25 70 Net profit att. 52 67 70 200 244 509

Equity-settled share-based 4 4 5 7 9 13 payment expenses Other inventories losses 3 10 22 0 0 0 Professional services expenses 0 0 0 45 0 0 Adjusted net profit 58 85 101 269 279 592

Margin Analysis GP margin 67.0% 65.1% 64.5% 63.0% 62.6% 62.1% Staff costs/ sales -28.1% -27.2% -27.7% -25.8% -27.0% -24.7% Depreciation of right-of-use assets/ sales -9.4% -8.8% -8.2% -7.7% -8.5% -7.7% Other rentals & related expenses/ sales -0.5% -0.6% -1.5% -1.8% -2.0% -2.2% D & A of other assets/ sales -5.6% -5.2% -4.3% -3.9% -4.0% -3.6% Utilities expenses/ sales -6.3% -5.4% -5.0% -4.0% -3.8% -3.2% EBIT margin 11.3% 10.4% 8.6% 12.6% 11.8% 15.4% NP att. margin 4.5% 4.6% 3.7% 7.0% 6.5% 9.0% Adjusted NP margin 5.0% 5.8% 5.3% 9.5% 7.5% 10.5%

Growth Analysis (YoY) Sales - 26.2% 28.8% 49.8% 31.6% 51.6% Gross profit - 22.6% 27.6% 46.3% 30.8% 50.4% EBIT - 15.8% 7.1% 119.3% 22.6% 98.3% Net profit att. - 28.9% 4.2% 186.7% 22.3% 108.4% Adjusted Net profit - 46.8% 18.3% 167.2% 3.5% 112.3%

Source: Company data, CMBIS estimates

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE ACCESS KEY TO OUR REPORTS ON BLOOMBERG: CMBR 39 17 Feb 2020

Figure 103: Income Statement, half year Fiscal Year, Dec YE (RMB mn) 1H18 2H18 1H19 2H19E Sales 874 1,018 1,237 1,599 Raw materials and consumables used (295) (377) (435) (615) Gross profit 579 642 802 984 Other income 1 2 2 7 Staff costs (240) (284) (320) (412) Depreciation of right-of-use assets (73) (82) (105) (113) Other rentals & related expenses (13) (16) (21) (30) D & A of other assets (39) (43) (49) (60) Utilities expenses (44) (49) (50) (63) Travelling & related expenses (5) (10) (5) (9) Professional services expenses 0 0 (10) (36) Advertising & promotion expenses (8) (12) (8) (9) Delivery service fees (9) (12) (15) (16) Other expenses (49) (73) (51) (54) EBIT 100 63 168 190 Share of (losses)/profits of associates (1) (1) 1 1 Other net (losses)/income 1 0 (2) (1) Finance costs (24) (34) (29) (36) Pre-tax income 76 28 139 154 Income tax (22) (9) (37) (39) Net profit 54 19 102 115 Minority interest 3 1 9 8 Net profit att. 51 18 93 107

Equity-settled share-based 2 3 4 2 payment expenses Other inventories losses 11 11 0 0 Professional services expenses 0 0 10 36 Adjusted net profit 68 33 116 153

Margin Analysis GP margin 66.2% 63.0% 64.8% 61.5% Staff costs/ sales -27.4% -27.9% -25.9% -25.8% Depreciation of right-of-use assets/ sales -8.4% -8.0% -8.5% -7.1% Other rentals & related expenses/ sales -1.5% -1.6% -1.7% -1.9% D & A of other assets/ sales -4.4% -4.2% -4.0% -3.8% Utilities expenses/ sales -5.1% -4.8% -4.1% -3.9% EBIT margin 11.5% 6.2% 13.6% 11.9% NP att. margin 5.8% 1.8% 7.5% 6.7% Adjusted NP margin 7.7% 3.3% 9.4% 9.6%

Growth Analysis (YoY) Sales - - 41% 57% Gross profit - - 39% 53% EBIT - - 68% 200% Net profit att. - - 81% 479% Adjusted Net profit - - 72% 361%

Source: Company data, CMBIS estimates

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE ACCESS KEY TO OUR REPORTS ON BLOOMBERG: CMBR 40 17 Feb 2020

Figure 104: Balance Sheet Fiscal Year, Dec YE (RMB mn) FY16A FY17A FY18A FY19E FY20E FY21E NON-CURRENT ASSETS 227 216 268 380 480 589 Right-of-use assets 420 457 574 574 574 574 Intangible assets (Incl. product dev. costs) 3 3 4 4 4 4 Associates & jointly controlled companies 0 4 4 6 9 14 L-T deposits, prepayments & other receivables 22 40 57 57 57 57 Others 32 39 54 54 54 54 Non-current assets 705 759 960 1,075 1,177 1,291

CURRENT ASSETS Inventories 20 33 36 52 61 88 Accts & bills receivable 9 12 17 22 30 45 Prepayments & deposits 61 68 88 132 174 263 Due form related parties 15 17 20 20 20 20 Pledge deposit & Fixed deposits 4 2 6 6 6 6 Other current assets 0 0 0 0 0 0 Cash 33 52 60 2,423 2,565 3,028 Current assets 143 183 227 2,654 2,856 3,450

CURRENT LIABILITIES Trade payable 50 54 72 92 115 164 Tax 6 8 12 12 12 12 Accruals & other payables 76 82 145 217 285 432 Bank loans 39 20 49 49 49 49 Finance leases 103 112 144 144 144 144 Other current liabilities 14 16 18 18 18 18 Current liabilities 288 290 440 532 623 819

NON-CURRENT LIABILITIES Bank loans 0 0 0 0 0 0 Provisions 14 16 21 21 21 21 Other non-current liabilities 398 428 522 522 522 522 Non-current liabilities 412 445 543 543 543 543

SHAREHOLDER'S EQUITY Minority interest 0 0 0 18 43 113 Shareholder's equity 147 207 204 2,636 2,824 3,265

DEBT ANALYSIS Total debt 155 146 210 210 210 210 Total equity 147 207 204 2,654 2,867 3,378 D/E ratio 105.2% 70.6% 103.1% 7.9% 7.3% 6.2% D/A ratio 18.3% 15.5% 17.7% 5.6% 5.2% 4.4% Net debt 80.0% 44.5% 70.8% Net cash Net cash Net cash Source: Company data, CMBIS estimates

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE ACCESS KEY TO OUR REPORTS ON BLOOMBERG: CMBR 41 17 Feb 2020

Figure 105: Cash Flow Statement Fiscal Year, Dec YE (RMB mn) FY16A FY17A FY18A FY19E FY20E FY21E CASH FLOW Operating cash flow 262 314 373 419 528 936

Capex (89) (75) (150) (221) (250) (311) Investment (7) (14) (0) 0 0 0 Acquisition of intangible assets (3) (2) (2) 0 0 0 Sale of assets 0 0 0 0 0 0 Others (0) 0 0 (0) (0) (0) Investing cash flow (99) (90) (152) (221) (250) (311)

Net change in bank loans (5) (19) 29 0 0 0 Net change in other non-curr liabilities (1) 2 (4) 0 0 0 Issue of shares 0 0 0 2,200 0 0 Others (152) (188) (238) (35) (135) (162) Financing cash flow (158) (205) (214) 2,165 (135) (162)

Cash at period end 33 52 60 2,423 2,565 3,028

WORKING CAPITAL TURNOVER Inventory days 17 19 19 18 16 15 Trade receivable days 2 3 3 3 3 3 Trade payable days 40 37 34 32 30 28 Cash conversion cycle (days) (21) (15) (13) (11) (11) (10) Source: Company data, CMBIS estimates

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE ACCESS KEY TO OUR REPORTS ON BLOOMBERG: CMBR 42 17 Feb 2020

Scenario analysis: impact on financials of the coronavirus

 15/ 30/ 45 days of restaurants’ suspension may lead to 17%/ 28%/ 41% cut in FY20E net profit, due to the coronavirus. JMJ announced on 29-Jan-2020 that it has suspended all of its restaurant operation since 26-Jan-2020 due to the coronavirus outbreak in China, and on 9-Feb-2020, it had decided to extend it suspension to until further notice.

According to our scenario analysis, 15/ 30/ 45 days of suspension could lead to 4%/ 7%/ 10% cut in FY20E sales (assumed daily sales of RMB 9.5mn in 1Q20E), and 17%/ 28%/ 41% cut in FY20E net profit (we estimate the fixed /variable costs account for 64%/36% of FY20E opex).

We have factored in a 30-day case in our model.

Figure 106: Impact on sales due to coronavirus – CMBI est. Period FY20E Sales (RMB mn) - before virus 4,007

Period 1H20E 2H20E Sales (RMB mn) - before virus 1,803 2,204 As % of FY20E sales 45% 55%

Period 1Q20E 2Q20E 3Q20E 4Q20E Sales (RMB mn) - before virus 862 942 1,062 1,142 As % of FY20E sales 21.5% 23.5% 26.5% 28.5%

Period Jan20 Feb20 Mar20 Apr20 May20 Jun20 Jul20 Aug20 Sep20 Oct20 Nov20 Dec20 Monthly sales (RMB mn) - before virus 301 260 301 321 321 301 361 361 341 385 373 385 As % of FY20E sales 7.50% 6.50% 7.50% 8.00% 8.00% 7.50% 9.00% 9.00% 8.50% 9.60% 9.30% 9.60% Number of days in each month 31 29 31 30 31 30 31 31 30 31 30 31 Daily sales for each month (RMB mn) 9.7 9.0 9.7 10.7 10.3 10.0 11.6 11.6 11.4 12.4 12.4 12.4

Days of store closures (since 26-Jan-2020) 15 30 45 60 75 90 Total sales impact 139 274 416 561 715 876 Downward revision of FY20E sales -3.5% -6.8% -10.4% -14.0% -17.9% -21.9% Downward revision of 1Q20E sales -16.1% -31.8% -48.2% -65.1% Source: Company data, CMBIS estimates

We also estimate for Jiumaojiu, that 80%/ 80%/ 90% of staff/ depreciation of right-of-use assets/ D&A costs are fixed and 90%/ 95%/ 95%/ 80%/ 90% of other rentals and related/ utilities/ travelling & others/ A&P expenses/ delivery service fees are variable.

Figure 107: Costs mix by fixed or variable items Opex breakdown Fixed % Variable % Staff costs 80% 20% Depreciation of right-of-use assets 80% 20% Other rentals & related expenses 10% 90% D & A of other assets 90% 10% Utilities expenses 5% 95% Travelling & related expenses 5% 95% Professional services expenses 90% 10% Advertising & promotion expenses 20% 80% Delivery service fees 10% 90% Other expenses 20% 80% Overall Opex - FY20E 64% 36%

Finance costs 85% 15% Source: Company data, CMBIS estimates

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE ACCESS KEY TO OUR REPORTS ON BLOOMBERG: CMBR 43 17 Feb 2020

Figure 108: Impact on overall financials due to coronavirus – CMBI est. Before virus After virus Days of restaurant closures 15 days 30 days 45 days 60 days Period FY19E FY20E FY20E FY20E FY20E FY20E Sales 2,836 4,007 3,868 3,733 3,591 3,446 COGS (1,050) (1,495) (1,447) (1,396) (1,343) (1,289) Gross profit 1,786 2,512 2,421 2,337 2,248 2,157 GP margin 63.0% 62.7% 62.6% 62.6% 62.6% 62.6% Other income (incl. interest income) 26 51 40 40 40 40 Staff costs (732) (1,016) Depreciation of right-of-use assets (218) (313) Other rentals & related expenses (52) (79) D & A of other assets (110) (151) Utilities expenses (113) (143) Travelling & relatedexpenses (17) (20) Professional services expenses (43) 0 Advertising & promotion expenses (21) (44) Delivery service fees (31) (41) Other expenses (108) (172) Opex - Fixed (938) (1,263) (1,263) (1,263) (1,263) (1,263) As % of sales -33.1% -31.5% -32.6% -33.8% -35.2% -36.6% Opex - Variable (506) (717) (700) (676) (650) (624) As % of sales -17.9% -17.9% -18.1% -18.1% -18.1% -18.1% Operating income 368 584 499 439 376 311 Finance costs (65) (75) (76) (75) (75) (74) JVs & ASSOs & exceptional (1) (1) (1) (1) (1) (1) Pre-tax profit 302 508 422 363 301 237 Income tax (78) (131) (109) (94) (77) (61) Effective tax rate -25.8% -26.5% -26.0% -26.0% -26.0% -26.0% Minority interests (18) (36) (30) (25) (21) (17) Net profit att. 206 341 284 244 202 159

Growth (YoY) FY19E FY20E FY20E FY20E FY20E FY20E Sales 41% 36% 32% 27% 22% Operating income 59% 36% 19% 2% -15% Net profit att. 65% 38% 18% -2% -23%

Revisions FY19E FY20E FY20E FY20E FY20E FY20E Sales -3% -7% -10% -14% Operating profit -14% -25% -36% -47% Net profit att. -17% -28% -41% -53% Source: Company data, CMBIS estimates

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE ACCESS KEY TO OUR REPORTS ON BLOOMBERG: CMBR 44 17 Feb 2020

Balance sheet and Cash flow

 JMJ Int’s cash flow from operation is strong, which, after the adjustment of the interest element of lease liabilities, is still higher than its capex and therefore sustainable in the future. We expect the trend to improve once its expansion stabilize gradually in FY18-21E.

The Company’s net cash flow from operation (“CFO”) were RMB 262mn/ 314mn/ 373mn in FY16/ FY17/ FY18. After adjustment for the interest element of lease liabilities of RMB - 143mn/ -171mn/ -185mn, the adjusted net cash flow from operation were RMB 118mn/ 143mn/ 188mn, which were still higher than the capex of RMB -89mn/ -75mn/ -150mn in FY16/ 17/ 18.

Going forward, we expect the capex to climb. However, net cash flow from operation should climb at a faster rate, therefore the overall trend should improve, thanks to improvement of per store profitability.

Figure 109: Closing cash balance Figure 110: Net operating cash flow ratio

(RMB mn) 1.2 (x) 1.1 3,500 1.1 3,028 3,000 1.0 0.9 2,565 2,423 0.8 0.8 2,500 0.8 0.8 2,000 0.6 1,500 0.4 1,000 0.2 500 33 52 60 - - FY16A FY17A FY18A FY19E FY20E FY21E FY16A FY17A FY18A FY19E FY20E FY21E Source: Company data, CMBIS estimates Source: Company data, CMBIS estimates, Net operating cash flow ratio = dividing net operating cash flow by current liabilities

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE ACCESS KEY TO OUR REPORTS ON BLOOMBERG: CMBR 45 17 Feb 2020

 We expect JMJ Int’l’s CCC to normalize to ~ negative 10-15 days in FY20E and onwards.

Inventory days increased from 16.7 days in FY16 to 19.0 and 18.9 in FY17 and FY18, was mainly due to the launch of central kitchen in Foshan in late 2016. But, in the future, we expect inventory days to gradually fall to 15 days in FY21E, as sales contribution from Tai Er increase. Noted that the inventory days for Tai Er, in general, would be lower than Jiu Mao Jiu because the mix of inventory that can be consumed in just 1 day is much higher.

Receivable days increased slightly from 2.2 days in FY16 to 2.6 and 2.7 days in FY17 and FY18, as more and more customers prefer to make the payment through digital payment platforms or APP (e.g. Wechat pay or Alipay, etc.). We forecast this to steady move up to 3.0 days by FY21E, because the penetration and frequency of digital payment is relatively low and will continue to grow.

Payable days was falling from 40.3 days in FY16 to 36.9 and 34.3 in FY17 and FY18, that was a result of the Company’s decision to strengthen its relationship with suppliers, in order to secure stable source of raw materials. We expect the number to fall but to 32 in FY19E but stabilize afterward at 30 in FY20E and 28 in FY21E.

All in all, we estimate the CCC to normalized to ~ negative 10-15 days in FY19E and onwards.

Figure 111: Net debt or (cash) to equity Figure 112: Working capital (days) (%) (days) 100 50 80 40 37 71 34 32 30 28 30 19 19 60 45 17 18 16 15 10 2 3 3 3 3 3 20 (10) (20) (11) (11) (10) (15) (13) (30) (21) FY16A FY17A FY18A FY19E FY20E FY21E (60) Avg. INV T/O (days) Avg. AR T/O (days) (100) (84) (84) (86) Avg. AP T/O (days) FY16A FY17A FY18A FY19E FY20E FY21E Cash conversion cycle (days)

Source: Company data, CMBIS estimates Source: Company data, CMBIS estimates

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE ACCESS KEY TO OUR REPORTS ON BLOOMBERG: CMBR 46 17 Feb 2020

Valuation

Figure 113: Peers valuation Up/do ROE 3yrs Yield YTD Net 12M TP Price wn- Mkt cap Year PER (x) PBR (x) (%) PEG(x) (%) perform Gearing Ratin HK$/ HK$/ side ance Company Ticker g LC LC (%) HK$ mn End FY1 FY2 FY1 FY2 FY0 FY1 FY1 (%) FY0 Leading Greater China Catering Jiumaojiu Int'l 9922 HK BUY 10.82 9.00 20% 12,451 Dec-18 60.2 45.8 4.3 4.0 33.9 0.6 0.5 n/a 70.8 Haidilao Int'l 6862 HK BUY 39.83 32.60 22% 172,780 Dec-18 61.2 41.7 14.1 11.1 36.9 1.6 0.3 4.2 (43.0) Cafe De Coral 341 HK HOLD 18.26 17.72 3% 10,379 Mar-19 24.4 20.4 3.1 3.1 16.5 n/a 4.2 (4.0) (25.1) Xiabuxiabu 520 HK NR n/a 8.67 n/a 9,377 Dec-18 19.9 15.5 3.4 3.1 18.9 2.0 2.1 (15.0) (59.7) Yihai Int'l 1579 HK NR n/a 51.50 n/a 53,915 Dec-18 64.4 47.5 18.0 13.6 32.0 2.1 0.4 12.7 (57.8) Yum China YUMC US NR n/a 44.85 n/a 130,988 Dec-19 47.3 22.5 5.3 4.5 24.0 7.7 1.0 (6.6) 5.4 Gourmet Master 2723 TT NR n/a 103.00 n/a 4,797 Dec-18 17.7 15.1 1.7 1.6 10.5 n/a 3.4 (16.6) (44.4) Avg. 42.2 29.8 7.1 5.9 24.7 2.8 1.7 (4.2) (22.0) Med. 47.3 22.5 4.3 4.0 24.0 2.0 1.0 (5.3) (43.0) Other Greater China Catering Fairwood 52 HK NR n/a 19.26 n/a 2,495 Mar-19 11.3 16.3 3.2 3.1 18.3 n/a 4.6 (3.1) (66.8) Tai Hing 6811 HK NR n/a 1.37 n/a 1,370 Dec-18 9.4 7.4 1.2 1.2 108.2 1.4 4.3 (16.5) 80.4 Hop Hing 47 HK NR n/a 0.09 n/a 947 Dec-18 n/a n/a n/a n/a 17.6 n/a n/a (8.7) (95.9) Tsui Wah 1314 HK NR n/a 0.40 n/a 564 Mar-19 n/a n/a n/a n/a (5.2) n/a n/a (7.0) (32.5) Ajisen 538 HK NR n/a 2.14 n/a 2,336 Dec-18 10.5 10.7 n/a n/a 17.1 n/a 4.9 (22.7) (34.4) Tao Heung 573 HK NR n/a 1.19 n/a 1,210 Dec-18 n/a n/a n/a n/a 8.1 n/a n/a (7.0) (22.6) Tang Palace 1181 HK NR n/a 1.00 n/a 1,076 Dec-18 6.4 6.0 n/a n/a 25.4 n/a n/a (15.3) (76.6) Avg. 9.4 10.1 2.2 2.1 27.1 1.4 4.6 (11.5) (35.5) Med. 10.0 9.0 2.2 2.1 17.6 1.4 4.6 (8.7) (34.4) Greater China Catering Avg. 30.3 22.6 6.0 5.0 25.9 2.6 2.6 (8.1) (28.7) Med. 19.9 16.3 3.4 3.1 18.6 1.8 2.8 (7.0) (38.7)

International Catering Yum! Brands YUM US NR n/a 105.28 n/a 247,342 Dec-19 26.7 23.5 n/a n/a n/a 1.8 1.8 4.5 n/a Mcdonald'S MCD US NR n/a 217.09 n/a 1,269,901 Dec-19 25.5 23.5 n/a n/a n/a 3.1 2.3 9.9 n/a Starbucks SBUX US NR n/a 89.28 n/a 813,940 Sep-19 29.7 26.0 n/a n/a n/a 2.5 1.9 1.5 n/a Restaurant Brands QSR US NR n/a 67.24 n/a 242,860 Dec-19 22.8 20.9 9.1 8.3 31.4 1.7 3.1 5.4 274.8 Chipotle Mexican CMG US NR n/a 921.94 n/a 198,851 Dec-19 50.1 40.1 12.4 10.1 22.4 1.7 0.0 10.1 117.1 Darden DRI US NR n/a 121.71 n/a 114,874 May-19 19.1 18.0 6.0 5.4 27.7 2.5 2.9 11.7 27.0 Domino'S Pizza DPZ US NR n/a 291.60 n/a 92,640 Dec-18 31.0 27.4 n/a n/a n/a 2.7 0.9 (0.7) n/a Dunkin' Brands DNKN US NR n/a 75.78 n/a 48,758 Dec-19 23.5 21.7 n/a n/a n/a 2.9 2.1 0.3 n/a Wendy'S WEN US NR n/a 22.91 n/a 40,938 Dec-18 38.6 36.0 9.6 12.1 18.0 4.0 1.8 3.2 362.9 Shake Shack SHAK US NR n/a 73.28 n/a 21,357 Dec-18 112.0 121.1 9.9 8.9 8.1 9.8 n/a 23.0 (28.4) Wingstop WING US NR n/a 100.17 n/a 22,917 Dec-18 131.6 110.7 n/a n/a n/a 6.2 0.4 16.2 n/a Jollibee Foods JFC PM NR n/a 185.20 n/a 31,214 Dec-18 34.4 31.2 3.9 3.6 13.7 13.3 1.1 (14.3) 4.2 Avg. 45.4 41.7 8.5 8.1 20.2 4.3 1.7 5.9 126.3 Med. 30.4 26.7 9.4 8.6 20.2 2.8 1.8 5.0 72.0

A-shares Greater China Catering Foshan Haitian 603288 CH NR n/a 104.70 n/a 314,312 Dec-18 53.7 44.8 16.7 13.8 36.6 3.1 1.1 (2.6) (100.7) Fujian Sunner 002299 CH NR n/a 21.86 n/a 30,122 Dec-18 6.9 6.7 2.6 2.0 42.0 0.2 4.6 (9.2) 41.4 Angel Yeast 600298 CH NR n/a 26.97 n/a 24,708 Dec-18 23.9 20.3 4.4 3.8 19.0 2.1 1.4 (12.1) 55.9 Meihua 600873 CH NR n/a 4.25 n/a 14,667 Dec-18 11.3 9.0 n/a n/a 12.7 0.6 n/a (4.5) 56.9 Guangzhou Restaurant 603043 CH NR n/a 27.00 n/a 12,126 Dec-18 25.0 20.4 4.8 4.1 20.6 1.5 1.5 (11.1) (77.3) China Quanjude 002186 CH NR n/a 8.94 n/a 3,066 Dec-18 33.1 30.8 n/a n/a (0.2) 4.7 n/a (13.3) (62.0) Xi'An Catering 000721 CH NR n/a 3.56 n/a 1,975 Dec-18 n/a n/a n/a n/a (1.5) n/a n/a (14.0) (16.7) Avg. 25.7 22.0 7.1 5.9 18.5 2.0 2.2 (9.5) (14.7) Med. 24.5 20.3 4.6 4.0 19.0 1.8 1.5 (11.1) (16.7)

H-shares Consumer Staples UPC 220 HK NR n/a 8.73 n/a 37,708 Dec-18 24.9 22.8 2.5 2.5 10.1 1.8 4.0 6.7 (20.0) Tingyi 322 HK NR n/a 15.20 n/a 85,482 Dec-18 28.5 25.5 3.7 3.6 14.2 3.8 3.0 14.3 (12.6) Want Want 151 HK NR n/a 6.32 n/a 78,464 Mar-19 18.4 17.3 4.3 4.0 27.2 3.2 4.1 (13.2) (49.4) Mengniu Dairy 2319 HK NR n/a 29.80 n/a 117,283 Dec-18 21.9 22.9 3.6 3.2 14.2 1.2 1.0 (5.4) (14.4) Vitasoy 345 HK NR n/a 30.85 n/a 32,818 Mar-19 46.0 39.9 9.5 8.8 23.0 4.5 1.4 9.2 (27.7) Budweiser Brewing 1876 HK NR n/a 23.35 n/a 309,233 Dec-18 41.8 33.0 3.7 3.4 9.4 n/a 1.5 (11.2) (10.3) Tsingtao Brewery 168 HK NR n/a 44.00 n/a 63,642 Dec-18 29.2 25.2 2.8 2.6 9.9 1.7 1.5 (16.0) (70.6) CR Beer 291 HK NR n/a 39.15 n/a 127,010 Dec-18 51.6 35.2 5.6 5.2 6.7 0.9 0.6 (9.2) (6.1) Dali Foods 3799 HK NR n/a 5.57 n/a 76,276 Dec-18 17.4 16.0 4.1 3.9 24.5 3.5 4.5 (3.5) (65.4) Avg. 31.1 26.4 4.4 4.1 15.5 2.5 2.4 (3.1) (30.7) Med. 28.5 25.2 3.7 3.6 14.2 2.5 1.5 (5.4) (20.0) Source: Bloomberg, Company data, CMBIS estimates, as at 14 Feb 2020

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE ACCESS KEY TO OUR REPORTS ON BLOOMBERG: CMBR 47 17 Feb 2020

Initiate BUY on JMJ Int’l with TP of HK$ 10.82 using SOTP method We initiate on JMJ Int’l with a BUY rating and a target price of HK$ 10.82, using the Sum- of-the-part (SOTP) method, due to different development stages of Jiu Mao Jiu and Tai Er. And we also applied Comparable analysis (P/E, PEG) to derive valuation for each of the sub brand. We will assume net profit mix for Jiu Mao Jiu and Tai Er + others to be 30% and 70% in FY20E (2 years forward), same as their restaurant level operating income mix respectively. Our TP is based on 17x FY20E P/E for Jiu Mao Jiu and 0.65x PEG for Tai Er (implied 71.1x FY20E P/E), and this TP also implied a 55x FY20E P/E and 0.7x PEG for the entire group.

Figure 114: SOTP-based valuation FY18-21E Implied FY20E CMBI CMBI est. Valuation Value Target Implied 3 years est. net profit operating SOTP Valuation (RMB mn) Split Method Ratio (x) P/E (x) PEG (x) (Rmb mn) profit CAGR Remarks 1. Jiu Mao Jiu 1,238 9% FY20E P/E 17.0 17.0 73 6.3% 25% discount to industry average of 22.6x 2. Tai Er + others 12,178 91% FY18-21E PEG 0.65 71.1 171 113.1% 64% discount to leaders' median of 1.6x Total/ implied valuation 13,416 FY20E 55.0 0.84 244

Source: Bloomberg, Company data, CMBIS estimates

 Our TP is based on SOTP method, applying a 17x FY20E P/E for Jiu Mao Jiu and a 0.65x FY18-21E adjusted PEG for TaiEr. The valuation was derived from  17.0x FY20E P/E for Jiu Mao Jiu (25% discount to Greater China Catering peers’ 22.6x),  0.65x 3 years (FY18-21E) adjusted PEG for Tai Er (64% discounts to over Leading Greater China Catering peers’ median of 1.8x), also implied a 71.1x FY20E P/E.

For Jiu Mao Jiu, We believe its size is not huge and growth was not particularly impressive, therefore despite its decent margin level, we would still apply a discount on it.

For Tai Er, although current business size for Tai Er is small (in terms of sales and stores), we do believe it should deserve a higher premium valuation (in terms of P/E), because

1) its leading position in the Sauerkraut fish industry, 2) superior popularity (Dianping customer ratio) and operating numbers (seat turnover) and financial numbers (ROE), 3) rapid growth (past 3 years CAGR) and huge expansion potential (stores numbers and profit margins) and 4) good quality of growth (supported by many heathy factors e.g. strong sales per stores not yet fully reflected and sales network is still underpenetrated),

Figure 115: China catering leaders sector P/E Figure 116: Global catering sector P/E

(x) 130.0 (x) 121.1 60.0 110.7 110.0 45.8 47.5 41.7 45.0 90.0 29.8 70.0 30.0 22.5 22.5 20.4 41.7 50.0 40.1 36.0 15.5 15.1 26.0 31.2 23.5 27.4 26.7 15.0 30.0 23.5 20.9 18.0 21.7 10.0 0.0

Source: Bloomberg, CMBIS estimates Source: Bloomberg, CMBIS estimates

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE ACCESS KEY TO OUR REPORTS ON BLOOMBERG: CMBR 48 17 Feb 2020

 Our TP is also implying a implying a 55.0x FY20E P/E for JMJ Int’l. Furthermore, by crosschecking the valuation at the group level, our TP should also imply a 55.0x FY20E P/E (a 85% premium over China catering leaders average of 29.8x) and a 0.84x 3 years adjusted PEG (much lower than China catering leaders’ median of 1.8x).

The stock is trading at 46x FY20E P/E, which is 54%/ 10% premium over China catering leaders/ International peers, and 0.7x PEG (derived from 80.4% adjusted net profit CAGR in FY18-21E), comparing to China catering leaders/ International peers median of 1.8x/ 2.8x.

Figure 117: China catering leaders sector PEG Figure 118: Global catering sector PEG 7.7 8.0 (x) 15.0 (x) 13.3 12.0 6.0 9.8 9.0 4.0 6.2 2.8 6.0 4.3 2.0 2.1 2.0 4.0 1.6 3.1 2.5 2.5 2.7 2.9 2.8 2.0 3.0 1.8 1.7 1.7 0.6 n.a. n.a. 0.0 0.0

Source: Bloomberg, CMBIS estimates Source: Bloomberg, CMBIS estimates

Figure 119: Leading Chinese peers NP CAGR vs P/E Figure 120: Global peers NP CAGR vs P/E

60 (P/E, x) Yihai (30.5%, y = 33.523x + 21.564 (P/E, x) y = 150.03x + 22.834 HDL R² = 0.6275 100 WENDY R² = 0.091 47.5 ) Jollibee Average (37.3%, (9.6%, 50 (2.6%, (12.6%, CMG 41.7 ) 80 36.0 ) 31.2 ) 41.7 ) (30.0%, MCD 40.1 ) 40 CDC (-1.3%, Average JMJ Int'l 60 (8.3%, YUM 20.4 ) STAR (24.5%, (94.0%, 45.8 ) 23.5 ) (14.8%, 30 (12.1%, 29.8 ) 40 26.0 ) 23.5 ) YUM China Domino'S( 20 QSR (6.1%, 22.5 ) 20 11.7%, XBXB (10.0%, (13.2%, Dunkin Darden 27.4 ) 10 15.5 ) 0 20.9 ) Gourment Master (8.2%, (7.7%, (3 yrs NP CAGR) 21.7 ) 18.0 ) 0 (-4.8%, 15.1 ) (20) (3 yrs NP CAGR) -5% 15% 35% 55% 75% 95% 115% -5% 15% 35% 55%

Source: Bloomberg, CMBIS estimates Source: Bloomberg, CMBIS estimates

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE ACCESS KEY TO OUR REPORTS ON BLOOMBERG: CMBR 49 17 Feb 2020

Shareholding Structure

Figure 121: JMJ International’s corporate structure after IPO

Mr. Guan Yi Hong Shanghai Ling Yu Gao Defu Ye Shang Ying 27 individuals 33 individuals Huang Qin (黃琴) Fu Yong (符勇) (管毅宏) (PRC) (高德福) (葉尚英) 100% 100% 100% 100% 100% 100% 100% 100% Other Public GYH BVI Eskadale BVI MT BVI MX BVI GDF BVI HQ BVI YSY BVI FY BVI Shareholders 44.42% 10.84% 6.59% 6.60% 2.17% 0.84% 0.58% 0.24% 27.71%

Jiumaojiu International (Cayman Islands) (9922 HK) 100% 100% Tai Er HK JMJ Enterprises (BVI) (Hong Kong) 100% 100%

Too Two Catering Inc. (USA) Jiumaojiu HK (Hong Kong) Offshore

100%

JMJ Holdings (PRC) Onshore

100%

Guangzhou Jiumaojiu (PRC)

100% 100% 100% 100% 100% 100% 100% 100% 85% Shenzhen Ruizhao Pin Xin Yue Gu Haikou Jiumaojiu Beijing Jiumaojiu Tianjin Jiumaojiu Wuhan Jiumaojiu Nanjing Jiumaojiu Foshan Maidian Jiumaojiu Investment

100% 100% 100% 100% 85% 80% 80% 80% 100% 100% 100% 100% 100% 100% 100%

Happy Mouth Guangzhou Guangzhou Double Eggs

Uncle Chef Guangzhou

Hongyuantai Catering

Mi Mi Liang Ren Liang

Zhongxin Catering

Hainan Jiujiuhong

Fang Xing Wei Ai Baoying Catering

Foshan Maixuan

Tai Er Catering

Beijing Jiujiufa

TaiEr Trading

Jinkai Caterin

Cong Xin

100%

Shanghai

Er You

Source: Company data, CMBIS, MT J Limited is wholly-owned by 27 individuals, who are our employees or former employees, MX J Limited is wholly-owned by 33 individuals, who are our employees, former employees and one independent third party external investor, Shang Hai Ling Yu Enterprise Management Consulting Partnership (Limited Partnership) (上海領語企業管理諮詢合夥企業(有限合夥)), a limited partnership established in the PRC on November 15, 2018 and whose general partner is Beijing He Xie Tian Cheng Investment Management Center (Limited Partnership) (北京和諧天成投資管理中心（有限合夥))

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE ACCESS KEY TO OUR REPORTS ON BLOOMBERG: CMBR 50 17 Feb 2020

Management Profile

Figure 122: JMJ Int’s management profile Joined the Date of Name Age Position Responsibility group since appointment Founder of the group, formulating the overall development strategies and business plans and overseeing Mr. Guan Yihong Founder in Chairman, CEO and 50 years old Feb-2019 the management and strategic development of the Company. He has over 23 years of experience in the (管毅宏) 2005 Executive Director catering industry. Overseeing the finance, strategic investments and investors’ relationship of the Company. Since Jan 2013, Executive Director, Chief he has been the CFO of Guangzhou Jiumaojiu, and served as a director and the board secretary of Mr. Li Zhuoguang 36 years old Jan-2013 Feb-2019 Financial Officer and Joint Guangzhou Jiumaojiu from Oct 2015 to May 2019. He worked in Tianji Real Estate Development (李灼光) Company Secretary (Shenzhen) Co., Ltd., a real property development company as vice financial controller from Apr to Dec 2012 and KPMG as manager from Jun 2005 to Apr 2012. Overseeing the human resource management and business operations of the Company. She was appointed as executive Director on May 2019. She was the director of human resources of Guangzhou Ms. Cui Longyu 44 years old Dec-2014 May-2019 Executive Director Jiumaojiu since joining the company in Dec 2014 and served as a director of Guangzhou Jiumaojiu from (崔弄宇) Nov 2018 to May 2019. Before that, she worked as the senior brand manager in McDonald (China) from 2013 to 2014 and operation manager in Guangdong San Yuan McDonald Food Co. from 1997 to 2012. Overseeing the information technology aspect of the Company. He joined the Group as the director of information technology of Guangzhou Jiumaojiu on Sep 2017. Prior to that, he accumulated extensive Mr. Fu Danwei Director of Information working experience in the information technology sector. He worked as the chief technology officer in 46 years old Sep-2017 Sep-2017 (付丹偉) Technology Shenzhen Holpe Commercial Chain Co. from Aug 2015 to Sep 2017. From Jun 2013 to Aug 2014, he worked at McDonald (China) Co. as the information technology manager. From Nov 2011 to Dec 2012, he worked as a senior manager at Huawei Technologies Co.. Overall supervision of restaurant decoration and renovation. He joined the Group as the director of Mr. Huang Bobo engineering of Guangzhou Jiumaojiu on Sep 2015. Prior to that, he worked in Guangzhou Yuexiu Real 54 years old Sep-2015 Sep-2015 Director of Engineering (黃伯波) Estate Engineering Management Co. from Jul 1987 to Dec 1999 and his last position was project director, then senior manager in Guangdong Sanyuan McDonald’s Food Co. from Dec 2003 to Jul 2015. Mr. Hu Zhonghua Overall supervision of restaurant expansion and development. He joined the Group on Sep 2008 and has 40 years old Sep-2008 Jan-2014 Director of Development (胡中華) been the director of development of Guangzhou Jiumaojiu since Jan 2014. Providing advice and making recommendation to the Board. From Apr 2018 to Jul 2019, Mr. Zou was an investment manager of Guangzhou You Rong Equity Investment Management Co. From May 2016 to March 2018, he was an investment manager in an investment company, Zhuhai Hexie Boshi Capital Management Mr. Zou Dinghang 33 years old Aug-2019 Aug-2019 Non-executive Director Co. Mr. Zou subsequently rejoined Zhuhai Hexie in Aug 2019 and has been served as investment manager (鄒定航) since then. He worked in China Merchants Bank (a company listed on the Shanghai Stock Exchange, stock code: 600036, and the Stock Exchange, stock code: 3968) at its Guangzhou Branch, Huangpu Avenue Division from Jun 2009 to May 2016. Providing independent advice and judgment to the Board. Since August 2017, he has been the vice president, board secretary and CFO of Guangzhou Holike Creative Home Co. (stock code: 603898). He has acquired rich industry experience and obtained a number of industry awards, including Sina Finance 3rd Board Secretary Gold Award, Guangdong Listed Companies Quanjing Annual Mr. Deng Tao Independent Non-executive Investor Relations Gold Award, New Fortune 15th Golden Board Secretary Award, 12th Chinese Listed 38 years old Oct-2015 Aug-2019 (鄧濤) Director Companies Information Disclosure OutstandingBoard Secretary Award, Chinese Listed Company The Most Valued Board Secretary Award, Sina Finance 4th Golden Board Secretary Award, 2017 Jinniu Investor Relations Management Award. He worked at KPMG Huazhen LLP from Aug 2006 to Aug 2013, where he served in various positions, including manager. From August 2013 to June 2015, Mr. Deng worked as the deputy director of accounting at Zhuhai Zhongfu Enterprise Co. (stock code: 000659). Providing independent advice and judgment to the Board. He has been a director of Guangdong Jintou Dingshi Asset Management Co., which provides asset and investment management services since Aug 2011. From Dec 2002 to Apr 2011, he worked at Guangdong Guoxun Telecommunication Co. He worked Mr. Zhong Weibin Independent Non-executive 46 years old Mar-2016 Aug-2019 at China Telecommunication Company Guangzhou Branch, from Dec 2001 to Nov 2002. He obtained the (鐘偉斌) Director assistant economist (助理經濟師) qualification in Aug 2002 and served as a standing committee member of the 4th Finance Professional Committee of Guangdong’s Association For Promotion of Cooperation between Guangdong, Hong Kong & Macao. Providing independent advice and judgment to the Board. He has served as vice general manager and Independent Non-executive Mr. Ivan Xu 44 years old Aug-2019 Aug-2019 director of Trendy Group, a fashion clothing company, since 1999. Mr. Xu has over 20 years of experience Director in corporate management. Source: Company data, CMBIS

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE ACCESS KEY TO OUR REPORTS ON BLOOMBERG: CMBR 51 17 Feb 2020

Key Risks

 Faster than expected increase in raw material costs Costs of raw material and consumables used accounted for 36% of total sales, in which food ingredient (fish and meat) should make up the majority. Therefore, any shortage of supply or sudden surge of demand due to fluctuation in weather, spread of diseases or any other economic reasons may restrain the Company from passing all these costs onto the customers, hence driving down the overall operating margins.

 Failure to keep up with store expansion plan or new stores’ popularity is not as good as expected Tai Er is a brand with short history but great popularity (indicated by high seat turnover). Its fast growing expansion plan in the coming years will require many supporting factors to sustain its popularity, including food safety and quality consistency, staff and service quality and supply chain capability. New stores may not achieve high popularity as the existing stores do if all elements mentioned above fail to keep up.

 Level of competition intensifies, or competitors successfully catch up on product, service and brand quality If the level of competition in the industry intensifies, the competitors catch up with Jiu Mao Jiu and Tai Er in terms of price, food and service quality, or Jiu Mao Jiu and Tai Er’s quality standard declines, this may lead to loss of customers, revenue and profit.

 Unfavourable shift in consumer tastes If consumer tastes change fast, it could be in a way that is unfavorable to JMJ Int’s business nature, says, for example, 1) demand for delivery surges and to the extent that significantly affects the sales of food at restaurants, or 2) a faster than expected growth on fast food or on mass market restaurants due to the quicker and tougher working environment may adversely divert demand from the fast casual dining which the Company is focusing on.

 Labour shortage or faster than expected increase in staff costs If the labour supply shrinks, the competition of labour force increases, people become more unwilling to work for the Company, or sudden surge in labour benefits and launches of related government policies, all these may lead to faster than expected increase in wages or labour costs, and would be negatively hurting the Company’s profit margins.

 Involvement in lethal or other severe food safety scandal Failure in food quality control system, such as mistreatment of food in the kitchen by staff or during the transportation by the Company’s suppliers, could have a material and adverse impact on Jiu Mao Jiu and Tai Er’s brand equity and reputation. On top of that, any lethal or severe food safety scandal, if occurs, could lead to a significant loss in customer confidence and reduce daily restaurant traffic, which is highly negative to sales and profit.

 Involvement in fraud or other misconduct committed by employees or third parties Even though the Company has imposed series of counter measures to monitor and discourage employees’ from any misconduct and seeking for person interest that would harm the Company, there could still be chances for such actions to happen.

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE ACCESS KEY TO OUR REPORTS ON BLOOMBERG: CMBR 52 17 Feb 2020

Financial Summary Income statement Cash flow summary

YE 31 Dec (RMB mn) FY16A FY17A FY18A FY19E FY20E FY21E YE 31 Dec (RMB mn) FY16A FY17A FY18A FY19E FY20E FY21E Revenue 1,164 1,469 1,893 2,836 3,733 5,657 EBIT 132 153 163 358 439 871 Jiu Mao Jiu 1,092 1,204 1,334 1,416 1,392 1,664 D & A 65 76 81 110 151 201 Tai Er 68 244 540 1,377 2,213 3,776 Chg. in working capital (24) (18) (1) 27 32 65 Other brands 4 22 19 43 128 218 Income tax paid (24) (34) (40) (76) (94) (202)

Others 113 137 168 (1) (0) 1 Cost of goods sold (384) (513) (672) (1,050) (1,396) (2,142) NC from operating 262 314 373 419 528 936

Gross profit 780 957 1,221 1,786 2,337 3,515 Other income 1 2 3 9 40 46 Capex & investments (89) (75) (150) (221) (250) (311)

Associated companies (10) (16) (2) (0) (0) (0) Operating expenses (650) (806) (1,060) (1,437) (1,938) (2,690) Interest received 0 1 1 - - - Staff costs (328) (400) (523) (732) (1,006) (1,397) Others (1) (0) (1) - - - Rental & ROUA (116) (138) (184) (269) (394) (561) NC from investing (99) (90) (152) (221) (250) (311) depre.D & A expenses (65) (76) (81) (110) (151) (201) Utilities expenses (73) (80) (94) (113) (143) (183) Equity raised - - - 2,200 - - Other opex (68) (112) (178) (212) (244) (348) Net change in bank (5) (19) 29 - - - EBIT 132 153 163 358 439 871 loansDividend paid (9) (20) (25) 30 (60) (73) Others (143) (166) (218) (65) (75) (89) Finance costs (49) (52) (58) (65) (75) (89) NC from financing (158) (205) (214) 2,165 (135) (162) JVs & associates (1) (1) (2) 2 3 5 Exceptional (5) (1) 1 (3) (4) (6) Net change in cash 5 19 7 2,363 143 463 Pre-tax profit 76 99 104 293 363 781 Beginning cash 28 33 52 60 2,423 2,565 balanceExchange difference ------Income tax (24) (28) (31) (76) (94) (202) Cash at end of year 33 52 60 2,423 2,565 3,028 Less: Minority interests (1) 5 4 18 25 70 year Net profit att. 52 67 70 200 244 509 Adj. net profit att. 59 80 97 252 253 522

Balance sheet Key ratios

YE 31 Dec (RMB mn) FY16A FY17A FY18A FY19E FY20E FY21E YE 31 Dec FY16A FY17A FY18A FY19E FY20E FY21E

Non-current assets 705 759 960 1,075 1,177 1,291 Sales mix (%) Fixed asset 227 216 268 380 480 589 Jiu Mao Jiu 93.8 81.9 70.5 49.9 37.3 29.4 Intangible assets & GW 424 460 578 578 578 578 Tai Er 5.8 16.6 28.5 48.6 59.3 66.7 goodwillPrepaid lease payments 22 40 57 57 57 57 Other brands 0.4 1.5 1.0 1.5 3.4 3.8 Interest in joint ventures - 4 4 6 9 14 Other non-current 32 39 54 54 54 54 Total 100.0 100.0 100.0 100.0 100.0 100.0 assets Current assets 143 183 227 2,654 2,856 3,450 P&L ratios (%) Cash and cash 33 52 60 2,423 2,565 3,028 Gross margin 67.0 65.1 64.5 63.0 62.6 62.1 equivalentsInventories 20 33 36 52 61 88 EBIT margin 11.3 10.4 8.6 12.6 11.8 15.4 Trade and other 9 12 17 22 30 45 Pre-tax margin 6.5 6.8 5.5 10.3 9.7 13.8 receivablesPrepayments 61 68 88 132 174 263 Net margin 4.5 4.6 3.7 7.0 6.5 9.0 Other current assets 19 18 26 26 26 26 Effective tax rate 31.8 27.8 28.7 26.0 26.0 26.0

Current liabilities 288 290 440 532 623 819 Balance sheet ratios Bank loans 39 20 49 49 49 49 Current ratio (x) 0.5 0.6 0.5 5.0 4.6 4.2 Trade payables 50 54 72 92 115 164 Quick ratio (x) 0.4 0.5 0.4 4.9 4.5 4.1 Accruals & payables 76 82 145 217 285 432 Cash ratio (x) 0.1 0.2 0.1 4.6 4.1 3.7 Tax payables 6 8 12 12 12 12 Inventory turnover 17 19 19 18 16 15 others 117 127 162 162 162 162 daysTrade receivables 2 3 3 3 3 3

daysTrade payables days 40 37 34 32 30 28 Non-current liabilities 412 445 543 543 543 543 Total debt / total 105 71 103 8 7 6 Bank loans ------equityNet debtratio /(%) equity 80 45 71 Net cash Net cash Net cash Deferred income 14 16 21 21 21 21 ratioReturns (%) (%) Deferred tax ------ROE 35.2 32.3 34.2 7.6 8.6 15.6 Others 398 428 522 522 522 522 ROA 6.1 7.1 5.9 5.4 6.1 10.7

Per share Minority Interest - - - 18 43 113 EPS (RMB) n.a. n.a. n.a. 0.14 0.18 0.37 Total net assets 147 207 204 2,636 2,824 3,265 DPS (RMB) n.a. n.a. n.a. 0.04 0.05 0.11 Shareholders' equity 147 207 204 2,636 2,824 3,265 BVPS (RMB) n.a. n.a. n.a. 1.91 2.04 2.36 Source: Company data, CMBIS estimates

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE ACCESS KEY TO OUR REPORTS ON BLOOMBERG: CMBR 53 17 Feb 2020

Appendix

Figure 123: Northwestern Chinese Cuisine Market Figure 124: Sauerkraut Fish Restaurant Market (China), by revenue, in 2018 (China), by revenue, in 2018 Retail Sales Market Retail Sales Market Value (RMB Shares Value (RMB Shares Ranking Company bn) (%) Ranking Company mn) (%) 1 Co. A (1988) 5.3 3.2% 1 Tai Er (2015) 540.2 4.4% 2 JMJ (1994) 1.3 0.8% 2 Co. G (2015) 473.8 3.9% 3 Co. F (1998) 0.7 0.4% 3 Co. D (2010) 363.4 3.0% Sum of top 3 7.3 4.3% Sum of top 3 1,377.4 11.2% Others 160.9 95.7% Others 10,922.6 88.8%

Total 168.2 Total 12,300.0 Source: Frost & Sullivan, CMBIS estimates Source: Frost & Sullivan, CMBIS estimates

Figure 125: Hot selling items Pickled Chinese Sauerkraut Fish Soft Glutinous Rice Cakes in Crepe with Egg, meat, (老罎子酸菜魚) Meringue (蛋酥軟糍粑) Cold Pot Skewers (冷鍋串串), vegetables and other (蛋酥軟糍粑)

Full-kilo Gigantic Pork Ribs King-sized Beef Noodles Stewed Lentil Noodles Birthday Noodles (長壽麵) (二斤大骨頭) (大塊牛肉麵) (幹香燜面)

Source: Company data, CMBIS estimates

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE ACCESS KEY TO OUR REPORTS ON BLOOMBERG: CMBR 54 17 Feb 2020

Disclosures & Disclaimers Analyst Certification The research analyst who is primary responsible for the content of this research report, in whole or in part, certifies that with respect to the securities or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views about the subject securities or issuer; and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific views expressed by that analyst in this report. Besides, the analyst confirms that neither the analyst nor his/her associates (as defined in the code of conduct issued by The Hong Kong Securities and Futures Commission) (1) have dealt in or traded in the stock(s) covered in this research report within 30 calendar days prior to the date of issue of this report; (2) will deal in or trade in the stock(s) covered in this research report 3 business days after the date of issue of this report; (3) serve as an officer of any of the Hong Kong listed companies covered in this report; and (4) have any financial interests in the Hong Kong listed companies covered in this report.

Disclosures CMB International Securities Limited and/or its affiliates performed investment banking services to Jiumaojiu International (9922 HK) over the past 12 months

CMBIS Ratings BUY : Stock with potential return of over 15% over next 12 months HOLD : Stock with potential return of +15% to -10% over next 12 months SELL : Stock with potential loss of over 10% over next 12 months NOT RATED : Stock is not rated by CMBIS

OUTPERFORM : Industry expected to outperform the relevant broad market benchmark over next 12 months MARKET-PERFORM : Industry expected to perform in-line with the relevant broad market benchmark over next 12 months UNDERPERFORM : Industry expected to underperform the relevant broad market benchmark over next 12 months

CMB International Securities Limited Address: 45/F, Champion Tower, 3 Garden Road, Hong Kong, Tel: (852) 3900 0888 Fax: (852) 3900 0800

CMB International Securities Limited (“CMBIS”) is a wholly owned subsidiary of CMB International Capital Corporation Limited (a wholly owned subsidiary of China Merchants Bank)

Important Disclosures There are risks involved in transacting in any securities. The information contained in this report may not be suitable for the purposes of all investors. CMBIS does not provide individually tailored investment advice. This report has been prepared without regard to the individual investment objectives, financial position or special requirements. Past performance has no indication of future performance, and actual events may differ materially from that which is contained in the report. The value of, and returns from, any investments are uncertain and are not guaranteed and may fluctuate as a result of their dependence on the performance of underlying assets or other variable market factors. CMBIS recommends that investors should independently evaluate particular investments and strategies, and encourages investors to consult with a professional financial advisor in order to make their own investment decisions. This report or any information contained herein, have been prepared by the CMBIS, solely for the purpose of supplying information to the clients of CMBIS or its affiliate(s) to whom it is distributed. This report is not and should not be construed as an offer or solicitation to buy or sell any security or any interest in securities or enter into any transaction. Neither CMBIS nor any of its affiliates, shareholders, agents, consultants, directors, officers or employees shall be liable for any loss, damage or expense whatsoever, whether direct or consequential, incurred in relying on the information contained in this report. Anyone making use of the information contained in this report does so entirely at their own risk. The information and contents contained in this report are based on the analyses and interpretations of information believed to be publicly available and reliable. CMBIS has exerted every effort in its capacity to ensure, but not to guarantee, their accuracy, completeness, timeliness or c orrectness. CMBIS provides the information, advices and forecasts on an "AS IS" basis. The information and contents are subject to change without notice. CMBIS may issue other publications having information and/ or conclusions different from this report. These publications reflect different assumption, point-of-view and analytical methods when compiling. CMBIS may make investment decisions or take proprietary positions that are inconsistent with the recommendations or views in this report. CMBIS may have a position, make markets or act as principal or engage in transactions in securities of companies referred to in this report for itself and/or on behalf of its clients from time to time. Investors should assume that CMBIS does or seeks to have investment banking or other business relationships with the companies in this report. As a result, recipients should be aware that CMBIS may have a conflict of interest that could affect the objectivity of this report and CMBIS will not assume any responsibility in respect thereof. This report is for the use of intended recipients only and this publication, may not be reproduced, reprinted, sold, redistributed or published in whole or in part for any purpose without prior written consent of CMBIS. Additional information on recommended securities is available upon request.

For recipients of this document in the United Kingdom This report has been provided only to persons (I)falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (as amended from time to time)(“The Order”) or (II) are persons falling within Article 49(2) (a) to (d) (“High Net Worth Companies, Unincorporated Associations, etc.,) of the Order, and may not be provided to any other person without the prior written consent of CMBIS.

For recipients of this document in the United States This report is intended for distribution in the United States to "major US institutional investors", as defined in Rule 15a-6 under the US, Securities Exchange Act of 1934, and may not be furnished to any other person in the United States. Each major US institutional investor that receives a copy of this research report by its acceptance hereof represents and agrees that it shall not distribute or provide this research report to any other person.

For recipients of this document in Singapore This report is distributed in Singapore by CMBI (Singapore) Pte. Limited (CMBISG) (Company Regn. No. 201731928D), an Exempt Financi al Adviser as defined in the Financial Advisers Act (Cap. 110) of Singapore and regulated by the Monetary Authority of Singapore. CMBISG may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, as defined in the Securities and Futures Act (Cap. 289) of Singapore, CMBISG accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact CMBISG at +65 6350 4400 for matters arising from, or in connection with the report.

Disclosures: CMB International Securities Limited and/or its affiliates performed investment banking services to Jiumaojiu (9922 HK) over the past 12 months

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE ACCESS KEY TO OUR REPORTS ON BLOOMBERG: CMBR 55