HomeMost PopularTH International Limited: Updates Warranting Strong Buy (Part 1)

TH International Limited: Updates Warranting Strong Buy (Part 1)

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Tim Hortons coffee store with brand logo

Investment Outlook

Our analysis, released on Jan 14, 2023, suggested that the recent underperformance of TH International Limited (NASDAQ:THCH) was undeserved. We believe there is significant potential for the valuation gap to close, given the alignment of macro, fundamental, and technical factors in 2023.

As of September 26, 2023, THCH has seen a further decline of 32% year-to-date (following a 72% decrease in 2022). In comparison, its licensor Restaurant Brands International (QSR) has had a 5% increase, coffee chain competitor Luckin Coffee (OTCPK:LKNCY) has risen by 48%, and fast food competitor Yum China Holdings (YUMC) has gained 3%. Additionally, THCH has underperformed the Global X MSCI China Consumer Discretionary ETF (CHIQ) by a significant margin during the same period, with CHIQ only down 11%.

THCH vs peers

Despite these market trends, THCH has reported strong and improving financial performance for its Tim Hortons business. The company has also acquired the exclusive rights to develop Popeyes brand restaurants in mainland China. By completing the warrant exchange, THCH has reduced future dilution and resolved the low free float caused by the deSPACing process. The growing disparity between THCH’s fundamentals and its stock performance is likely due to increasing concerns about China’s macroeconomics and the company’s poor communication with investors.

We maintain steadfast belief in our investment thesis that THCH has been unjustly penalized by macro and technical factors. With the stock currently below the price paid by institutional investors during private rounds, there is a unique opportunity for substantial upside and limited downside. This update will delve deeper into THCH’s store opening status, the impact of China’s economic situation, and its investor relations efforts. Subsequent write-ups will focus on fundamental analysis and valuation.

Store Openings: Accelerated Growth Expected in 2H 2023

According to THCH’s earnings release, the company operated 700 Tim Hortons stores as of the end of 2Q 2023. It aims to open an additional 300 stores in the second half of the year. THCH has already opened its first Popeyes store in Shanghai and plans to open 10 more stores in 2023, with a goal of expanding to 1,700 locations across China over the next decade.

Based on data retrieved from THCH’s social media channels and Baidu maps, it appears the company operates in 56 cities in China as of August 31, 2023, up from 39 cities in 2022. While the majority of new stores are concentrated in the Shanghai, Beijing, Chengdu-Chongqing, and Pearl River Delta regions, THCH has also expanded into strategic new markets such as Lanzhou, Yinchuan, Changchun, and Urumqi.

To meet its annual target of 1,000 stores, THCH will need to accelerate its new store openings to an average of 150 stores per quarter or 50 stores per month from July to December. This would be a record pace since 2021. The previous high was 131 stores per quarter in 4Q 2022, potentially influenced by seasonality and the lifting of COVID restrictions in November 2022. The upcoming surge in store openings is expected to come from franchised stores.

The proportion of THCH’s franchised stores has been steadily increasing, accounting for 18% of the store mix in China by the end of 2Q 2023. This shift towards franchised stores has played a crucial role in driving growth starting from 3Q 2022. In 1Q 2023, the pace of newly opened franchised stores surpassed that of company-owned stores. This trend is likely to continue, as THCH moves towards an “asset-light” model with higher returns on capital. It would not be surprising if most new store openings in 2H 2023 are franchised stores.

THCH’s growth trajectory in 2023 is reminiscent of Starbucks’ growth in 1995. With 700 stores at the end of 1H 2023 and a target of 1,000 stores by year-end, THCH is on a similar path. The company aims to reach 2,750 stores in China by 2026 and potentially surpass 3,000 stores by 2027. Starbucks, in a comparable timeframe, had 677 stores at the end of 1995 and took five years to exceed 3,000 stores.

THCH Store Count

1H 2023

700

2023E

1,000

2026E

2,750

2027E

>3,000



SBUX Store Count

1995

677

1996

1,025

1997

1,412

1998

1,886

1999

2,498

2000

3,501



China’s Influence: Headwinds or Tailwinds

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