OldTown’s China Business Model Provides Growth

Maintain buy recommendation and a fair value (FV) of RM3.20 per share: OldTown Bhd, through its wholly-owned subsidiary Shenzhen Kopitiam Asia Pacific Ltd, entered into a territorial licence agreement with Xiamen Kuaike Investment Management Co Ltd (Xiamen Kuaike) to operate in Shanghai, China. This agreement is an extension to an earlier negotiated territorial licence agreement on March 30, 2017.

The licensee has now exercised its right to operate restaurants in the provinces of Fujian and Shanghai under the OldTown White Coffee brand. Apart from that, Xiamen Kuaike has the first right of refusal to accept take-up territorial licences for the provinces of Beijing and Guangdong.

The terms of the agreement extends to five years with an option to renew two consecutive terms of five years, potentially bringing the total to 15 years.

The China licensed business model provides OldTown opportunities for growth without the downside risk and capital intensive investments. The financial risk is solely borne by the licensee. In return for its franchise, OldTown is expected to receive royalty from generated sales and other various territorial fees. We imagine OldTown to derive superior terms than those agreed with its Myanmar licensee.

The resurgence of OldTown’s food and beverage segment gathers momentum as this announcement closely trails its licensed expansion into Myanmar and Fujian in February 2017 and March 2017 respectively. As of March 2017, OldTown has two stores in China, representing less than 1% of the group’s total store count. Xiamen Kuaike would be well aware of OldTown’s past struggles in China and the impending challenges ahead. OldTown’s China store count peaked at four stores in 2013, before being scaled back to one store in the subsequent year. Therefore, we imagine the licensee to be highly selective and strategic in the gradual rollout of stores.

The immediate impact on earnings is materially insignificant by our estimates. However, we expect greater benefits to arise from its physical store presence and branding, creating advertising and promotional synergies for its e-commerce distribution channels to boost  fast-moving consumer goods (FMCG) sales. We gather that with the exception of the Guangdong province, Xiamen Kuaike has licence agreements to the territories that generate close to 80% of OldTown’s China FMCG sales.

 

Source: The Edge Markets

NB: The best way to find information on this website is to key in your search terms into the Search Box in the top right corner of this web page. E.g. of search terms would be “property research report”, ”condominium law”, “Puma Energy”, “MOGE”, “yangon new town”,”MECTEL”, “hydropower”, etc.

.

Looking for foreign investors to invest in your business in Myanmar