Summary

Ajisen (China) Holdings Limited is one of the leading fast casual restaurant chain operators in China, business of which covers mainland of China, Hongkong and Macao. Ajisen (China) has been listed on the Main Board of the Stock Exchange of Hong Kong on 30 March 2007 and become the first fast casual restaurant chain operators listed on Hongkong Exchange who bases in mainland of China.

In 1H2010, Ajisen's key performance indicators all produced double-digit growth with its profitability rising continuously and steadily. The revenue grew by 26.8% YOY and net profit by 44.9% YOY.

According to historical data, the growth rate of catering industry has been higher than it of retail sales of consumer goods and GDP of China. In recent years, branded chain store operation develops rapidly and the catering industry tends to standardization and modernization.

Ajisen is positioned to be a fast casual restaurant supplying Japanese ramen and Japanese-style dishes whose standardized products mix can ensure its characteristic services. In addition, its refined production processes can enhance operational efficiency as well as the replicability of business, all of which can improve its single store operation ability.

Ajisen still has huge potential to expand in mainland of China. It is worth noting that the comprehensive production facilities and processing centers will well support its expansion.

Despite higher than its peers, we believe Ajisen's stable managements and sound perspective can support the higher valuation. Giving a leading PE on EPS of FY11E of 26X, we target the 12-month price as HK$15.47, higher by 10.66% than current price. We initially rate it HOLD.

Results Review: the profitability rises continuously and steadily

The interim report of Ajisen shows that its key performance indicators all produced double-digit growth in 1H10 with its profitability rising continuously and steadily.

In 1H2010, the revenue of Ajisen amounted to HK$1188.1 million, growing by 26.8% YOY which rebounded significantly from FY09. In 1H10, the gross profit of HK$821.1 million grew by 27.3% from HK$645.1 million in 1H2009 which also rebounded significantly from the gross profit growth rate of 18.69% in FY09.

In 1H10, the net profit amounted to HK$192.8 million, growing by 44.90% YOY which continued to rebound from 42.39% reached in FY09. EPS reached HK$0.18 which grew significantly by 44.86% from HK$0.12 in 1H09.

In terms of profitability, the gross profit margin of 69.12% in 1H10 was a little higher than 68.85% in 1H09 but declined weakly from 69.74% of FY09 due to the increasing prices of raw materials. In addition, Ajisen's labor costs accounted for approximately 17.7% of the revenue, a small increase of approximately 0.2 percentage point over the corresponding period last year. However, in 1H10 the operating profit margin and net profit margin reached 21.32% and 16.23% respectively, higher than 18.41% and 14.20% of 1H09 as well as 20.06% and 15.84% of FY09, which indicated that despite the fact the prices of raw materials and costs of labor increased simultaneously, Ajisen improved its profitability by reducing other costs and enhancing operating efficiency.

Industry Outlook: branded and standardized

The growth rate of catering industry has been higher than it of retail sales of consumer goods and GDP of China. In 2009, the sales of lodging and catering industry amounted to RMB1.8 trillion, the average growth rate of which reached nearly 21%, significantly higher than the growth rate of retail sales of consumer goods and GDP, indicating a booming trend in the catering industry. According to the Development Plan of National Catering Industry released by Ministry of Commerce in 2009, the average growth rate of catering industry will be 18% and its sales will amount to RMB3.3 trillion by 2013.

Branded chain store operation develops rapidly and the catering industry tends to standardization and modernization. More and more catering enterprises pay attention to branded operation and the total number of stores owned by catering enterprises is increasing steadily. In 2009, the number of chain catering enterprises above the designated size reached 426 and each owned 32 stores averagely. From 2003 to 2009, the average growth rate of revenue of chain catering enterprises above the designated size reached 24.30%, significantly higher than the whole lodging and catering industry, indicating that the branded operation supported by chain stores is developing rapidly. In addition, modern science and technology is gradually being integrated into such processes as production, management and R&D, which promotes the industry's standardization and industrialization from traditional manual operation.

Large catering enterprises are sensitive to economic fluctuations. Although the whole catering industry is of rigid consumption and weak periodicity, large catering enterprises are still easily affected by economic fluctuations. Take Aug 2009 to Aug 2010 for example, with a of correlation coefficient of 0.81, it is believed that the revenue growth rate YOY of catering enterprises above the designated size is significantly correlated with consumer confidence index. In periods of economic depression, residents usually firstly reduce their times and cost of dining out while the larger catering enterprises are difficult to adjust business due to their large scale.

Standardized operation and refined management enhance single store operation ability

Ajisen is positioned to be a fast casual restaurant supplying Japanese ramen and Japanese-style dishes. Its target consumers are urban inhabitants who pursue food and beverage quality but don`t want to spend too much cost and time in daily dining. With urbanization speeding up in China, urbanized consuming habit is gradually spreading and the fashion of dining out is being popularized. On one hand, the pace of life speeding up in cities makes fast casual restaurants attractive and on the other the increasing frequency of dining out promotes consumers to care costs, all of which can be well met by Ajisen's accurate positioning.

The standardized products mix can ensure its characteristic services. The distinctive product ingredients and taste of Japanese ramen are keys to attract consumers, so it is of the utmost importance to keep its products standardized. The Ajisen ramen has been introduced to China since a perpetual franchise agreement was signed with Shigemitsu in 1995 and Ajisen (China) has been authorized to use the special Japanese soup base formulated and produced by Shigemitsu and the trade name of “Ajisen Ramen” and related trademarks. By centralized purchasing, the special taste as well as standardization of Japanese soup base can be assured, which benefits its market image of fast casual restaurant.

The refined production processes can enhance operational efficiency as well as the replicability of business. The production of ramen is finished in the Central Kitchen located at Shenzhen and Shanghai where quantitative management is strictly used in purchasing, processing, fixing quantity, fixing sets and storing. The semi-finished products from facilities will be delivered to regional logistics centers who then distribute them to each restaurant according to needs every day. Even in every store's kitchen, there is a strict set of procedures from semi-finished products to products which are directly edible. We believe the refined production process can enhance operating efficiency of the whole enterprise and each restaurant on one hand, on the other it is of obvious replicability which favors Ajisen to expand in broad China.

Sustained expansion will benefit future earnings growth

Ajisen still has huge potential to expand in mainland of China. Among the three major businesses, revenue proportions of restaurants in Mainland of China and packaged noodles have been increasing to 84.41% and 11.42% in 1H10. In addition, the profitability of the two businesses has been rising in recent three years while profitability of Hongkong restaurants is declining. Considering the highest profitability, we believe Ajisen still has huge potential to expand in mainland of China. By the end of 1H10, Ajisen had opened 450 restaurants in China increasing by 100 from 350 of the same time of last year. 411 of all are located at mainland of China and the newest 52 restaurants opened in 1H10 are all from mainland of China.

Comprehensive production facilities and processing centers will well support its expansion. Based on the two Central Kitchens located at Shenzhen and Shanghai, the construction of 4 new production bases in Shanghai, Tianjin, Chengdu and Dongguan will lay a solid foundation for the accelerated expansion of the restaurant network in the future. They can support 1500-1800 restaurants together and Ajisen will start to operate them gradually according to market and restaurant number. A production base in Hongkong with 2700 s.q.m has been in operation since the early of 2009 and can support 70 restaurants. In addition, 12 food manufacturing and processing centers have been in operation to distribute products to restaurants. We believe the comprehensive production facilities and processing centers indicate Ajisen's determination to expand and will certainly become solid supports for its expansion in China.

Earnings Estimates

We estimate earnings with follow assumptions:

(1) According to managements` plan, Ajisen plans to open 120 new restaurants in FY10 resulting in a total number of 518 restaurants at the end of this year. Considering managements` planning to open a little more new restaurant in the future, we assume 135 and 140 new restaurants will be opened in FY11-12.

(2) According to the average operating area per restaurant in recent three years and Ajisen's planning to open more economic stores with smaller area, we assume the average operating area per restaurant are 250 s.q.m in FY11-12.

(3) We believe Ajisen's operational efficiency of single store will be further enhanced and assume its average revenue per s.q.m will reach HK$19.6 thousand, 19.8 thousand and 20.0 thousand.

By calculation, we estimate Ajisen's revenue will amount to HK$2538 million, 3232 million and 3965 million in FY10-12 respectively, growing by 27.82%, 22.67%, 22.67% YOY with a CAGR of 25.92%.

We estimate Ajisen's net profit will reach HK$456 million, 635 million and 829 million in FY10-12, growing by 44.39%, 39.31%, 30.48% YOY with a CAGR of 38.13%.

Risk

GDP growth can`t reach expectations.

Consumer confidence drops unexpectedly.

Overseas and domestic competitors emerge strongly.

The implementation of expansion plan can`t reach expectations.

Valuation

Economic structure transformation and domestic demands expansion have been keywords in China, so the expectations that the reform of income distribution and Wage Rules will be introduced benefit consumer goods stocks. In addition to the higher growth rate of catering industry than the whole consumer industry, the chain catering enterprises of branded and standardized operation will benefit from the trends of consumption upgrade and urbanization. We overweight Ajisen's potential in enhancing single store operation ability and new store expansion as leading fast casual restaurant in China. We estimate its EPS will reach HK$0.427, 0.595, 0.776 in FY10-12, growing by 44.99%, 39.31%, 30.48% YOY with a CAGR of 38.13%.

Ajisen's newest closed price (22 Oct 2010) is HK$13.98 with PE of 32X and 23X on EPS of FY10E and FY11E. Despite higher than its peers, we believe Ajisen's stable managements and sound perspective can support the higher valuation. Giving a leading PE on EPS of FY11E of 26X, we target the 12-month price as HK$15.47, higher by 10.66% than current price. We initially rate it HOLD.

Financial Data

Click Here for PDF format...