Singapore Company Guide

BreadTalk Group Ltd

Bloomberg: BREAD SP | Reuters: BRET.SI Refer to important disclosures at the end of this report

DBS Group Research . Equity 4 Apr 2017

BUY Piping hot bread in the making
(Re-instating Coverage)
 We see earnings recovering led by Foodcourt
Last Traded Price ( 3 Apr 2017): S$1.36 (STI : 3,187.51)
Price Target 12-mth: S$1.69 (25% upside) business which has turned around in 4Q16

 Bakery’s cost rationalisation & better Din Tai Fung

Potential Catalyst: Earnings turnaround sales mix will support operating margin expansion
Analyst  Project 3-year CAGR growth of 63% for FY16-FY18F
Alfie YEO +65 6682 3717 alfieyeo@dbs.com
Andy SIM CFA +65 6682 3718 andysim@dbs.com  Re-instating coverage with BUY and SOTP-based TP
of S$1.69 backed by investment properties worth
Price Relative S$0.43 per share
S$ Relative Index
1.7
Foodcourt earnings has turned around in 4Q16 and
1.6
1.5
205 poised for growth. BreadTalk is poised for earnings growth
this year. After dismal performances in FY15 and 1H16, we
185
1.4
1.3 165

1.2 145 saw a turnaround in 2H16 earnings. Its cost saving initiatives
1.1
1.0
125 led to margin improvements and we saw a recovery of its
0.9
105
Foodcourt business through outlet rationalisation in China.
0.8 85
Mar-13 Mar-14 Mar-15 Mar-16 Mar-17
We see earnings recovery momentum spilling over to FY17F.
Breadtalk Group Ltd (LHS) Relative STI (RHS) All three business segments are now better positioned for
Forecasts and Valuation earnings growth. We forecast core earnings CAGR of 63% for
FY Dec (S$m) 2015A 2016A 2017F 2018F FY16-FY18F on the back of earnings recovery and a low base.
Revenue 624 615 643 673 Turnaround of its Foodcourt business in China, better Bakery
EBITDA 80.9 80.0 93.1 97.8 cost efficiencies, and outlet expansion of high margin Din Tai
Pre-tax Profit 25.4 29.7 47.2 41.4
Net Profit 7.60 11.4 26.3 23.0 Fung restaurants will collectively drive earnings growth in the
Net Pft (Pre Ex.) 12.2 8.63 17.0 23.0 medium term. BreadTalk’s valuation based on its core business
EPS (S cts) 2.70 4.07 9.34 8.19 (ex-property investments) is compelling at 18x FY17F PE.
EPS Pre Ex. (S cts) 4.33 3.07 6.04 8.19
EPS Gth (%) (66) 50 130 (12)
EPS Gth Pre Ex (%) (45) (29) 97 36 Share price backed by property investments worth
Diluted EPS (S cts) 2.69 4.05 9.30 8.15 S$0.43 per share. The valuation of BreadTalk’s property
Net DPS (S cts) 1.50 3.85 2.50 2.50 investments based on current market value implies an upside
BV Per Share (S cts) 45.9 46.9 53.8 59.5
PE (X) 50.2 33.3 14.5 16.5 of 3% over their book value. BreadTalk has a track record of
PE Pre Ex. (X) 31.3 44.1 22.5 16.5 monetising its property investments (111 Somerset and 112
P/Cash Flow (X) 5.7 4.3 4.4 4.5 Katong). Successful sale of property investments above market
EV/EBITDA (X) 6.2 5.6 4.4 3.9
valuation is a possible share price catalyst.
Net Div Yield (%) 1.1 2.8 1.8 1.8
P/Book Value (X) 3.0 2.9 2.5 2.3 Reinstate coverage with BUY and S$1.69 TP based on
Net Debt/Equity (X) 0.7 0.3 0.0 CASH SOTP. We value BreadTalk’s core retail business at S$1.33 per
ROAE (%) 6.0 8.8 18.6 14.5 share pegged to 22x PE, in line with peers. Together with
Consensus EPS (S cts): 5.90 7.90 property investments and net debt, BreadTalk’s TP is S$1.69,
Other Broker Recs: B: 2 S: 0 H: 1 offering 25% upside. Reinstating coverage with a BUY
recommendation
ICB Industry : Consumer Services
ICB Sector: Food & Drug Retailers
Principal Business: BreadTalk is engaged in the operations and At A Glance
franchising of bakery outlets, restaurants and food atrias. Issued Capital (m shrs) 281
Mkt. Cap (S$m/US$m) 381 / 273
Source of all data on this page: Company, DBS Bank, Major Shareholders (%)
Bloomberg Finance L.P. Meng Tong Quek 34.0
Lih Leng Lee 18.6
Primary Investment 14.0
Free Float (%) 27.4
3m Avg. Daily Val (US$m) 0.21

ASIAN INSIGHTS VICKERS SECURITIES

ed: JS / JC, PY
 Company Guide
BreadTalk Group Ltd
INVESTMENT THESIS
Profile
BreadTalk Group is a Singapore-based food and beverage
(F&B) group engaged in the operations and franchising of
bakery/confectionery outlets, food courts and restaurants
across the region. BreadTalk’s portfolio currently has six
brands – BreadTalk, ToastBox, Food Republic, Ramen Play,
San Pou Tei and Din Tai Fung. It operates over 900 outlets
across 17 countries.
Valuation
Our TP of S$1.69 is derived from a sum-of-parts (SOTP)
valuation. On a per share basis, we value its retail business
at 22x FY17F PE at S$1.33, investment properties at S$0.43
based on market value, net debt at -S$0.07 per share.
Source: DBS Bank
ASIAN INSIGHTS
Page 2
Rationale
We reinstate our coverage of BreadTalk with a Buy
recommendation and S$1.69 TP based on SOTP. BreadTalk’s
business is turning around with closure of non-performing
Foodcourts in China, better sales mix at its restaurants, and
cost rationalisation at its bakeries. These are set to lift
margins and improve earnings quality. Our TP is backed by
S$0.43 per share worth of investment properties, with core
earnings valued at 18x FY17 PE.
Risks
Food safety and licences. As a restaurant operator, it is
important to maintain food safety. Lapses would lead to
reputational risks and in extreme cases, food operation
licences could be revoked.
Negative publicity affects consumer confidence and the
marketability of its franchise. BreadTalk has had some
negative publicity, especially in 2015 over food safety and
food preparation procedures in Singapore and China.
Incidences such as these can generate negative responses
from the public which can potentially affect sales as well as
the marketability of its franchise overseas.
VICKERS SECURITIES

SWOT Analysis
Strengths
 Brand owner model. BreadTalk owns the BreadTalk brand
and has a franchise business model that franchises out the
brand to third party franchisees. This offers scalable
expansion and BreadTalk has control over franchisees.
 Strong network across Asia. BreadTalk has established a
strong presence across Asia. It has over 400 outlets in China
alone and is also present in Hong Kong and Taiwan. Its
relationships with landlords and franchisees allow the
business to scale and grow quickly.
 Multibrand, multiformat portfolio. BreadTalk has various
brands and formats including BreadTalk and Toastbox for
Bakery, Din Tai Fung (as a franchisee) and Ramen Play for
Restaurants, Food Republic for Foodcourt. These allow
BreadTalk to grow using various penetration and multibrand
strategies to expand into malls, which also facilitates its
collective bargaining power with landlords over rents as well.
 Innovation. BreadTalk innovates to stay ahead of the
competition. There are 50-60 new products and seasonal
items to be launched in stages in the pipeline, which help to
increase average cheque size and to drive more traffic into its
bakery shops.
 Cash-generative business. BreadTalk’s business generates
operating cashflows of around S$65-90m annually. Working
capital generally positive with cash collection at 35 days,
payables at 144 days and inventory at 16 days.
Opportunities
 Well positioned to capitalise on growing food consumption
in Asia. According to Euromonitor, the market size for
Food/Drink/Tobacco specialist retailers in Singapore and
China is expect to grow at a CAGR of 1.7%-3.5% over the
next 5 years. BreadTalk as a leading bakery retailer in
Singapore and regionally is well positioned to capture the
growing demand in the region.
 Relationship with landlords. Partnership with retail mall
landlords to introduce food retail concept themes, will further
entrench its position and raise barriers to entry in addition to
collective bargaining of rents for all of its brands.
 More opportunities to expand in China. BreadTalk has a
strong presence in China with 44% of stores located there.
Going forward, the focus is to increase franchised bakery
outlets faster than expanding self-operated own stores.
Hence, there is more scope to increase store count in China.
Source: DBS Bank
ASIAN INSIGHTS
Company Guide
BreadTalk Group Ltd
Weakness
 Competition. There are many mid-range foodservice
restaurants players in Singapore, each offering their own
unique concepts. Direct and indirect competitors are chain
casual-dining full-service F&B/restaurant groups such as
Creative Eateries, Japan Foods, RE&S Enterprises, Katrina,
Minor Food Group, Sakae Holdings, ABR Holdings, etc.
Competitors in the Foodcourt space are Kopitiam, S-11,
Koufu and competitors for bakery include Bengawan Solo
and Prima Deli.
 Reputational risk. BreadTalk is one of the biggest brands
in Singapore with Euromonitor ranking it as the number
one player in Food/Drink/Tobacco specialist in Singapore.
The brand is also known regionally in North Asia and South
East Asia. Reputational risk is at stake if consumers take to
social media for any operational lapses or negative issues.
 F&B business has low entry barriers. F&B foodservice
businesses have low entry barriers. However, BreadTalk’s
strong branding and economies of scale make it difficult
for new and smaller entrants to compete on cost and
profitability.
Threats
 Negative publicity. Negative publicity could affect
BreadTalk’s demand and support from its regular
customers. In the past, BreadTalk had been alleged that it
had not changed its doughnut frying oil for years in
Shenzhen. In Singapore, it also drew negative response on
social media in 2015 for promoting buns commemorating
Mr Lee Kuan Yew after his death in addition to marketing
soya bean milk from commercially available sources as
freshly prepared.
 Food safety and operating licence. The F&B business is
licensed in Singapore by the National Environment Agency.
Food safety and hygiene standards must be met. In extreme
cases of non-compliance, licences could be revoked.
 May be affected by disease outbreaks and poor weather.
Business could slow during a health crisis or poor weather
such as haze. During Singapore’s haze in October 2015,
businesses were disrupted as consumers hid indoors. The
Singapore government estimated that the haze had
resulted in economic losses of about S$700m.
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 Company Guide
BreadTalk Group Ltd

Company Background

Singapore-based regional F&B restaurant brand owner and Revenue by business segment FY16
operator. BreadTalk Group is a Singapore-based food and
beverage (F&B) group engaged in the operations and F ood court
26%
franchising of bakery/confectionery outlets, food courts and
restaurants across the region. BreadTalk was listed on the
SGX in 2003 and is today a regional F&B group which
operates and franchises a total of 951 outlets. BreadTalk’s Bakery
50%
portfolio currently has 6 brands – BreadTalk, ToastBox, Food
Republic, Ramen Play, San Pou Tei and Din Tai Fung.

Outlet distribution by brand FY16

Restaurant
24%
Din Tai F ung, San Pou Tei, 2,
24, 2% 0% Source: Company, DBS Bank
RamenPlay , 6,
F ood Republic, 1%
57, 6%
Innovative food concepts, streamlined to focus on next stage
of growth. The Group has been in the forefront of food
concepts and innovation, having introduced the boutique
bakery concept in 2000. It was also the first to introduce the
thematic food atrium where consumers are able to
experience quality local food fare in a food court location. In
2010, it undertook a major review and organised the Group
Breadtalk and
toastbox, 862, into three divisions – Bakery, Restaurant and Food Atrium, to
91%
pave the way for future growth. BreadTalk created its
Source: Company, DBS Bank flagship pork floss bun in 2000, which remains one of its
best-seller till today.
951 outlets under the group. BreadTalk operates and
manages 862 owned and franchised bakeries, 32 Din Tai Revenue mainly from Singapore and China bakery business.
Fung, Ramen Play and Sou Pou Tei restaurants in Singapore A majority of BreadTalk’s revenue is derived from the bakery
and Thailand, as well as 57 Food Republic food atria in business and in Singapore and China. The bakery business
China, Singapore, Hong Kong, Malaysia, Taiwan and comprising of BreadTalk and Toastbox contributed 50% of
Thailand. BreadTalk currently operates c.260 bakery outlets Group revenue in for FY16 and has the most number of
directly in addition to c.600 franchise outlets regionally. outlets across the three formats, with significant
concentration in Singapore and China.
Outlet distribution by country FY16
Revenue by geography FY16
Singapore, 167, Thailand, 6, 1%
18% Others
6%
Hong Kong
11%

China, 423,
44%

Singapore
55%
China
Others, 355, 28%
37%

Source: Company, DBS Bank

Source: Company, DBS Bank
A retail operator and franchisor of its own brands, and
franchisee to other brands. BreadTalk operates in the
consumer foodservice space and operates retail outlets for
bakery products, Foodcourts and restaurants. Its retail
operations comprise of a mix of 1) self-operated outlets for
its own brands; 2) a retail operator as a franchisee for Din Tai
Fung restaurants; and 3) a franchisor of its own brands such
as BreadTalk to third party retail operators.

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 Company Guide
BreadTalk Group Ltd

Owns 30% equity stake in a JV with Jumbo Group to
operate Jumbo Seafood outlets in Shanghai. BreadTalk owns
30% in a JV with Jumbo Group to operate seafood
restaurants in Shanghai, China. As BreadTalk’s Chairman and
Founder Mr George Quek has extensive experience in
operating in China, the collaboration with Jumbo leverages
on BreadTalk’s operating and retail experience there to
source for new and suitable locations for Jumbo Seafood
restaurants. The JV is limited to the Huadong area (华东区 –
defined by the provinces of Shandong, Jiangsu, Anhui,
Zhejiang, Jiangxi, Fujian and Shanghai) and the opening and
operation of the Jumbo Seafood restaurant brand only.
Results for the JV are recognised in share of results in
associates. Other associates include Carl’s Jr China and
CHIJMES.
Property investments in Singapore and China worth S$130m.
BreadTalk holds some property investments on its books in
the form of investment securities. Key properties are mainly
AXA Tower, CHIJMES, 111 Somerset (sold in 1Q17), Beijing
Tongzhou and a property located in Shanghai Luidi. AXA
Tower, CHIJMES, 111 Somerset and Beijing Tongzhou are
investments made in collaboration with Perennial. Shares in
CHIJMES are revalued under associates on the balance sheet,
while investments held at cost on the balance sheet reflect
CHIJMES bonds, AXA Tower’s shares and bonds, and Beijing
Tongzhou shares. BreadTalk also owns the BreadTalk IHQ
land on a leasehold basis for 30 years from 1 February 2010.
The IHQ which opened in 2013 houses its corporate office,
research and development laboratories, training academy,
warehousing facilities and central kitchen operations.

Cost Breakdown FY16 Owns a 29% stake in CHIJMES

Perennial Real
Breadt alk Ot hers
Est at e

29% 51.61% 19.39%

Perennial
(CHIJ M ES) Pt e
Ltd
100%
Pre 8
Inv est ment s
Pt e Lt d
100%

CHIJ M ES

Source: Company, DBS Bank estimates Source: Perennial Real Estate, Company, DBS Bank

Cost of Goods Sold (COGS), rents and staff costs make up Potential for properties to be sold. Perennial has a good track
over 80% of total costs. We estimate that COGS make up record of selling properties. It previously sold 112 Katong in
approximately 22% of total costs, with rents and staff costs 1Q16 and 111 Somerset in 1Q17 in which BreadTalk booked
each making up approximately 30% of total expenses. COGS accounting gains of S$8.5m and S$9.3m respectively.
comprise mainly of food inputs such as flour, wheat, oil etc. Potential sale of stakes in AXA Tower (5.31%), CHIJMES
for Bakery and Restaurants. Depreciation is mainly renovation (29%) and Beijing Tongzhou in the future would provide
for Foodcourts, Bakery and to a smaller extent Restaurants, additional catalysts for the stock.
and is charged over a period of 2-6 years.
Investment properties sold
Properties Sold Cost Selling Accounting
price Gain
112 Katong 1Q16 S$7.5m S$16m S$8.5m
111 Somerset 1Q17 S$17.2m S$26.5m S$9.3m
Source: Company, DBS Bank

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 Company Guide
BreadTalk Group Ltd

Value of property investments on BreadTalk’s books (excluding 111 Somerset sold in 1Q17)
Securities Bonds Shares Cost Valuation Accounting classification
AXA Tower (5.31%) S$8.496m S$10.875m S$19.4m S$23m Investment securities at cost
CHIJMES (29%) S$18m S$22.685m S$18m S$41m Bonds as investment securities at cost,
Shares as associates revalued at market
Beijing Tongzhou Integrated Dev’t n/a S$34m S$34m S$34m Equity instruments (unquoted) at cost
Shanghai Luidi Investment property n/a S$23m S$23m S$23m Investment property revalued at market
Total S$94.4m S$121m
Source: Company, DBS Bank

Operates a total of 951 owned and franchised outlets

Division Bakery Food atrium Restaurant
Brand BreadTalk & Toastbox Food Republic Din Tai Fung Ramen Play San Pou Tei Total
Singapore 123 15 21 6 2 167
Hong Kong 24 5 - - - 29
China 394 29 - - - 423
Rest of the world 321 8 3 - - 332
Total 862 57 24 6 2 951
Source: Company, DBS Bank

Sales Trend Profitability Trend

S$ m
S$ m
47
700 20.0%
18.0% 42
600
16.0% 37
500 14.0%
32
400 12.0%
10.0% 27
300 8.0%
22
200 6.0%
4.0% 17
100
2.0% 12
0 0.0%
7
2014A 2015A 2016A 2017F 2018F 2014A 2015A 2016A 2017F 2018F

Total Revenue Revenue Growth (%) (YoY) Operating EBIT Pre tax Profit Net Profit

Source: Company, DBS Bank

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Page 6

Competitive Strengths
Franchisor brand owner model for most of the brands it
operates
Brand owner - has control over its own brands. BreadTalk is
a F&B brand owner of the BreadTalk, Food Republic, Ramen
Play and San Pou Tei brands. Being a brand owner allows
BreadTalk to have control over the growth and evolvement
of the brand and its business. It is able to exercise control
over its franchisees on how the brands are represented and
operated at franchisee outlets. Likewise, it is not subject to
requirements of the franchisor or at risk of franchisor
recalling the franchise agreement. Its BreadTalk brand of
bakeries has been successful in establishing franchisees
across China, which enabled it grow quickly from 342 outlets
in FY09 to 951 outlets in FY16. Today, franchisee stores
make up 70% or 602 of BreadTalk’s 862 self-operated and
franchised bakery stores.
Strong franchisee of Din Tai Fung’s restaurants. BreadTalk is
also a franchisee of other F&B brands (Michelin Star Din Tai
Fung chain of restaurants since 2003). Although a smaller
contributor to revenue, its high operating margins (15.4% in
FY16) makes this segment a key contributor to operating
profit. In FY16, segment operating profit was S$23.2m,
forming 66% of group operating profit of S$35.3m. The
impressive numbers were generated from just 32 (3.4% of
store count, 30 of 951 outlets) out of a total of 951 outlets
in FY16.
Economies of scale
Leading F&B company in Singapore. BreadTalk is one of the
largest bakery companies in Singapore. According to
Euromonitor, BreadTalk is ranked number one in
food/drink/tobacco specialists with 6% market share, ahead
of Prima Deli and Bengawan Solo.
Brand portfolio provides better bargaining power for rents.
BreadTalk’s F&B brands cut across the restaurant, bakery and
Foodcourt foodservice sub-segments. Most of these F&B
offerings are commonly available in shopping malls. Unlike
mono brand companies, it is able to undertake collective
negotiations on outlet space with landlords for all its brands.
Furthermore, it has presence in many malls and has extensive
relationships with developers and landlords. This is also a key
reason why Jumbo Group partnered BreadTalk in its China JV
for the Huadong area. BreadTalk brands usually collectively
take up a decent portion of property space (Foodcourt
c.20,000 sqft, bakery c.600-800 sqft, restaurant c.3,000
sqft), enabling it to obtain rents at a competitive rate due to
scale. Rental rates will therefore be relatively more
competitive than its smaller competitors.
ASIAN INSIGHTS
Company Guide
BreadTalk Group Ltd
Relationships with landlords and developers provide
opportunities for new outlets. With more than 900 outlets
across 17 countries, BreadTalk’s strong relationship with
developers and landlords puts it in a favourable position to
be offered new outlet space in new mall developments. This
is because it has the ability to help landlords fill up key F&B
spaces quickly with a good mix of restaurants, bakery and
Foodcourts. Therefore, BreadTalk will often be one of the
first tenants to be offered shop units in new malls by
landlords, enabling it to select more strategic shop units in
the development.
Diversified F&B brand portfolio
Multi-brand strategy. BreadTalk is a balanced mix of F&B
brands. While these brands can grow together collectively in
malls, each of these brands also enables BreadTalk to target
different sub-segments of the foodservice market –
restaurant for higher end consumers, bakery for staple F&B
consumption, Foodcourt for lower end foodservice
customers, allowing BreadTalk to reach a larger customer
base while capturing the market’s higher marginal propensity
to spend on food.
Entrenched in China
Well positioned to capitalise on demand in China. BreadTalk
has been in China for more than 10 years and today has
close to 400 bakeries and 30 Foodcourts, contributing close
to one-third of revenue and 44% of total store count. It has
a presence in tier 1 and 2 cities including Shanghai, Beijing,
Tianjin, Chongqing, Xian, Shenzhen, Chengdu. According to
Euromonitor, China’s Food/Drink/Tobacco specialist retail
space is expected to grow by a CAGR of 1.7% over the next
5 years.
Innovative retail and food concepts to capture market
Innovation improves customer experience and stickiness.
BreadTalk differentiates itself with unique concepts and food
products, most notably is flagship pork floss bun. It has an
R&D team to innovate new products. There are 50-60 new
products and seasonal items to be launched in stages in the
pipeline, which help to increase average cheque size and to
drive more traffic into its bakery shops. It is also
experimenting with digital systems that inform customers
when a fresh batch of bread is ready. These initiatives help to
improve customer experience and stickiness.
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 Company Guide
BreadTalk Group Ltd

Growth Strategies

Quality of earnings to improve

Less aggressive store expansion to concentrate on yielding Non-performing legacy franchisees. BreadTalk has been in
higher operating efficiencies. Store count has grown the process of restructuring its list of franchisees by ending
aggressively over the past few years (CAGR of 18% from agreements with non-performing franchisees including those
FY09 to FY16), yet net profit has not grown in similar with legacy relationships. With this restructuring, we expect
magnitude due to increase in operating costs including to see a stronger franchisee base with less drag from non-
rental, depreciation and staff costs. There is currently a shift performing accounts. Following this portfolio restructuring, it
in focus to make existing operations more efficient, lower will look to increase franchisee outlets with the stronger
operating costs and expand margins. Therefore, store remaining partners. As franchise outlets have higher net
opening in the next few quarters will not be aggressive. We margins, and lower direct operational risk, there is potential
see FY17F as a year where BreadTalk repositions itself and for Bakery margins to increase as well given that franchise
reorganises its operations internally to become more revenue is royalty income, recognised a percentage of
efficient. franchisee sales with minimal costs to BreadTalk. Store
increases this year will mostly be franchisee stores in Beijing
Total store count has led by franchise outlets and Shanghai. We expect margins to increase when mix of
St ore count
franchise stores improve going forward.
1,000 957 951
914
900 836 Food Atrium division has turned profitable in 4Q16
800
686
700 Changes to management personnel, tenant-mix and tentnat
600 534 quality has turned Foodcourt losses into profitability.
500 448 Foodcourt is the division that is expected make a marked
400 342 turnaround in FY17F. FY17F will start on a clean slate post
278
300
200
store closures and impairments made in FY16 (S$5-6m). The
200 business had overexpanded into tier 1 and 2 cities in China,
100 with only tier 1 cities’ Foodcourts outperforming tier 2 cities.
0 While Foodcourts in Singapore were profitable, Foodcourts in
07 08 09 10 11 12 13 14 15 16
Bakery Restaurants Food Courts Total tier 2 cities in China were a drag. Changes were made to the
Source: Company, DBS Bank portfolio in FY16 by closing non-performing outlets especially
in tier 3 cities. It also replaced China Foodcourt’s
Expect cost efficiencies and margin improvement. We see management team with new personnel. There were changes
margins improving at Group level. The swing to profitability made to tenant quality and tenant mix, which led to an
at the Foodcourt business, cost savings initiatives at the improved performance and occupancy at its China
bakery and improved sales mix from restaurant business Foodcourts. Foodcourt’s operating profit in 4Q16 had
should collectively improve margins. We expect store already improved from a loss to a small profit. Store
expansion to take on a more aggressive pace once cost openings this year will include Shenzhen, Guangdong and
efficiencies and margin improvements are realised in the Shanghai.
coming year or two.
Restaurants continue to grow
Bakery division to become more cost efficient
New outlet in London this year. BreadTalk currently has 21
Driving margin improvement through cost efficiencies. Din Tai Fung outlets in Singapore, and 3 in Thailand. It has
BreadTalk has already demonstrated that it has the ability to already planned for a new outlet in London this year through
improve cost efficiency as FY16 gross margins had improved a JV (BreadTalk is the major shareholder of the JV) with Fairy
to 54.9% y-o-y (+2.0ppts). Initiatives such as better demand Rise Development (Din Tai Fung franchise owner), Din Tai
planning, more efficient human resource planning, tighter Fung Taiwan, a UK partner and a Taiwanese individual. We
cost controls have helped to benefit operating margins. also see scope for more outlets in Thailand as there are
Better demand planning has led to lower food wastage, currently only three Din Tai Fung restaurants. As restaurant
while human resource efforts in overtime policies and tighter margins are attractive, better sales mix from restaurant
scheduling of workers especially in the central kitchen have business would improve overall profitability.
contributed to lower excessive wage payments. It has also
been spending less on capex, leading to some moderation in
depreciation expenses going forward.

ASIAN INSIGHTS VICKERS SECURITIES

Page 8
 Company Guide
BreadTalk Group Ltd

Industry landscape

Singapore China

Leading player in Singapore. According to Euromonitor, 1,344 bakery companies operating in a RMB262bn market in
BreadTalk is the largest player as a Food/Drink/Tobacco China. According to Euromonitor, the Food/Drink/Tobacco
specialist in Singapore. BreadTalk has 6% market share, specialist retailers market reached RMB262b in 2016, with
leading Prima Deli and Bengawan Solo in the bakery space. Bakery specialists accounting for the largest share of sales
within food/drink/tobacco specialists. There were 1,344
Leading Food/Drink/Tobacco Specialist in Singapore bakery companies competing in China as of June 2015
Breadtalk
according to Bread and Cake Professional Committee of
6% Prima Deli China National Food Industry Association. Bakery players
5%
include local players like Holiland, Ruby, and foreign players
Bengawan Solo
4% such as 85C, Bakery Christine, and UBC Coffee from Taiwan,
BreadTalk from Singapore, Paris Baguette, Tous Les Jours and
Caffé Bene from Korea, Vie de France from Japan.

CAGR of 1.7% in the next five years. Euromonitor expects

Others
85%
Source: Euromonitor, DBS Bank
CAGR of 3.5% over the next five years. The
Food/Drink/Tobacco specialist space in Singapore is estimated
to be worth S$887m in 2016 by Euromonitor and it is
expected to grow at a CAGR of 3.5% from 2016 to 2021
driven by increase in selling space and sales per square feet.
The decline in sales from 2014 was affected by decline in
number of outlets, selling space and sales per square feet, in
line with the weak GDP subject to a one-year lag.
the Food/Drink/Tobacco specialists space to grow by 1.7%
CAGR in the next five years and sees rising acceptance of the
Western diet and the growing preference for diverse foods,
bread and cakes becoming popular for breakfast and snacks,
especially among the younger generation. According to
another report by Daxue Consulting, a market research and
management consulting firm focusing on the Chinese
market, it notes that there is scope for the market to grow as
the average annual consumption of bakery products per
capita in China is low at 5.83kg compared with close to
22kg in Japan.
Food/Drink/Tobacco space to grow by 1.7% CAGR till
2021F

RM Bb
Food/Drink/Tobacco space forecast to reach S$1.05b by 300
2021F
250
S$m
1,100 200

1,050 150

100
1,000

50
950
0
900

850
Source: Euromonitor, DBS Bank
800
2012 2013 2014 2015 2016F 2017F 2018F 2019F 2020F 2021F

Source: Euromonitor, DBS Bank

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 Company Guide
BreadTalk Group Ltd

Management composition

Professionally managed, led by founder. BreadTalk continues
to be led by its founder Mr George Quek who is the
Chairman of the Group, and is responsible for driving its
strategic direction and future development. His wife
Katherine Lee is Deputy Chairman, and is responsible for
concept creation, product development and enhancement of
various brands both locally and globally. BreadTalk has a
professional management team of executives comprising of
former bankers and executives in F&B managing its day to
day operations. Key executives of BreadTalk are
compensated above S$250,000 annually.
Focus to improve earnings quality. BreadTalk’s strategy in its
earlier years had been to grow its presence regionally. In
particular, store count increased by 572 between 2010 and
2014. It adopted the franchise model, and licensed
franchisees regionally to grow its store network. While
revenue grew, margins and earnings had suffered in FY15
due to cost management issues. Loss making and poorer
performing outlets were consolidated in FY16, improving net
profit margins as revenue declined. Management is now
focused on improving the quality of earnings in the near
term before growing its regional footprint aggressively again.

Key Management Team

Name and appointment Profile
Mr. Oh Eng Lock Mr Oh oversees the Group’s global operations, focusing on strategic planning, investments, business
Group CEO development and regional expansion. He was Regional MD at Merrill Lynch in Hong Kong, overseeing
the North Asia businesses and has held senior executive and management posts at DBS Bank and
UOB, growing their franchises in China, Taiwan and the USA. Mr Oh holds a Bachelor of Arts degree
from the University of Singapore.

Mr. Chan Ying Jian Mr Chan is responsible for the Finance, Legal and Risks functions of BreadTalk. He was formerly Vice
Group CFO President of Equity Research at J.P. Morgan Securities Singapore, as ASEAN Sector Head for Agri-
Commodities and Consumer Staples. Mr Chan holds a double-degree in Business Management
(majoring in Finance) and Accountancy from the SMU (summa cum laude – with Highest Distinction).
He is also a Chartered Accountant of Singapore (CA Singapore) & Chartered Financial Analyst (CFA).

Mr. Janson Ong China Lock
CEO Food Atrium Division
Mr Ong is responsible for the overall development, operations, projects execution and strategic
planning of the business globally. He has over 20 years of F&B experience, pioneering Singapore’s first
food court business and initiating over 100 food court concepts 350 F&B outlets in ASEAN and
Greater China. He joined the BreadTalk in 2003 as Director of Food Republic in China and was also
MD for Food Republic in Hong Kong.

Mr. Tan Aik Peng Mr Tan joined BreadTalk as MD of the Bakery Division in 2014. He was previously Head of Corporate
CEO Bakery Division Strategy, Planning and Business Development at SATS Ltd. He has an MBA from Nanyang Business
School and also holds a Bachelor of Mechanical Engineering (Hons, 2nd Upper) and a Master of
Engineering in Quality and Statistics from NUS.

Mr. Cheng William Mr Cheng leads BreadTalk’s business and marketing strategies, structure and people development at
CEO Restaurant Division all Din Tai Fung and Ramen Play’s businesses in Singapore and Thailand. He has over 20 years of
experience in culinary and operations and was previously Branch Manager at BreadTalk before the
inception of Din Tai Fung in 2003.

Mr Frankie Quek Swee Heng
CEO ASEAN Region
Mr Quek is responsible for the formulation and implementation of the expansion plans for the Group
in the ASEAN Region. He started out as the Group’s Assistant GM in 2001 before assuming various
roles including GM, Head of Bakery ops in Shanghai and Beijing, Group COO and CEO for China
Region. Mr Quek holds an honorary Master of Business Administration degree from the American
University of Hawaii, USA. He is the brother of Chairman George Quek.

Source: Company, DBS Bank

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Key Risks
Negative publicity affects consumer confidence and the
marketability of its franchise. Food safety is an important
aspect of the foodservice sector. It not only affects the health
of customers consuming BreadTalk’s food products, but it
also influences the marketability of the franchise when
attracting new and capable franchisees. BreadTalk has had
some negative publicity in especially in 2015. A China TV
programme claimed that its Shenzhen outlet has not
changed its doughnut frying oil for years. There were also
other issues apart from food safety. In Singapore, it launched
buns commemorating Mr Lee Kwan Yew after his death,
which drew negative responses over social media. BreadTalk
was however quick to stop the sale of those buns. BreadTalk
also apologised to the public after a photograph showing a
staff member filling up “freshly prepared” soya milk for sale
using commercially brand soya bean milk, made its rounds
on the internet. Incidences such as these can generate
negative responses from the public which can potentially
affect sales as well as the marketability of its franchise
overseas.
ASIAN INSIGHTS
Company Guide
BreadTalk Group Ltd
Food safety and licences. As a foodservice operator, it is
important to maintain food safety. Lapses would lead to
reputational risks and in extreme cases, food operation
licences could be revoked. Other risks include food
contamination and tampering risks, outbreak of diseases or
viruses in livestock inducing food scares, exposure to
negative publicity, customer complaints and potential
litigation.
May be affected by disease outbreaks and poor weather.
Business could slow during a health crisis or poor weather
such as haze. During Singapore’s haze in October 2015,
businesses were disrupted as consumers hid indoors. The
Singapore government estimated that the haze had resulted
in economic losses of about S$700m.
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BreadTalk Group Ltd

Financials

Profit and Loss around in 4Q16 with a small profit, and absence of segments
write-offs of S$5-6m would improve segment earnings. A
Profit growth driven by better cost management. Revenue sustained improvement in earnings from Foodcourt would lift
has largely been driven by store count. However, EBIT margins going forward. We see higher mix from restaurant
margins have fallen due to higher operating expenses as a sales over the next two years, and the higher margin nature
result of store expansion. Over the last two years, there has of the restaurant business would lift overall margins. Expect
been more focus on cost management to achieve better operating margins to increase to 6.6% by FY18F led by these
store operating efficiencies. In FY16, gross margins and initiatives.
operating cost management had improved through better
control of food wastage, as well as better staff cost Balance sheet and cashflow
management. Both gross margins and EBIT margins
improved by 2ppts and 0.1ppt respectively. More effective Cash business, balance sheet currently in net debt. As with
cost management strategies should continue to improve all foodservice companies, BreadTalk is a cash business. The
margins that will ultimately drive earnings growth. We business generated S$65-90m of operating cashflows
expect net profit to reach S$23.0m by FY18F. annually and S$28-54m of positive free cashflows in the last
three years. Net debt as of end-Dec16 is about S$60.7m,
More focused on cost and margins in recent years equivalent to approximately S$0.22 per share, or net debt
ratio 0.3x. BreadTalk was in net cash till FY12 when it built
Store count margin %
Store count (LHS) EBIT Margins (RHS) its BreadTalk IHQ. In FY13 when it opened it IHQ, net debt
1200 7.0
was S$89m. It further issued S$75m of bonds in FY16 due 1
1000 6.0 April 2019 at 4.6% coupon for general corporate purposes,
5.0
including refinancing of existing borrowings, and financing
800 capital expenditure and general working capital.
4.0
600
3.0 Strong cash position
400
2.0 S$m FY15 FY16 FY17F FY18F
Operating cashflow 66.5 89.2 87.6 84.4
200 1.0
Collection days 33.5 35.4 34.5 34.6
0 0.0 Payable days 143.3 144.1 140.1 140.9
08 09 10 11 12 13 14 15 16
Net cash/(debt) (99.6) (43.5) (3.0) 34.4
Source: Company, DBS Bank Net cash/share (Scts) (35.4) (15.5) (1.1) 12.2
Source: Company, DBS Bank
Revenue driven by operational efficiencies. Even though
outlet growth is expected to be muted, revenue growth will Generates positive working capital cashflows. Outlets
be led by more efficient store operating matrices such as provide foodservice for cash while operational scale allows it
sales per square foot and sales per outlet. We expect sales procure supplies on credit. Inventory days are minimal due to
per outlet to grow from S$0.65m to S$0.69m per year over the short shelf life and freshness of food inputs. Therefore,
the next two years. We expect revenue to reach S$673m by the business generates positive working capital cashflows.
FY18F. Even though business is on a cash basis, collection days are a
result of payment lag by franchisees.
Revenue assumptions
S$m FY15 FY16 FY17F FY18F Higher capex requirement for Foodcourts due to larger floor
Total outlets 957 951 962 969 area. Capex per store ranges from S$200,000 to S$300,000
Sales/outlet/yr (S$m) 0.65 0.65 0.67 0.69 for bakery, approximately S$1m for restaurant, S$2-3m for
Source: Company, DBS Bank Foodcourts.

Expect margins to improve. We see margins improving over Capex

the next few years from 1) increased mix of franchise outlets S$m Capex Avg Sqft Capex- Avg lease
as opposed to owned bakery stores; 2) turnaround in psf
Foodcourt operations; and 3) higher mix of restaurant Bakery S$2-300k 600-800 385 3 years
business. Franchise stores have much higher margins Foodcourt S$3m 20,000 150 5-6 years
compared to owned bakery stores due to the absence of Restaurants S$1m 3,000-4,000 285 4-5 years
operating expenses. Change in store mix would see margin Source: Company, DBS Bank
improvements. Meanwhile, Foodcourt business turned

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BreadTalk Group Ltd

Improving ROAE Strong ROAE

S$m FY15 FY16 FY17F FY18F
ROAE to recover, driven by better margins. ROAE was as Revenue 624 615 643 673
high as 20% in FY14, but has fallen because of lower net Net profit 7.60 11.4 26.3 23.0
profit. However, we expect ROAE to head higher over the Net margin (%) 1.2 1.9 4.1 3.4
next two years on the back of earnings and margin Total assets 545 534 555 584
recovery. Equity 129 132 151 167
ROAE (%) 6.0 8.8 18.6 14.5
Source: Company, DBS Bank

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BreadTalk Group Ltd

Valuation and recommendation

Project earnings CAGR of 63%, led by more new franchise Reinstate coverage with BUY, SOTP-based TP of S$1.69.
stores, turnaround of food court business. We see earnings The stock currently trades at 22.5x FY17F PE, which implies
CAGR growth driven by more franchise stores and a that BreadTalk’s core business is valued at 18x PE (after
turnaround of the loss making food atrium business. stripping out the value of its investments), a discount to
Franchise stores generate high margins as there is minimal regional restaurants, QSRs, bakery and foodservice peer
cost, and revenue recognised from these stores flows average of 23x. Our valuation of BreadTalk comprises of
directly to operating profit. We see lower losses from food core F&B business which we value at S$1.33 based on 22x
atrium business as it heads for a turnaround in profitability FY17F core PE, investments at S$0.43 based on book and
within two years. Initiatives such as fine tuning tenant mix market value, and net debt worth S$0.07 per share. We
to fill up vacant stalls are currently being implemented to derive a TP of S$1.69, representing 25% upside from the
ensure that the food atrium business turns around. Finally, last closing price. Reinstate coverage with a BUY
higher mix of Din Tai Fung restaurants will improve overall recommendation.
margins.
Core business valued at 18x forward PE at current
Core earnings trades at average PE valuations share price
(x) Component S$m Per share S$
40.0 BreadTalk’s share price 381 1.36
+2 sd
35.0 Value of investments -121.8 -0.43
30.0 +1 sd 111 Somerset -12.5 -0.04
25.0 Net debt / (cash) FY16 60.7 0.22
20.0 Avg Core share price ex investments 307.6 1.09
15.0 Core earnings S$m 17.0 0.06
-1 sd
10.0 Core PE ex investments 18.1 18.1
5.0 Source: Company, DBS Bank
-2 sd
-
Jan-11
Apr-11

Jan-12
Apr-12

Jan-13
Apr-13

Jan-14
Apr-14

Jan-15
Apr-15

Jan-16
Apr-16

Jan-17
Apr-17
Oct-11

Oct-12

Oct-13

Oct-14

Oct-15

Oct-16
Jul-11

Jul-12

Jul-13

Jul-14

Jul-15

Jul-16

SOTP valuation
SOTP breakdown S$ Basis

Source: DBS Bank Core business based on PE 373.5 22x FY17F earnings
Shanghai Luidi China Inv’t ppty 23.0 Based on book
AXA’s valuation within market range of S$1,700- Beijing Tongzhou Investment 34.65 Based on cost
2,100/NLA Equity stake in CHIJMES 22.685 Based on book
Value of AXA stake less debt 23 Market valuation
Office buildings NLA Valuation Rate/NLA
CHIJMES Bonds 18 Based on book
CPF building 324,000 S$550m 1,698
Net (debt)/cash FY17F -20.2 Inc. Somerset disposal
Twenty Anson 207,000 S$432m 2,086
Equity Value 475.1
Capital Tower 738,000 S$1,325m 1,795
No of shares 281
Mapletree Anson 332,000 S$690m 2,078
TP 1.69
AXA Tower 675,000 S$1,247m 1,847
Source: Company, DBS Bank
Source: Company, DBS Bank

ASIAN INSIGHTS VICKERS SECURITIES

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 Company Guide
BreadTalk Group Ltd

Valuation of comparable office buildings

Attributed
Contract
Property Name Location Tenure Net Lettable Price ($) Rate per NLA Buyer
Date
Area (sq ft)
Jan-15 AXA Tower Tanjong 66.5 675,000 1,170,000,000 1,733 PREH
Pagar remaining
(2015)
Jun-15 One Raffles Raffles Place 99/FH 600,000 1,429,166,667 2,382 OUECT
Place
Jun-15 PWC Building 8 Cross Street 99 LH 106,712 150,000,000 1,892 DBS Bank
(30% stake)
Dec-15 ICS Building 137 Cecil Freehold 67,550 210,000,000 3,109 Mr Zhou
Street
Dec-15 Suntec Tower Suntec 99 LH 38,352 101,560,000 2,648 Suntec REIT
Two -12, 13
and 29 Floor
Nov-15 CPF Building 79 Robinson 99 LH 324,000 550,000,000 1,698 Ascendas Land
Road (2067)
Apr-16 78 Shenton 78 Shenton 99 LH 181,100 301,500,000 1,665 Alpha Investment
Way (50% Way Partners
stake)
May-16 Remaining 60% Raffles Place 57 703,122 1,600,500,000 2,276 (2,700 CCT
interest in remaining assuming 99
CapitaGreen expiring year
31Mar2073 leasehold)
May-16 Straits Trading 9 Battery 999 LH 158,897 560,000,000 3,524 Mr Tahir - Found of
Building Road Mayapada Group
Jun-16 Asia Square Marina Bay 99 LH from 1,200,000 3,400,000,000 2,668 Qatar Investment
Tower 1 2007 sqft office & Authority
40,000 sqft
retail
Sep-16 110 Robinson 110 Robinson FH 14,233 45,100,000 3,169 Mr Tahir - Found of
Road Road Mayapada Group
Jan-17 GSH Plaza Raffles Place Remaining - 725,200,000 2,900 Fullshare Holdings
72 years
Feb-17 PWC Building 8 Cross Street 78.5 years 355,704 747,000,000 2,100 Manulife
(100% stake)
Source: Various press reports, DBS Bank

Core earnings trade below regional peer average of 23x

M ark et Operat ing Net Div idend Net
Cap P/BV P/Sales ROE M argin M argin Y ield Gearing
Company (US$m) Px L ast PE (A c t ) PE (Y r 1) PE(Y r 2) (x) (x ) (%) (%) (%) (%) (x )
BreadTalk Group Ltd 273 1.36 44.1x 22.5x 16.5x 2.5x 0.6x 19% 6.5% 4.1% 1.8% 0.02
L oc al & regional f oodserv ic e/bak ery /rest aurant play ers
J ollibee F oods Corp 4,227 197.00 33.6x 28.4x 24.4x 5.4x 1.6x 20% 6.9% 5.8% 1.3% cash
SPC Samlip Co Ltd 1,700 220,500 37.2x 30.5x 29.0x 6.3x 1.0x 17% 3.5% 2.6% 0.4% 0.52
MK Restaurant Group PCL 1,654 63.00 27.3x 24.9x 24.2x 4.3x 3.8x 16% 14.7% 13.9% 3.4% cash
Gourmet Master Co Ltd 1,403 287.00 24.4x 20.7x 19.7x 5.0x 1.9x 20% 10.5% 7.9% 0.8% cash
Berjay a Corporation Bhd 423 0.37 NULL NaN NaN 0.2x 0.2x -3% 6.7% -1.8% na cash
J UMBO Group Ltd 326 0.71 25.3x 22.6x 20.1x 6.1x 3.1x 29% 15.6% 13.8% 2.4% cash
Oldtown Bhd 282 2.76 22.7x 19.2x 17.9x 3.2x 3.0x 17% 20.3% 15.4% 2.2% cash
ABR Holdings Ltd 104 0.72 26.8x NaN NaN 1.5x 1.4x 5% 6.5% 5.2% 3.5% cash
Old Chang Kee Ltd 74 0.86 20.9x 20.2x 19.3x 3.3x 1.4x 14% 8.3% 6.7% 3.5% cash
Christine International Holdings Ltd 66 0.48 NULL NaN NaN 0.6x 0.4x NaN na na na NaN
Neo Group Ltd 61 0.58 55.6x 29.0x 14.5x 2.9x 0.6x 20% 4.9% 4.8% 1.7% 1.97
J apan F oods Holding Ltd 54 0.44 16.6x NaN NaN 2.4x 1.2x 12% 6.5% 6.0% 4.6% cash
Soup Restaurant Group Ltd 37 0.18 48.9x NaN NaN 5.6x 1.4x 11% 1.0% 2.6% 1.9% cash
Katrina Group Ltd 37 0.23 10.7x 9.5x 8.1x 3.1x 0.8x 35% 9.5% 7.9% 6.3% cash
Sakae Holdings Ltd 35 0.34 NULL NaN NaN 1.4x 0.6x -41% -10.7% -15.4% na 1.24
Tung Lok Restaurants (2000) Ltd 27 0.14 38.2x NaN NaN 2.4x 0.4x 4% 0.3% 0.7% na cash
Pav illon Holdings Ltd 15 0.05 23.5x NaN NaN 0.5x 1.3x 2% 2.3% 5.7% na cash
Regional av erage 29.4x 22.8x 19.7x 3.2x 1.4x 11% 6.7% 5.1% 2.7% 1.2x

Source: Thomson Reuters, DBS Bank

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BreadTalk Group Ltd

Key Assumptions
FY Dec 2013A 2014A 2015A 2016A 2017F 2018F

Bakery outlets 1,223 1,373 862 862 867 872

Restaurant outlets 41.0 34.0 30.0 32.0 34.0 36.0
Food court outlets 58.0 63.0 65.0 57.0 61.0 61.0
Total 1,322 1,470 957 951 962 969
Annual sales per outlet 0.64 0.65 0.65 0.65 0.67 0.69
S$m
Segmental Breakdown
FY Dec 2013A 2014A 2015A 2016A 2017F 2018F

Revenues (S$m)
Bakery operations 271 294 308 306 314 322
Includes S$9m investment
Restaurant sales 122 131 143 150 163 176
income
Food court income 143 165 173 159 167 175
Others 0.0 0.0 0.0 0.0 0.0 0.0

Total 537 590 624 615 643 673 Food court business to
turnaround
Operating profit (S$m)
Bakery operations 11.1 7.23 5.15 12.6 14.1 14.5
Restaurant sales 9.02 12.7 25.8 23.2 25.2 27.3
Food court income 4.87 5.53 (2.9) (7.5) 2.50 2.63 Margins to expand through
better cost
Others (2.1) (0.6) (0.1) 6.99 0.0 0.0
management/efficiencies

Total 22.9 24.9 28.0 35.3 41.9 44.4

Operating profit (S$m)
Margins (%)
Bakery operations 4.1 2.5 1.7 4.1 4.5 4.5
Higher staff costs and
Restaurant sales 7.4 9.7 18.0 15.4 15.5 15.5 coming off a more robust
Food court income 3.4 3.4 (1.7) (4.7) 1.5 1.5 SG50 year
Others N/A N/A N/A N/A N/A N/A

Total 4.3 4.2 4.5 5.7 6.5 6.6

Source: Company, DBS Bank

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BreadTalk Group Ltd

Income Statement (S$m) Margins Trend

FY Dec 2013A 2014A 2015A 2016A 2017F 2018F 7.0%

6.0%
Revenue 537 590 624 615 643 673
5.0%
Cost of Goods Sold (252) (279) (294) (278) (283) (296)
4.0%
Gross Profit 285 311 330 337 360 377
Other Opng (Exp)/Inc (262) (286) (298) (305) (318) (332) 3.0%

Operating Profit 22.9 24.9 32.6 32.5 41.9 44.4 2.0%

Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 0.0 1.0%
2014A 2015A 2016A 2017F 2018F
Associates & JV Inc 0.83 9.50 (1.3) (0.8) 0.87 0.92 Operating Margin % Net Income Margin %

Net Interest (Exp)/Inc (1.4) (1.7) (1.3) (4.8) (4.8) (3.9)

CHIJMES, Carl’s Jr China
Exceptional Gain/(Loss) 0.0 0.0 (4.6) 2.80 9.30 0.0
and Jumbo. Expect less
Pre-tax Profit 22.4 32.8 25.4 29.7 47.2 41.4 drag from Carl’s Jr.
Tax (6.3) (6.8) (10.8) (12.1) (10.9) (9.5)
Minority Interest (2.5) (3.9) (7.0) (6.2) (10.1) (8.8) Includes divestment gain of
111 Somerset.
Preference Dividend 0.0 0.0 0.0 0.0 0.0 0.0
Net Profit 13.6 22.2 7.60 11.4 26.3 23.0
Net Profit before Except. 13.6 22.2 12.2 8.63 17.0 23.0 Includes divestment gain of
112 Katong and
EBITDA 63.1 80.4 80.9 80.0 93.1 97.8 impairment of Foodcourt
Growth business in China.
Revenue Gth (%) 19.9 9.9 5.9 (1.5) 4.6 4.6
EBITDA Gth (%) 26.0 27.4 0.6 (1.1) 16.4 5.0 Includes S$3.2m write off
Opg Profit Gth (%) 23.1 8.7 30.8 (0.2) 28.7 6.0 for store closures
Net Profit Gth (Pre-ex) 13.3 63.0 (45.0) (29.2) 96.6 35.7
(%)
Margins & Ratio Rationalisation of stores
Gross Margins (%) 53.0 52.7 52.9 54.9 56.0 56.0
Opg Profit Margin (%) 4.3 4.2 5.2 5.3 6.5 6.6
Net Profit Margin (%) 2.5 3.8 1.2 1.9 4.1 3.4
Includes special dividend of
ROAE (%) 15.4 20.2 6.0 8.8 18.6 14.5 1.35 Scts
ROA (%) 3.3 4.4 1.4 2.1 4.8 4.0
ROCE (%) 6.9 6.2 5.2 5.4 9.1 9.1
No fixed dividend policy
Div Payout Ratio (%) 37.2 19.1 55.6 94.7 26.8 30.5
Net Interest Cover (x) 16.9 14.9 24.7 6.8 8.7 11.3

Source: Company, DBS Bank

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BreadTalk Group Ltd

Quarterly / Interim Income Statement (S$m) Revenue Trend

164 12%
FY Dec 3Q2015 4Q2015 1Q2016 2Q2016 3Q2016 4Q2016 162 10%
160
8%
Revenue 162 155 155 150 157 153 158
156
6%

Cost of Goods Sold (74.5) (72.3) (73.5) (67.4) (68.8) (67.8) 154
152
4%

2%

Gross Profit 87.2 82.8 81.1 82.4 88.5 85.5 150

0%
148

Other Oper. (Exp)/Inc (79.6) (68.5) (73.9) (75.7) (79.6) (75.8)

-2%
146
144 -4%

Operating Profit 7.60 14.4 (1.0) 10.3 13.2 9.71 142 -6%

3Q2014

4Q2014

1Q2015

2Q2015

3Q2015

4Q2015

1Q2016

2Q2016

3Q2016

4Q2016
Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 0.0
Associates & JV Inc (0.6) (0.7) (0.3) 0.0 0.56 (1.0) Revenue Revenue Growth % (QoQ)

Net Interest (Exp)/Inc (1.3) 0.79 (1.1) (1.5) (1.2) (0.9)

Exceptional Gain/(Loss) 0.0 (4.6) 8.19 (3.5) (4.3) 2.40
Pre-tax Profit 5.71 9.88 5.70 5.15 8.32 10.1 Includes write off of
Foodcourt business totalling
Tax (2.3) (5.6) (2.3) (2.2) (3.0) (4.7)
S$5-6m from 1Q16 to 3Q16
Minority Interest (1.8) (3.1) (1.0) (1.7) (2.1) (1.4)
Net Profit 1.57 1.15 2.45 1.31 3.26 4.02
Net profit bef Except. 1.57 5.74 (5.8) 4.85 7.50 1.63 Includes gain from sale of 112
EBITDA 18.8 25.9 11.4 21.9 25.9 20.4 Katong

Growth
Revenue Gth (%) 4.4 (4.1) (0.3) (3.1) 5.1 (2.6)
EBITDA Gth (%) 4.2 37.8 (55.8) 91.6 18.0 (21.2)
Opg Profit Gth (%) 46.1 89.0 (107.2) (1,086.7) 28.4 (26.3)
Net Profit Gth (Pre-ex) (45.7) 266.0 (200.2) (184.3) 54.8 (78.3)
(%)
Margins
Gross Margins (%) 53.9 53.4 52.5 55.0 56.3 55.8
Opg Profit Margins (%) 4.7 9.3 (0.7) 6.9 8.4 6.3
Net Profit Margins (%) 1.0 0.7 1.6 0.9 2.1 2.6

Source: Company, DBS Bank

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BreadTalk Group Ltd

Balance Sheet (S$m) Asset Breakdown

FY Dec 2013A 2014A 2015A 2016A 2017F 2018F

Net Fixed Assets 226 221 206 181 171 159

Invts in Associates & JVs 8.21 34.0 33.9 35.3 36.1 37.1
Other LT Assets 85.8 115 126 105 105 104
Cash & ST Invts 79.4 95.5 102 138 164 202
Inventory 10.0 10.6 9.88 9.81 9.99 10.5
Debtors 49.2 54.5 60.0 59.2 62.4 65.3
Other Current Assets 9.81 8.19 7.28 6.46 6.46 6.46
Total Assets 468 539 545 534 555 584

ST Debt 30.3 76.3 82.0 31.5 31.5 31.5

Creditor 103 97.7 94.1 86.8 91.9 96.2
Other Current Liab 80.3 89.1 86.2 99.8 99.8 99.8
LT Debt 138 121 120 150 136 136
Other LT Liabilities 12.9 15.7 16.8 14.5 14.5 14.5
Shareholder’s Equity 94.0 125 129 132 151 167 S$75m bond issuance
Minority Interests 10.0 13.2 17.2 19.9 30.0 38.8 4.9% coupon due 1
April 2019
Total Cap. & Liab. 468 539 545 534 555 584

Non-Cash Wkg. Capital (114) (113) (103) (111) (113) (114) Gearing resulted from
financing for building
Net Cash/(Debt) (89.1) (102) (99.6) (43.5) (3.0) 34.4 IHQ
Debtors Turn (avg days) 31.6 32.1 33.5 35.4 34.5 34.6
Creditors Turn (avg days) 166.1 156.8 143.3 144.1 140.1 140.9
Mainly from payment
Inventory Turn (avg days) 16.7 16.2 15.3 15.7 15.5 15.3 lag by franchisees.
Asset Turnover (x) 1.3 1.2 1.2 1.1 1.2 1.2 Otherwise a cash
Current Ratio (x) 0.7 0.6 0.7 1.0 1.1 1.2 based business

Quick Ratio (x) 0.6 0.6 0.6 0.9 1.0 1.2

Net Debt/Equity (X) 0.9 0.7 0.7 0.3 0.0 CASH
Net Debt/Equity ex MI (X) 0.9 0.8 0.8 0.3 0.0 CASH
Capex to Debt (%) 63.0 21.7 18.6 20.2 23.9 23.9

Source: Company, DBS Bank

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BreadTalk Group Ltd

Cash Flow Statement (S$m) Capital Expenditure

FY Dec 2013A 2014A 2015A 2016A 2017F 2018F S$m
44.0
43.0
Pre-Tax Profit 22.4 32.8 25.4 29.7 47.2 41.4 42.0
41.0
Dep. & Amort. 39.3 45.9 49.6 48.3 50.4 52.5 40.0
39.0
Tax Paid (7.6) (6.9) (6.9) (9.1) (10.9) (9.5) 38.0
37.0
Assoc. & JV Inc/(loss) (0.8) (9.5) 1.31 0.83 (0.9) (0.9) 36.0

Chg in Wkg.Cap. 16.9 6.00 0.42 10.2 1.71 0.95 35.0

34.0
Other Operating CF 2.28 5.02 (3.4) 9.20 0.0 0.0 33.0
2014A 2015A 2016A 2017F 2018F

Net Operating CF 72.5 73.3 66.5 89.2 87.6 84.4 Capital Expenditure (-)

Capital Exp.(net) (106) (42.9) (37.5) (36.7) (40.0) (40.0)

Other Invts.(net) (14.7) (22.1) (20.4) 16.3 0.0 0.0
Invts in Assoc. & JV (2.9) (5.0) (22.9) (2.8) 0.0 0.0
Div from Assoc & JV 0.0 0.75 1.19 0.46 0.0 0.0
Other Investing CF 1.34 (16.6) 21.7 (2.3) 0.0 0.0
Net Investing CF (122) (85.9) (57.9) (25.0) (40.0) (40.0) Capex to be similar to
Div Paid (3.7) (5.1) (4.2) (8.0) (7.0) (7.0) FY16
Chg in Gross Debt 72.5 28.6 3.60 (20.6) (14.0) 0.0
Capital Issues 0.0 (0.6) (0.7) 0.0 0.0 0.0
Other Financing CF (3.7) (4.4) (8.7) (9.6) 0.0 0.0
Net Financing CF 65.1 18.5 (10.0) (38.2) (21.0) (7.0)
Currency Adjustments 0.0 (1.0) 0.82 (0.4) 0.0 0.0
Chg in Cash 15.2 4.94 (0.6) 25.7 26.5 37.4
Opg CFPS (S cts) 19.8 23.9 23.5 28.1 30.5 29.7 Repaid S$14m debt for
Free CFPS (S cts) (12.0) 10.8 10.3 18.7 16.9 15.8 111 Somerset
investment
Source: Company, DBS Bank

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BreadTalk Group Ltd

DBS Bank recommendations are based an Absolute Total Return* Rating system, defined as follows:
STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)
BUY (>15% total return over the next 12 months for small caps, >10% for large caps)
HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)
FULLY VALUED (negative total return i.e. > -10% over the next 12 months)
SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)
Share price appreciation + dividends

Completed Date: 4 Apr 2017 08:27:48 (SGT)

Dissemination Date: 4 Apr 2017 08:55:07 (SGT)

GENERAL DISCLOSURE/DISCLAIMER
This report is prepared by DBS Bank Ltd. This report is solely intended for the clients of DBS Bank Ltd, its respective connected and associated
corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii)
redistributed without the prior written consent of DBS Bank Ltd.

The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS
Bank Ltd, its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively,
the “DBS Group”) have not conducted due diligence on any of the companies, verified any information or sources or taken into account any other
factors which we may consider to be relevant or appropriate in preparing the research. Accordingly, we do not make any representation or
warranty as to the accuracy, completeness or correctness of the research set out in this report. Opinions expressed are subject to change without
notice. This research is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific
investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees
only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial
advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit)
arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This document is not
to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or persons
associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group, may have
positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and
other banking services for these companies.

Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can
be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments.
The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed, it may
not contain all material information concerning the company (or companies) referred to in this report and the DBS Group is under no obligation to
update the information in this report.

This publication has not been reviewed or authorized by any regulatory authority in Singapore, Hong Kong or elsewhere. There is no planned
schedule or frequency for updating research publication relating to any issuer.

The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and
assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on
which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual
results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED
UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that:

(a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and
(b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk
assessments stated therein.

Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets.
Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies)
mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the
commodity referred to in this report.

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 Company Guide
BreadTalk Group Ltd

DBSVUSA, a US-registered broker-dealer, does not have its own investment banking or research department, has not participated in any public
offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months and does not engage
in market-making.

ANALYST CERTIFICATION
The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the
companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her
compensation was, is, or will be, directly or indirectly, related to specific recommendations or views expressed in the report. The research analyst (s)
primarily responsible for the content of this research report, in part or in whole, certifies that he or his associate1 does not serve as an officer of the
issuer or the new listing applicant (which includes in the case of a real estate investment trust, an officer of the management company of the real
estate investment trust; and in the case of any other entity, an officer or its equivalent counterparty of the entity who is responsible for the
management of the issuer or the new listing applicant) and the research analyst(s) primarily responsible for the content of this research report or
2
his associate does not have financial interests in relation to an issuer or a new listing applicant that the analyst reviews. DBS Group has
procedures in place to eliminate, avoid and manage any potential conflicts of interests that may arise in connection with the production of
research reports. The research analyst(s) responsible for this report operates as part of a separate and independent team to the investment
banking function of the DBS Group and procedures are in place to ensure that confidential information held by either the research or investment
banking function is handled appropriately. There is no direct link of DBS Group's compensation to any specific investment banking function of the
DBS Group.

COMPANY-SPECIFIC / REGULATORY DISCLOSURES

1. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates do not have a proprietary
position in the securities recommended in this report as of 28 Feb 2017.
2. Neither DBS Bank Ltd, DBS HK nor DBSV HK market makes in equity securities of the issuer(s) or company(ies) mentioned in this Research
Report.

Compensation for investment banking services:

3. DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a
manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further
information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document
should contact DBSVUSA exclusively.

Disclosure of previous investment recommendation produced:

4. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates may have published other
investment recommendations in respect of the same securities / instruments recommended in this research report during the preceding 12
months. Please contact the primary analyst listed in the first page of this report to view previous investment recommendations published by
DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates in the preceding 12 months.

1
An associate is defined as (i) the spouse, or any minor child (natural or adopted) or minor step-child, of the analyst; (ii) the trustee of a trust of
which the analyst, his spouse, minor child (natural or adopted) or minor step-child, is a beneficiary or discretionary object; or (iii) another person
accustomed or obliged to act in accordance with the directions or instructions of the analyst.
2
Financial interest is defined as interests that are commonly known financial interest, such as investment in the securities in respect of an issuer or a
new listing applicant, or financial accommodation arrangement between the issuer or the new listing applicant and the firm or analysis. This term
does not include commercial lending conducted at arm's length, or investments in any collective investment scheme other than an issuer or new
listing applicant notwithstanding the fact that the scheme has investments in securities in respect of an issuer or a new listing applicant.

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BreadTalk Group Ltd

RESTRICTIONS ON DISTRIBUTION
General This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or
located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be
contrary to law or regulation.

Australia This report is being distributed in Australia by DBS Bank Ltd. (“DBS”) or DBS Vickers Securities (Singapore) Pte Ltd
(“DBSVS”), both of which are exempted from the requirement to hold an Australian Financial Services Licence under the
Corporation Act 2001 (“CA”) in respect of financial services provided to the recipients. Both DBS and DBSVS are regulated
by the Monetary Authority of Singapore under the laws of Singapore, which differ from Australian laws. Distribution of this
report is intended only for “wholesale investors” within the meaning of the CA.

Hong Kong This report has been prepared by a person(s) who is not licensed by the Hong Kong Securities and Futures Commission to
carry on the regulated activity of advising on securities in Hong Kong pursuant to the Securities and Futures Ordinance
(Chapter 571 of the Laws of Hong Kong). This report is being distributed in Hong Kong and is attributable to DBS Vickers
Hong Kong Limited, a licensed corporation licensed by the Hong Kong Securities and Futures Commission to carry on the
regulated activity of advising on securities pursuant to the Securities and Futures Ordinance (Chapter 571 of the Laws of
Hong Kong).

For any query regarding the materials herein, please contact Paul Yong (CE. No. ASE988) at equityresearch@dbs.com.

Indonesia This report is being distributed in Indonesia by PT DBS Vickers Sekuritas Indonesia.

Malaysia This report is distributed in Malaysia by AllianceDBS Research Sdn Bhd ("ADBSR"). Recipients of this report, received from
ADBSR are to contact the undersigned at 603-2604 3333 in respect of any matters arising from or in connection with this
report. In addition to the General Disclosure/Disclaimer found at the preceding page, recipients of this report are advised
that ADBSR (the preparer of this report), its holding company Alliance Investment Bank Berhad, their respective connected
and associated corporations, affiliates, their directors, officers, employees, agents and parties related or associated with any
of them may have positions in, and may effect transactions in the securities mentioned herein and may also perform or seek
to perform broking, investment banking/corporate advisory and other services for the subject companies. They may also
have received compensation and/or seek to obtain compensation for broking, investment banking/corporate advisory and
other services from the subject companies.

Wong Ming Tek, Executive Director, ADBSR

Singapore This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) or DBSVS (Company Regn No.
198600294G), both of which are Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the
Monetary Authority of Singapore. DBS Bank Ltd and/or DBSVS, 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, DBS Bank Ltd accepts legal responsibility for the contents of the report to such persons
only to the extent required by law. Singapore recipients should contact DBS Bank Ltd at 6327 2288 for matters arising from,
or in connection with the report.

Thailand This report is being distributed in Thailand by DBS Vickers Securities (Thailand) Co Ltd. Research reports distributed are only
intended for institutional clients only and no other person may act upon it.

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BreadTalk Group Ltd

United This report is produced by DBS Bank Ltd which is regulated by the Monetary Authority of Singapore.
Kingdom
This report is disseminated in the United Kingdom by DBS Vickers Securities (UK) Ltd, ("DBSVUK"). DBSVUK is authorised
and regulated by the Financial Conduct Authority in the United Kingdom.

In respect of the United Kingdom, this report is solely intended for the clients of DBSVUK, its respective connected and
associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any
form or by any means or (ii) redistributed without the prior written consent of DBSVUK. This communication is directed at
persons having professional experience in matters relating to investments. Any investment activity following from this
communication will only be engaged in with such persons. Persons who do not have professional experience in matters
relating to investments should not rely on this communication.

Dubai This research report is being distributed by DBS Bank Ltd., (DIFC Branch) having its office at PO Box 506538, 3rd Floor,
Building 3, East Wing, Gate Precinct, Dubai International Financial Centre (DIFC), Dubai, United Arab Emirates. DBS Bank
Ltd., (DIFC Branch) is regulated by The Dubai Financial Services Authority. This research report is intended only for
professional clients (as defined in the DFSA rulebook) and no other person may act upon it.

United States This report was prepared by DBS Bank Ltd. DBSVUSA did not participate in its preparation. The research analyst(s) named
on this report are not registered as research analysts with FINRA and are not associated persons of DBSVUSA. The research
analyst(s) are not subject to FINRA Rule 2241 restrictions on analyst compensation, communications with a subject company,
public appearances and trading securities held by a research analyst. This report is being distributed in the United States by
DBSVUSA, which accepts responsibility for its contents. This report may only be distributed to Major U.S. Institutional
Investors (as defined in SEC Rule 15a-6) and to such other institutional investors and qualified persons as DBSVUSA may
authorize. Any U.S. person receiving this report who wishes to effect transactions in any securities referred to herein should
contact DBSVUSA directly and not its affiliate.

Other In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is intended only for qualified,
jurisdictions professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions.

DBS Bank Ltd

12 Marina Boulevard, Marina Bay Financial Centre Tower 3
Singapore 018982
Tel. 65-6878 8888
e-mail: equityresearch@dbs.com
Company Regn. No. 196800306E

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