DISCLOSURE APPENDIX CONTAINS ANALYST CERTIFICATIONS AND THE STATUS OF NON US ANALYSTS. FOR OTHER IMPORTANT DISCLOSURES, visit https://rave.credit-suisse.com/disclosures or call +1 (877) 291-2683 US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION ® Client-Driven Solutions, Insights, and Access 06 December 2013 Asia Pacific/Philippines Equity Research Restaurants Jollibee Foods Corporation (JFC.PS / JFC PM) INITIATION Great fast food comes at a price ■ Initiating coverage with OUTPERFORM and 20% total return potential upside. Rather than drawing the obvious conclusion that Jollibee is overvalued (history has proven this to be a questionable stance), our thesis is that ~20% EPS growth, positive surprise potential, higher returns, 40%+ FCF growth and higher cash distributions to shareholders cannot be underestimated. Jollibee is an immensely relevant consumer company where 11% of the Philippine population visits one of the company’s outlets every single week. ■ Three pillars to defining a superior consumer franchise. Empirical data supports that consistent EPS growth, high and rising excess returns, and financial prowess are the key criteria that determine whether consumer companies can trade at PEG ratios of 2.0-2.5x. Jollibee has among the best earnings growth track records, the highest and fastest rising excess returns and one of the best balance sheets and FCF generation profiles of NJA consumer companies. ■ Home is the foundation, abroad is the catalyst. The Philippines is our most preferred consumer market for 2014 because consumption growth can sustain at 1.5-2.0x higher than historical trends. We believe 80% of Jollibee’s sales growth will come from the Philippines over the next three years. By deploying excess capital behind ROIC-accretive expansion both home and abroad, the value of their existing franchise should rise by 16% annually. In addition, we believe there is >50% probability that the company enters Indonesia, which would be incremental to earnings and is not factored into today’s share price. ■ Upside driven by earnings growth. We have a high degree of confidence in our above-consensus EPS forecasts and that this will drive share price gains from here. Our P205 target price assumes flat multiples. Downside risks include macroeconomic, forex, acquisition and natural disaster risks. Share price performance 80 100 120 140 160 80 130 180 Dec-11 Apr-12 Aug-12 Dec-12 Apr-13 Aug-13 Price (LHS) Rebased Rel (RHS) The price relative chart measures performance against the PHILIPPINE SE COMPOSITE INDEX which closed at 6030.95 on 05/12/13 On 05/12/13 the spot exchange rate was P43.86/US$1 Performance Over 1M 3M 12M Absolute (%) -2.0 5.8 64.2 Relative (%) 5.5 4.8 58.1 Financial and valuation metrics Year 12/12A 12/13E 12/14E 12/15E Revenue (P mn) 71,059.0 80,688.9 91,710.7 104,100.4 EBITDA (P mn) 7,052.1 8,512.7 9,943.8 11,673.9 EBIT (P mn) 4,346.5 5,505.6 6,595.1 8,234.7 Net profit (P mn) 3,728.2 4,601.0 5,439.0 6,723.5 EPS (CS adj.) (P) 3.51 4.34 5.13 6.34 Change from previous EPS (%) n.a. Consensus EPS (P) n.a. 4.31 5.03 5.90 EPS growth (%) 13.5 23.4 18.2 23.6 P/E (x) 49.5 40.1 33.9 27.5 Dividend yield (%) 1.3 1.4 1.8 2.3 EV/EBITDA (x) 25.5 21.1 18.0 15.0 P/B (x) 9.8 8.8 8.0 7.2 ROE (%) 20.5 23.2 24.8 27.6 Net debt/equity (%) net cash net cash net cash net cash Source: Company data, Thomson Reuters, Credit Suisse estimates. Rating OUTPERFORM* Price (05 Dec 13, P) 174.00 Target price (P) 205.00¹ Upside/downside (%) 17.8 Mkt cap (P mn) 183,112 (US$ 4,175) Enterprise value (P mn) 179,459 Number of shares (mn) 1,052.37 Free float (%) 40.9 52-week price range 185.0 - 102.0 ADTO - 6M (US$ mn) 2.6 *Stock ratings are relative to the coverage universe in each analyst's or each team's respective sector. ¹Target price is for 12 months. Research Analysts Karim P. Salamatian, CFA 852 2101 7996 [email protected]Rebecca Kwee 852 2101 7951 [email protected]
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DISCLOSURE APPENDIX CONTAINS ANALYST CERTIFICATIONS AND THE STATUS OF NON US ANALYSTS. FOR OTHER IMPORTANT DISCLOSURES, visit https://rave.credit-suisse.com/disclosures or call +1 (877) 291-2683 US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION®
Client-Driven Solutions, Insights, and Access
06 December 2013
Asia Pacific/Philippines
Equity Research
Restaurants
Jollibee Foods Corporation
(JFC.PS / JFC PM) INITIATION
Great fast food comes at a price
■ Initiating coverage with OUTPERFORM and 20% total return potential
upside. Rather than drawing the obvious conclusion that Jollibee is
overvalued (history has proven this to be a questionable stance), our thesis
is that ~20% EPS growth, positive surprise potential, higher returns, 40%+
FCF growth and higher cash distributions to shareholders cannot be
underestimated. Jollibee is an immensely relevant consumer company
where 11% of the Philippine population visits one of the company’s outlets
every single week.
■ Three pillars to defining a superior consumer franchise. Empirical data
supports that consistent EPS growth, high and rising excess returns, and
financial prowess are the key criteria that determine whether consumer
companies can trade at PEG ratios of 2.0-2.5x. Jollibee has among the best
earnings growth track records, the highest and fastest rising excess returns
and one of the best balance sheets and FCF generation profiles of NJA
consumer companies.
■ Home is the foundation, abroad is the catalyst. The Philippines is our most
preferred consumer market for 2014 because consumption growth can sustain
at 1.5-2.0x higher than historical trends. We believe 80% of Jollibee’s sales
growth will come from the Philippines over the next three years. By deploying
excess capital behind ROIC-accretive expansion both home and abroad, the
value of their existing franchise should rise by 16% annually. In addition, we
believe there is >50% probability that the company enters Indonesia, which
would be incremental to earnings and is not factored into today’s share price.
■ Upside driven by earnings growth. We have a high degree of confidence
in our above-consensus EPS forecasts and that this will drive share price
Net cash 6,181 3,936 1,035 3,421 3,653 3,887 7,732 11,683
Net cash-to-equity 38.0% 22.3% 5.1% 15.6% 15.3% 14.9% 26.8% 36.8%
Source: Company data, Credit Suisse estimates
First, the order of business will be returning cash to shareholders as we assume dividends
grow at 25% annually from 2013E to 2016E. That being said, given the cash on the
balance sheet, there is the potential for positive dividend surprises. The dividend pay-out
ratio could exceed our 75% assumption in 2015.
Second, we believe there is over 50% possibility for a large-scale acquisition in the next
12-24 months. The company is looking to enter the highly appealing Indonesian market by
acquiring a local player(s) in much the same way it did in China and Vietnam. Such an
acquisition could be incremental to ROIC over 2-3 years, and justify deploying the capital.
We believe a new large-scale driver of higher earnings growth over the long term would
clearly be positive for the multiple argument on Jollibee shares.
Free cash flow generation is
vital for consumer
franchises to grow
Jollibee generates enough
FCF to maintain a net cash
balance while increasing its
asset and store base by
41% and 60% since 2009
FCF is expected to grow 2x
faster than earnings over
the next three years
Jollibee’s strong balance
sheet can support positive
dividend surprises
High probability that Jollibee
makes an acquisition in
Indonesia
06 December 2013
Jollibee Foods Corporation
(JFC.PS / JFC PM) 10
Maximising returns from existing formats The majority of Jollibee’s EPS growth is expected to be derived from rising EBITDA
margins over the next four years, which essentially translates into extracting greater
productivity from the existing store base of 2,800 and deployed capital base of nearly
US$650 mn.
Figure 15: Attribution of Jollibee’s EPS growth % of total EPS growth coming from SSSG, new stores and EBITDA margins expansion. Figure in bold is YoY EPS growth
26%44% 34% 42%
7%
15% 11% 13%
67%41%
55%
45%
FY13E FY14E FY15E FY16E
SSSG Store growth EBITDA Margin Expansion
23%
18%
24%
18%
Source: Credit Suisse estimates
Store profitability drives franchise value and
supports valuation
Positive relationship between EBITDA/store and EV/store
Maximising store profitability (commonly measured as EBITDA/store) is critical for
foodservice businesses, as investors tend to reward foodservice businesses that succeed
at increasing EBITDA/store. Figure 16 shows a strong (R-square = 0.99) positive
relationship between EBITDA/store and EV/store for regional and global foodservice
operators. Jollibee is on the trend line, meaning that the market is appropriately paying for
Jollibee’s store/outlet productivity levels. This relationship is exponential, so as profitability
per store increases, EV/store should rise at a quicker rate. This is evident in historical
precedents for both Jollibee and foreign foodservice operators.
The key driver of Jollibee’s growth and valuation will come from leveraging greater
profitability from existing stores. From 2012 to 2016E, we expect EBITDA per store to
increase by 11% annually from US$63,000 to US$96,000.
Rising EBITDA margins
from harvesting existing
assets will be key driver of
EPS growth
Key driver of enterprise
value is productivity—
EBITDA/store
EBITDA/store to increase
11% annually from 2012 to
2016E
06 December 2013
Jollibee Foods Corporation
(JFC.PS / JFC PM) 11
Figure 16: Strong positive relationship between EBITDA/store and EV/store for
foodservice operators 2013E EBITDA/ avg. store (log scale) vs EV/ avg. store, US$ mn
Jollibee
Chipotle
McDonald'sWendy's
Yum!
Jubilant
CDCAjisen
Tsui Wah
Domino's0
5
10
15
20
25
30
35
40
0.0 0.1 1.0
EV
/avg
. sto
re (
US
Dm
)
EBITDA/avg. store (USDm)
R²=0.99
Source: Company data, Credit Suisse estimates
Figure 17: Jollibee has productivity levels in line with
most peers … 2013E EBITDA/ avg. store, US$ mn
Figure 18: …suggesting significant upside potential in
enterprise value as productivity rises 2013E EV/ avg. store, US$ mn
0.030.06 0.07 0.08 0.09 0.09
0.20
0.29
0.42
0.51 0.67 0.88 1.34 1.58 2.46 3.09 3.10
10.90
32.39
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Historical precedents show that EBITDA/store growth drives multiple expansion
Figure 19 and Figure 20 break down the growth in EV/store for Chipotle and Yum! Brands,
which have experienced EV/store CAGRs of 33% and 26%, respectively, over the last two
years. For Chipotle, 22% of the EV/store appreciation from 2010-12 was driven by
EBITDA/store CAGR of 8%, with the remaining 78% from multiple expansion of 25%
CAGR. Similarly, for Yum! Brands 39% of EV/store growth was due to EBITDA/store
CAGR of 11%, while 61% was driven by multiple expansion of 15% CAGR.
Developed market
precedents show that when
EBITDA/store rises,
EV/store increases at a
quicker pace
06 December 2013
Jollibee Foods Corporation
(JFC.PS / JFC PM) 12
Figure 19: Chipotle breakdown in EV/store expansion
(2010-12)
Figure 20: Yum! Brands breakdown in EV/store expansion
(2010-12)
$4.43
$0.76
$2.70
$7.89
2010 EV per
store
EV gain - from
higher profit
EV gain - from
multiple
expansion
2012 EV per
store
(in USDm)
8% EBITDA
CAGR
25% multiple
CAGR
$0.56
$0.08
$0.19
$0.82
2010 EV per
store
EV gain - from
higher profit
EV gain - from
multiple
expansion
2012 EV per
store
(in USDm)
7% EBITDA
CAGR
15% multiple
CAGR
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
From the above examples it is clear that for companies that successfully increase store
profitability in a sustainable manner, valuation increases by an even greater degree. Thus,
the relationship between EBITDA/store and EV/store is not just a linear correlation but an
exponential one, and companies at the early stages of the trend line such as Jollibee have
a lot of incentive to focus on store profitability in order to warrant exponential growth in
enterprise value.
Market has already begun to reward Jollibee’s productivity improvements … more
to come
Jollibee’s per store valuation has increased by 35% in the last two years, triggered by 15%
improvement in store level profitability Figure 21. This confirms our view that investors
respond positively to EBITDA/store growth and suggests that further increases in
productivity for the firm can continue to drive higher shareholder value.
Figure 21: Jollibee’s recent re-rating has been triggered by EBITDA/store improvement Jollibee breakdown in EV/store expansion (2011-current)
$0.87
$0.27
$0.44
$1.58
2011 EV per store EV gain - from higher
profit
EV gain - from multiple
expansion
Current EV per store
(in USDm)
14.5% EBITDA CAGR
20.6% multiple CAGR
Source: Company data, Credit Suisse estimates
Rises in EBITDA/store have
an exponential impact on
enterprise value
Market has already
rewarded JFC’s 15%
increase in EBITDA/store,
but there is more to come
06 December 2013
Jollibee Foods Corporation
(JFC.PS / JFC PM) 13
Jollibee’s path to improved profitability
The key drivers to Jollibee’s store level profitability rising are strong domestic demand and
traffic growth in the Philippines (accounting for 80% of growth going forward), optimising
the format/concept portfolio, achieving greater scale in China, achieving profitability in
SuperFoods Group (Vietnam) and more efficient back-end/IT. We expect these drivers to
lead to 140 bp EBITDA margin expansion over the next four years. Interestingly, our
2016E EBITDA margin forecast of 11.3% is below the 2007 peak of 11.7%. Jollibee is a
superior operator today with more scale, so by capitalising on the existing assets, EBITDA
margin upside potential is a reality.
Optimising brand portfolio in the Philippines
With a portfolio of six brands in the Philippines, Jollibee has a wide exposure to the overall
2011 54% 66 0.6x 2011 P/B Philippines Burger King: Sole franchisee of the brand in
the Philippines
To gain presence in premium price segment
of hamburger category in fast food market
Chow Fun Holdings 2011 80.55% (from
13.89%)
140 8x 2011 P/B USA Jinja Bar and Bistro: Asian casual
restaurant chain in New Mexico, USA
To enhance capability in developing Asian
restaurant concepts for mainstream
consumers in the USA
Mang Inasal 2010 70% 2,976 15.3x 2010 P/E; 3.1x
2010 P/B
Philippines Mang Inasal: Filipino fast food Apply JFC's scale and know-how to increase
Mang Inasal's sales, store network, and
operational efficiency
Hong Zhuang Yuan 2008 100% 2,648 17.6x 2008 P/B China Hong Zhuang Yuan: congee chain
restaurant in China
To expand QSR exposure in China, to be
leader in category between fast casual and
casual restaurants
Source: Company data, Credit Suisse estimates
06 December 2013
Jollibee Foods Corporation
(JFC.PS / JFC PM) 21
Capitalising on the best growth markets The foodservice industry is underpenetrated in emerging Asia, as category spending per
capita in the region is 85% lower than that of developed Asia. The reason behind the
disproportionately lower spending levels is significantly lower GDP/capita, wealth levels and
urbanisation rates. This is set to change as urbanisation and wealth in emerging Asia is
projected to grow ahead of developed peers, leading to accelerating consumption growth
and upside potential for the foodservice industry. The foodservices market size in emerging
Asia is expected grow 7.1% CAGR over the next five years, compared to a 1.5% CAGR for
developed Asia. Jollibee is well positioned to benefit from accelerated spending in the region
as it has 79% of outlets in the Philippines and 15% in China, with optionality in Vietnam.
Increasing outlet penetration drives spending per
capita … but not in all markets
There is a direct linear relationship between total foodservice market size and number of
foodservice outlets, but the relationship between per capita spending vs outlets per capita
is slightly more complicated. Saturation can start to occur at 8-10 outlets per 1,000 people,
but the only Asian market seeing this potentially is Korea (Figure 35 and Figure 36). For
countries oversaturated with QSR outlets, incremental sales per outlet starts to decline for
reasons such as cannibalisation, consumers upgrading to different dining formats, etc.
Nevertheless, countries at the start of the curve will still experience acceleration in food
service spending/capita as outlets/capita rise due to under-penetration.
Thus, industry growth can be broken down to two types:
(1) Outlet-driven growth: Increase in spending per capita due to higher penetration of outlets.
(2) Narrowing the gap: In countries such as China where the market is at risk of being
saturated relative to demand (hence lying below the curve), more outlets/capita will not
drive incremental spending growth. Instead, demand will have to catch up and “narrow
the gap” and this will be due more to factors such as urbanisation and discretionary
income growth.
Figure 35: Philippines, China and Vietnam below the curve in food service spending per
capita relative to outlet penetration Food service outlets/1,000 persons vs food service spending/capita (USD), 2012. Red markers denote markets where Jollibee is present
Philippines
China
Hong Kong
IndiaIndonesia
Japan
Malaysia
Singapore
South Korea
Thailand Vietnam
Australia
Russia
Brazil
USA
France
Germany
UK
0
500
1,000
1,500
2,000
2,500
0 2 4 6 8 10 12
Fo
od
serv
ice s
pend
ing
/cap
ita (
US
D)
Food service outlets/1,000 persons
R²=0.23
Source: World Bank, Euromonitor
Key drivers of foodservice
penetration are incomes,
wealth and urbanisation
Outlet expansion is the
leading driver of higher per
capita spending on
foodservice
06 December 2013
Jollibee Foods Corporation
(JFC.PS / JFC PM) 22
Figure 36: Fast food spending per capita relative to outlet penetration is similarly low in
emerging Asian countries Fast food outlets/1,000 persons vs fast food spending/capita (US$), 2012. Red markers denote markets where Jollibee is present
Philippines China
Hong Kong
IndiaIndonesia
Japan
Malaysia
SingaporeSouth Korea
Thailand
Vietnam
Australia
Russia
Brazil
USA
France
Germany
UK
0
100
200
300
400
500
600
700
0.0 0.2 0.4 0.6 0.8 1.0 1.2
Fast
foo
d s
pend
ing
/cap
ita (
US
D)
Fast food outlets/1,000 persons
R²=0.38
Source: World Bank, Euromonitor
With the exception of China, foodservice outlets in emerging Asia are underpenetrated
Compared to developed Asian markets such as Australia, Japan, Hong Kong and
Singapore, penetration of total foodservice outlets and fast food outlets in emerging Asia is
54% and 59% lower respectively (Figure 37 and Figure 38). The only exceptions are
Vietnam and China, where the high penetration of food service outlets despite lower
spending/capita can be attributed to highly penetrated street stalls segment (although fast
food outlet penetration in Vietnam remains low). Not surprisingly, the under-penetration in
the region is reflected by lower spending per capita, as spending on foodservices
(cafes/bars, full service foodservices, fast food, street stalls, etc) per capita in developing
markets is 85% lower on average. In the Philippines, where Jollibee has 79% of its stores,
foodservice spending per capita each year is the second lowest in the region at only
US$100 (Figure 39).
Figure 37: Foodservice outlets underpenetrated in most
emerging countries… Foodservice outlets/ 1,000 persons, 2012. Red bars denote markets where Jollibee is present
Figure 38: …with fast food outlet penetration following a
similar trend Fast food outlets/ 1,000 persons, 2012. Red bars denote markets where Jollibee is present
11.9
6.2 5.85.2 4.9
2.9 2.0 2.0 1.61.1 0.8 0.8
Avg: 3.8
1.2
1.0
0.8
0.6
0.4
0.3 0.20.110.09
0.060.060.02
Avg: 0.4
Source: World Bank, Euromonitor Source: World Bank, Euromonitor
Foodservice outlet
penetration and spending
per capital are 54% and
85% lower in EM Asia than
DM Asia
06 December 2013
Jollibee Foods Corporation
(JFC.PS / JFC PM) 23
Figure 39: Strong divergence in foodservice
spending/capita between developed and developing
markets Foodservice spending/capita (US$), 2012. Red bars denote markets where Jollibee is present
Figure 40: Fast food spending/capita in emerging markets
similarly underpenetrated Fast food spending/capita (US$), 2012. Red bars denote markets where Jollibee is present
2,1332,037
1,678
1,444
1,225
375 342 340 328158 100 76
Avg: 853
649
392
319
168 159
7948 38 30 12 7 5
Avg: 159
Source: World Bank, Euromonitor Source: World Bank, Euromonitor
Rising wealth and urbanisation key drivers to outlet
and spending growth
The key factors driving accelerating growth in the NJA foodservice industry will be rising
urbanisation and wealth, as there is a clear positive relationship between foodservice
spending per capita and both urbanisation rate and wealth per adult.
The income effect
There is a strong positive correlation between both foodservice spending/capita and fast
food spending/capita with GDP per capita (Figure 41 and Figure 42). Developing countries
in Asia are all clustered in the bottom left corner of the chart, with low levels of both
spending and GDP per capita, but as nations get wealthier and per capita income
increases, spending per capita also starts to increase. Thus, a key driver of rising
spending per capita in the food service industry for emerging countries (where Jollibee is
present) will be GDP/capita growth.
Incomes in Jollibee’s core
markets are expected to
grow by 8% p.a. on average
over the next five years
06 December 2013
Jollibee Foods Corporation
(JFC.PS / JFC PM) 24
Figure 41: GDP per capita highly correlated to not only food service spending per
capita…. Foodservice spending/capita/annum (US$) vs GDP per capita (US$). Red markers denote markets where Jollibee is present
Figure 42: ….but also fast food spending per capita Fast food spending/capita/annum (US$) vs GDP per capita (US$). Red markers denote markets where Jollibee is present
Figure 43 highlights the positive relationship between foodservice spending per capita and wealth per adult for emerging and developed countries globally. Low foodservices consumption in emerging Asia is also explained by significantly lower wealth per adult in the region, as average wealth per adult in emerging Asia is only 5.5% that of average wealth per adult in more developed Asia (Japan, Hong Kong, South Korea, Singapore, Australia). As per the Credit Suisse Global Wealth Report 2013, Credit Suisse expects the pace of wealth generation in emerging markets to continue to be greater than that of developed markets, with wealth growing by a 9% CAGR over 2013-18 for global emerging markets against 6% CAGR for developed markets. In particular, China is expected to be the fastest growing at 10% over the next five years. Accelerating wealth growth in emerging Asia over the next few years makes a convincing case that foodservice consumption in the region has significant growth potential.
Figure 43: Rising wealth per adult correlated with higher food service spending/capita…. Foodservice spending/capita/annum (US$) vs Wealth per adult (US$). Red markers denote markets where Jollibee is present
PH
CN
Hong Kong
ININDO
Japan
MY
SingaporeSouth Korea
TH
VN
Australia
Brazil
USA
France
Germany
United Kingdom
0
500
1,000
1,500
2,000
2,500
-50,000 50,000 150,000 250,000 350,000 450,000
Fo
od
se
rvic
e s
pe
nd
ing
pe
r cap
ita
(US
D)
Wealth per adult (USD)
R²=0.68
Source: World Bank, Euromonitor
The relationship with fast food spending is even stronger (to the detriment of wealthy countries’ waistlines) as Figure 44 highlights. Except for China, emerging Asian countries lie below the trend line, meaning that fast food spending relative to wealth is disproportionality low and leaves lots of room for “catch-up”. This supports our belief that the fast food industry remains underpenetrated in the region and significant upside exists from closing the gap.
Figure 44: …as well as higher fast food spending/capita Fast food spending/capita/annum (US$) vs Wealth per adult (US$). Red markers denote markets where Jollibee is present
PH
China
Hong Kong
India
Indonesia
Japan
Malaysia
Singapore
South Korea
Vietnam
Australia
Brazil
USA
FranceGermany
UK
0
100
200
300
400
500
600
700
0 100,000 200,000 300,000 400,000
Fast
foo
d s
pend
ing
/cap
ita (
US
D)
Wealth per adult (USD)
R²=0.71
Source: World Bank, Euromonitor
Fast food and urbanisation go together like burgers and fries
As urbanisation rises, penetration of fast food outlets increases and this drives per capita
spending toward fast food (Figure 45 and Figure 46). Urbanisation remains below 50% for
emerging Asian countries. There is still significant spending/capita upside as urbanisation
rates in developed countries can reach 80-100%. In the Credit Suisse report, Opportunities in
an urbanizing world, CS estimates Non-Japan Asia will urbanise from 40% of its population in
2010 to 63% in 2050, and that the region is closest to the urbanisation per capita GDP growth
sweet-spot, where countries achieve peak real GDP/capita growth of close to 6% when
urbanisation is in the range of 30-50%. As urbanisation and GDP/capita increase in NJA in the
next few years, food services consumption should also accordingly accelerate.
Jollibee’s core markets (the Philippines, China and Vietnam) are expected to see urbanisation
increase from an average of 42% currently to 67% in 2050, higher than the regional average.
Figure 45: Foodservice spending/capita accelerates as urbanisation rates rise Foodservice spending/capita/annum (US$) vs urban population as % of total. Red markers denote markets where Jollibee is present
Phlippines
China
Hong Kong
India Indonesia
Japan
Malaysia
Singapore
South Korea
ThailandVietnam
Australia
Russia
Brazil
USA
France
Germany
United Kingdom
0
500
1,000
1,500
2,000
2,500
0.0 20.0 40.0 60.0 80.0 100.0 120.0
Fo
od
se
rvic
e s
pe
nd
ing
pe
r cap
ita
(US
D)
Urban population as % of total
R²=0.62
Source: World Bank, Euromonitor
Figure 46: Fast food spending/capita accelerates as urbanisation rates rise Fast food spending/capita/annum (US$) vs Urban population as % of total. Red markers denote markets where Jollibee is present
Philippines
China
Hong Kong
India
Indonesia
Japan
Malaysia
Singapore
South Korea
Thailand
Vietnam
Australia
Russia
Brazil
USA
FranceGermany
UK
0
100
200
300
400
500
600
700
30 40 50 60 70 80 90 100
Fast
foo
d s
pe
nd
ing
/cap
ita (
US
D)
Urban population as % of total
R²=0.71
Source: World Bank, Euromonitor
Jollibee well positioned in countries with high
growth potential
With 79% of outlets in the Philippines and 15% in China, Jollibee has significant exposure to countries where growth potential in the foodservice industry is the highest. Figure 47 shows historical and forward CAGR in the foodservice industry. In the past five years, China’s foodservice market size has grown the fastest at 17.4% CAGR and is projected to see 8.9% CAGR over 2012-17, which is the third highest in Asia. The Philippines is also expected to grow at an above-average CAGR of 5.3% over the next five years, although we believe growth rates could be even higher as wealth growth in the country is expected
The Philippines, China and
Vietnam have low
urbanisation rates of 49%,
47% and 30%, respectively
China foodservice to
maintain high level of
growth, but the Philippines
presents best upside
surprise potential
06 December 2013
Jollibee Foods Corporation
(JFC.PS / JFC PM) 27
to be the highest in the region (Figure 49) and we expect private consumption expenditure growth to continue to exceed the NJA and ASEAN average over the next two years.
Jollibee also has 40 outlets in Vietnam (as of 3Q2013) plus its SuperFoods Group JV, where the food service industry is projected to grow at 9.4% CAGR over the next five years, the highest in the region. Further expansion in Vietnam should be a promising long-term growth driver in addition to growth in the Philippines and China.
Figure 47: Projected growth rates for the foodservice industry highest in Vietnam,
Indonesia and China Foodservice industry 5Y historical CAGR vs 5Y forward CAGR
5.7%
-2.4%
7.4%
3.4%
4.7%
6.9%
7.2%
6.2%
6.8%
17.4%
7.2%
6.1%
-3.6%
1.5%
2.3%
3.3%
4.0%
4.2%
5.0%
5.3%
7.9%
8.9%
9.0%
9.4%
Japan
South Korea
Australia
Hong Kong
Thailand
Singapore
Malaysia
Philippines
India
China
Indonesia
Vietnam
5Y forward CAGR 5Y historical CAGR
Source: Euromonitor
Fast food growth rates are expected to outpace those of the overall foodservice industry (Figure 48). This is because the former is more underpenetrated.
Figure 48: Fast food industry to grow faster than overall foodservice industry Fast food industry 5Y historical CAGR vs 5Y forward CAGR
10.6%
9.6%
10.6%
5.8%
3.5%
6.4%
13.7%
9.8%
9.1%
15.8%
17.7%
10.8%
11.5%
-1.5%
3.2%
4.5%
5.2%
5.4%
5.9%
6.1%
6.9%
8.5%
9.0%
9.3%
12.0%
14.3%
Japan
Australia
Singapore
Taiwan
South Korea
Hong Kong
Malaysia
Philippines
India
Thailand
China
Indonesia
Vietnam
5Y forward CAGR 5Y historical CAGR
Source: Euromonitor
In terms of income and urbanisation growth, Jollibee also has exposure to countries with
above-average income and urban population growth, and as higher income and
urbanisation are correlated to higher fast food spending per capita, this should drive
significant upside potential in sales over the next few years. Figure 49 shows that the
Philippines and China -- Jollibee’s biggest markets – have had the highest growth rates in
wealth per adult over the last three years. Going forward, GDP per capita growth is
expected to be the highest in Vietnam and China, which is positive for Jollibee's expansion
plans in these countries (Figure 50). Philippines’ forward GDP per capita growth is also
above average in the region at 7% p.a. The pace of urbanisation is projected to be the
fastest in Vietnam (Figure 51), where Jollibee has not only 40 Jollibee stores but also a
Jollibee has optionality in the highest growth market in the region
Fast food format trends are
stronger due to low
penetration
06 December 2013
Jollibee Foods Corporation
(JFC.PS / JFC PM) 28
joint venture, showing that it is investing heavily in areas of high growth potential as it
seeks to expand regionally.
Figure 49: High wealth growth in the Philippines and
China to drive foodservice spending Wealth per adult, 2010-13 CAGR (US$)
Figure 50: Vietnam, China and the Philippines have
among the highest forward GDP per capita growth –
positive implications for Jollibee GDP per capita historical vs forward growth
-3.9%
-3.3%
-1.3%
1.4%
1.5%
1.6%
1.7%
4.4%
5.6%
5.8%
6.1%
6.9%
14.2%
India
Taiwan
Japan
Indonesia
Malaysia
Vietnam
South Korea
Thailand
Singapore
Hong Kong
Australia
China
Philippines
14%
20%
10%12%
4%
10%
16%
10%
9% 8%7% 7% 6%
4%3% 3%
7yr historical CAGR 5yr forward CAGR
Source: Credit Suisse Global Wealth Report 2013 Source: IMF
Figure 51: Urbanising populations to drive Jollibee’s store and topline growth Change in % of population urbanised, 2010-50E (%), ranked by highest to lowest change
72
50
49
44
40
30
47
34
30
88
69
69
66
63
54
73
60
59
Malaysia
World
Philippines
Indonesia
Non-Japan Asia
India
China
Thailand
Vietnam
% population urbanized 2050E % population urbanized 2010
Source: United Nations, Credit Suisse Emerging Market Research Institute
Competitive landscape
Domestic segment: Resilience at the top
Jollibee is the biggest player in the Philippine QSR industry, with a portfolio of six brands
(Jollibee, Greenwich Pizza, Red Ribbon, Chowking, Burger King and Mang Inasal) and a
market share of 58% (Figure 52). The company’s leading position domestically is a rare
success story considering that in almost every APAC country, the top two players in the
QSR industry are either McDonald’s or Yum! Brands. Management’s success at execution
and growing its portfolio has led to continued resilience in market share, with 3x the
market share of #2 McDonald’s (Figure 53). While the company has lost ~30 bp share to
Philippines is one of very
few EMs where the leader is
local rather than McDonald’s
or YUM! Brands
06 December 2013
Jollibee Foods Corporation
(JFC.PS / JFC PM) 29
McDonald’s in the last two years, we are not too concerned as Jollibee’s sales and store
network remains 3.2x and 5.6x bigger than McDonald's, respectively.
Figure 52: Jollibee is the indisputable leader in the
Sales/avg store (USDm, 2013E) 0.71 5.59 0.62 0.50 1.85
EBITDA/avg store (USDm, 2013E) 0.08 0.94 0.09 0.09 0.30
Avg check size (USD) 3.72 30.54 6.90 n/a
*comparable gross margin: adjusted COGS (only incl. cost of inventories) and excluding commisary sales to franchises Note: Priced as of Dec 5 2013
Source: Company data, Credit Suisse estimates
06 December 2013
Jollibee Foods Corporation
(JFC.PS / JFC PM) 34
Investment risks The company’s business involves a number of risks, some of which are listed below:
Macroeconomic
As 80% of Jollibee’s system-wide sales and revenues come from the Philippines, its
business is significantly influenced by the economic, political and social environment in the
country. Our model assumes that domestic system-wide sales will grow at 13% p.a. over
the next three years, driven by real private consumption growth of 6% p.a. Our economist
also forecasts CPI inflation to increase 3-4% per year. Any adverse change in the
Philippines’ economic condition could affect consumer sentiment, purchasing power and
spending patterns and have a negative impact on consumer demand for Jollibee’s
products and lead to downside risks in our revenue and earnings estimates.
Foreign currency exchange
Jollibee has significant foreign currency exchange risks as 20% of its revenues are from
abroad (primarily China, US and Vietnam), and FX exposure is expected to increase as
revenue growth from its international operations accelerates. As the company’s reporting
currency is the Philippines Peso, any significant change in the RMB, USD, or VND is likely
to change the company’s cost and revenue structures, leading to both upside and
downside risks to our earnings estimates.
Acquisition
The company has made significant acquisitions and joint ventures in the past 3-4 years,
and we expect acquisitions to continue as Jollibee seeks to expand both its brand portfolio
and its regional presence. Therefore there are risks relating to any potential acquisition
activity—risk of capital raising to fund investments, execution risk, and risk of overpaying
for acquisition targets.
Natural disaster
As a country prone to multiple typhoons a year, the Philippines faces significant natural
disaster risks, and Jollibee’s national presence is prone to business disruption.
Management stated that the overall impact of Typhoon Yolanda on 4Q13 results was
estimated to be manageable, as property damage sustained on company-owned stores
was insignificant and was covered by insurance. As of 13 November 2013, 23 stores
mostly in Leyte and Samar remained closed due to property damage and disruption of
product supply. While these stores represent only 1.1% of the JFC Group’s total store
network in the Philippines, management remains uncertain when the stores will re-open.
06 December 2013
Jollibee Foods Corporation
(JFC.PS / JFC PM) 35
Companies Mentioned (Price as of 05-Dec-2013)
Ajisen (0538.HK, HK$7.5) Alliance Global Group Inc (AGI.PS, P24.3) Belle Corporation (BEL.PS, P5.27) Bloomberry Resorts Corporation (BLOOM.PS, P9.87) Cafe De Coral (0341.HK, HK$25.55) Central Plaza Hotel PCL (CENT.BK, Bt36.0) Chipotle Mexican (CMG.N, $518.11) Colgate-Palmolive India (COLG.BO, Rs1259.4) Dominos Pizza (DPZ.N, $68.71) ITC Ltd (ITC.BO, Rs308.9) Jollibee Foods Corporation (JFC.PS, P174.0, OUTPERFORM, TP P205.0) Jubilant Foodworks (JUBI.BO, Rs1363.65) McDonald's Corp (MCD.N, $95.71) Minor International PCL (MINT.BK, Bt24.0) Mitra Adiperkasa (MAPI.JK, Rp5,350) Nestle (NESN.VX, SFr64.5) Nestle India (NEST.BO, Rs5077.5) PepsiCo, Inc. (PEP.N, $82.65) Procter & Gamble Co. (PG.N, $83.35) Puregold Price Club, Inc (PGOLD.PS, P41.6) Seven & i Holdings (3382.T, ¥3,740) Starbucks (SBUX.OQ, $79.5) The Wendy's Company (WEN.OQ, $8.54) Tsui Wah Holding (1314.HK, HK$5.4) Universal Robina Corp. (URC.PS, P119.1) Wal-Mart Stores, Inc. (WMT.N, $80.22) Yum! Brands, Inc. (YUM.N, $75.66)
Disclosure Appendix
Important Global Disclosures
I, Karim P. Salamatian, CFA, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities
As of December 10, 2012 Analysts’ stock rating are defined as follows:
Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months.
Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months.
Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months.
*Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the les s attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non -Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; Austr alia, New Zealand are, and prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s cove rage universe. For Australian and New Zealand stocks, 12-month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively. Prior to 10th December 2012, Japanese ratings were based on a stock’s total return relative to the average total return of the relevant country or regional benchmark.
Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances.
Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.
Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation:
Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months.
Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months.
Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months.
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Jollibee Foods Corporation
(JFC.PS / JFC PM) 36
*An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. A n analyst may cover multiple sectors.
Credit Suisse's distribution of stock ratings (and banking clients) is:
Global Ratings Distribution
Rating Versus universe (%) Of which banking clients (%)
Outperform/Buy* 42% (54% banking clients)
Neutral/Hold* 41% (49% banking clients)
Underperform/Sell* 15% (41% banking clients)
Restricted 3%
*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, an d Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative bas is. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.
Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein.
Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research and analytics/disclaimer/managing_conflicts_disclaimer.html
Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties.
Price Target: (12 months) for Jollibee Foods Corporation (JFC.PS)
Method: Our 12-month target price of PHP205 for Jollibee Foods Corporation is based on the average of: (1) P/E (price-to-earnings) multiple (40x 2014E EPS and 33x 2015E EPS) of PHP209/share; (2) EV/EBITDA (enterprise value-to-earnings before interest, depreciation and amortisation) multiple (21x 2014E EV/EBITDA and 18x 2015E EV/EBITDA) of PHP207/share and (3) DCF (discounted cash flow) value of PHP202/share (8.2% WACC, 10x EBITDA terminal value, 11% FCF CAGR)
Risk: Risks that could impede achievement of our target price of PHP205 for Jollibee Foods Corporation include: macroeconomic risks that would have a negative impact on consumer demand, foreign currency exchange risk (20% of JFC's revenues are from abroad), acquisition risk, and natural disaster risks.
Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections.
See the Companies Mentioned section for full company names
The subject company (CMG.N, MCD.N, NESN.VX, PG.N, PEP.N, WMT.N, URC.PS, BEL.PS, MINT.BK, MAPI.JK, 3382.T, NEST.BO) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse.
Credit Suisse provided investment banking services to the subject company (CMG.N, MCD.N, NESN.VX, PG.N, WMT.N, URC.PS, MINT.BK, NEST.BO) within the past 12 months.
Credit Suisse provided non-investment banking services to the subject company (MCD.N, NESN.VX, PG.N, PEP.N, WMT.N) within the past 12 months
Credit Suisse has managed or co-managed a public offering of securities for the subject company (NESN.VX, PG.N, WMT.N, URC.PS, NEST.BO) within the past 12 months.
Credit Suisse has received investment banking related compensation from the subject company (CMG.N, MCD.N, NESN.VX, PG.N, WMT.N, URC.PS, MINT.BK, NEST.BO) within the past 12 months
Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (0538.HK, CMG.N, MCD.N, YUM.N, NESN.VX, PG.N, PEP.N, WMT.N, SBUX.OQ, URC.PS, BEL.PS, MINT.BK, MAPI.JK, 3382.T, NEST.BO, COLG.BO) within the next 3 months.
Credit Suisse has received compensation for products and services other than investment banking services from the subject company (MCD.N, NESN.VX, PG.N, PEP.N, WMT.N) within the past 12 months
As of the date of this report, Credit Suisse makes a market in the following subject companies (CMG.N, MCD.N, WEN.OQ, YUM.N, PG.N, PEP.N, WMT.N, SBUX.OQ).
As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (JUBI.BO, NESN.VX).
As of the date of this report, an analyst involved in the preparation of this report has the following material conflict of interest with the subject company (PG.N). An analyst or a member of the analyst's household has a long position in the common stock of (PG).
06 December 2013
Jollibee Foods Corporation
(JFC.PS / JFC PM) 37
As of the date of this report, an analyst involved in the preparation of this report has the following material conflict of interest with the subject company (PEP.N). A Credit Suisse analyst involved in the preparation of this report has a long position in the common stock of PEP.N
Important Regional Disclosures
Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report.
The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (JFC.PS, JUBI.BO, 1314.HK, 0538.HK, CMG.N, MCD.N, WEN.OQ, YUM.N, NESN.VX, PG.N, PG.N, PEP.N, WMT.N, SBUX.OQ, URC.PS, BLOOM.PS, BEL.PS, AGI.PS, PGOLD.PS, MINT.BK, MAPI.JK, 3382.T, ITC.BO, NEST.BO, COLG.BO) within the past 12 months
Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares.
Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report.
For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit http://www.csfb.com/legal_terms/canada_research_policy.shtml.
The following disclosed European company/ies have estimates that comply with IFRS: (NESN.VX).
Credit Suisse has acted as lead manager or syndicate member in a public offering of securities for the subject company (MCD.N, NESN.VX, PG.N, WMT.N, URC.PS, NEST.BO) within the past 3 years.
As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report.
Principal is not guaranteed in the case of equities because equity prices are variable.
Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that.
For Thai listed companies mentioned in this report, the independent 2013 Corporate Governance Report survey results published by the Thai Institute of Directors Association are being disclosed pursuant to the policy of the Office of the Securities and Exchange Commission: Central Plaza Hotel PCL (Very Good) , Minor International PCL (Excellent)
To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.
Credit Suisse (Hong Kong) Limited ...................................................................................................... Karim P. Salamatian, CFA ; Rebecca Kwee
For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at https://rave.credit-suisse.com/disclosures or call +1 (877) 291-2683.
06 December 2013
Jollibee Foods Corporation
(JFC.PS / JFC PM) 38
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Investment principal on bonds can be eroded depending on sale price or market price. In addition, there are bonds on which investment principal can be eroded due to changes in redemption amounts. Care is required when investing in such instruments.
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