OldTown gets thumbs up for more expansion in China
KUALA LUMPUR: OldTown Bhd (OldTown) has gotten approval for further expansion into China as the group has entered into a territorial licence agreement (TLA) through its indirect unit Shenzhen Kopitiam Asia Pacific Ltd (Szkap) with Xiamen Kuaike Investment Management Co. Ltd (Xiamen Kuaike) to operate in Shanghai, China.
In recent updates from AmInvestment Bank Bhd (AmInvestment Bank) and the research arm of Kenanga Investment Bank Bhd (Kenanga Research), the agreement which was announced on Wednesday is actually an extension to the earlier TLA agreement between Szkap and Xiamen Kuaike.
According to reports, the earlier TLA which was agreed to on March 30 is for the five-year license to operate café outlets in Fujian, with an option to renew for two consecutive terms of five years.
Besides adding Shanghai into the fray of locations for OldTown to operate restaurants under the ‘OldTown White Coffee’ brand, the new TLA extension also gives Xiamen Kuaike the first right of refusal to accept take-up territorial licences for Beijing and Guangdong.
Overall both analysts have expressed their positivity towards the breaking of the news as they both view expansion into the greater China market to be a much more fruitful endeavour than expansion in local markets plagued with cautious consumer spending.
“It makes business sense for the group to expand this segment by tapping into foreign markets where sentiment is more vibrant,” said Kennaga Research who added that group’s products have demonstrated promising demand growth as its FY17 fast moving consumer goods (FMCG) sales from the greater China region had registered a 46 per cent y-o-y increase to RM105.2 million.
In addition, AmInvestment Bank reckons the business environment in China is also more hospitable as the China licensed business model would provide OldTown opportunities for growth without the downside risk and capital intensive investments.
“The financial risk is solely borne by the licensee, and in return for its franchise, OldTown is expected to receive royalty from generated sales and other various territorial fees.
“We imagine OldTown to derive superior terms than those agreed with its Myanmar licensees,” guided the bank.
Despite the positive outlook on the development, both analysts are not expecting there to be any materially insignificant impact to OldTown’s earnings.
“However, we expect greater benefits to arise form it physical store presence and branding, creating advertising and promotional synergies for its e-commerce distribution channels to boost fast moving consumer goods (FMCG) sales,” added the bank.
With that said, Kenanga Research has decided to tweak its FY18-19E earnings up slightly by 1.7 to 1.8 per cent; while AmInvestment Bank will be maintaining its estimates for now.
Kenanga Research maintains its ‘Outperform’ rating on the stock with a slightly higher tagrte price (TP) of RM3.00, while AmInvestment Bank maintains its ‘Buy’ recommendation and fair value of RM3.20 per share.