Argus Research Initiates Equity Research Report Coverage on TH International Limited (NasdaqCM: THCH).

Rhea-AI Summary

Argus Research initiates coverage on TH International Limited (THCH) with a positive outlook on its expansion in China's fast-growing coffee market. THCH aims to triple its locations by 2026, has completed major investments in infrastructure, offers a unique product mix, and shows promising margin expansion and loyalty program growth.

Positive

• THCH expanding in China's coffee market since 2019.
• Plans to increase locations to over 2,700 by 2026.
• Completed significant investments in infrastructure.
• Offers differentiated product mix in the Chinese market.
• Store EBITDA margin expanded to 7.5% in Q3 2023.
• Loyalty program base grew over 90% to 18 million.

Negative

• None.

Insights

Market Research Analyst

The expansion of TH International Limited (THCH) in China's coffee market is a strategic move that capitalizes on the cultural shift towards coffee consumption in a traditionally tea-drinking society. The growth potential in this sector is significant, considering the size of China's population and increasing westernization of consumer tastes. THCH's aggressive expansion plan to nearly triple its number of locations by 2026 indicates a robust growth strategy that could potentially increase market share and strengthen brand presence in a competitive landscape.

Moreover, the reported improvement in store EBITDA margins, from 5% to 7.5%, is a strong indicator of operational efficiency and cost management. An expanding margin suggests that THCH is not only increasing its revenue but also becoming more profitable, which is a positive sign for investors. The growth of the loyalty program base by over 90% is also noteworthy as it reflects customer retention and the potential for recurring revenue, which is vital for sustainability in the retail sector.

Financial Analyst

From a financial perspective, the completion of the investment phase for infrastructure, including a scalable supply chain and technology system, is a critical milestone for THCH. By front-loading these capital expenditures, the company can now focus on operational growth without the burden of significant additional investment. This positions THCH to potentially generate stronger cash flows going forward, which could be used for further expansion, debt reduction, or shareholder returns.

The emphasis on a differentiated product offering, particularly with a value focus compared to market leaders, is a strategic decision that can attract a broader customer base. This approach may allow THCH to capture market segments that are price-sensitive and looking for alternatives to premium-priced competitors. However, it is essential for investors to monitor how these strategies translate into revenue growth and whether the company can maintain its competitive pricing without compromising profit margins in the long term.

Cultural Trends Analyst

Understanding the cultural context is crucial when evaluating THCH's market strategy. The company's entry into a market undergoing a 'generational category shift' from tea to coffee represents a deep understanding of evolving consumer behaviors. By adapting its menu to local tastes, THCH is not only integrating into the Chinese market but also fostering a new coffee culture. This cultural adaptation could be a key driver for the company's growth, as it resonates with the younger demographic that is more open to embracing global trends while still valuing local customization.

It's important to consider the long-term cultural impact and acceptance of coffee as a staple in China, which could significantly influence THCH's success. If the trend towards coffee consumption continues to rise, THCH could be well-positioned to capitalize on this shift. However, if the market sees a resurgence in traditional tea consumption or other competitive beverage trends, it could pose a risk to the company's growth trajectory.

NEW YORK, Feb. 26, 2024 /PRNewswire/ -- Argus Research, an independent investment research firm, has launched Equity Research Report coverage on TH International Limited (NasdaqCM: THCH).

Click Here to view full Argus Equity Research Report.

COMPANY HIGHLIGHTS: Excerpts (as conveyed by Argus Analyst Steve Silver) include:

TH International: Expanding China's Fast Growing Coffee Market

• White Space for Growth: THCH has been expanding in China's Fast Growing Coffee Market since 2019. We see the market for coffee consumption in China as still in the early-stages of a generational category shift from a previously tea drinking culture.
• Adding Locations: In our view, THCH is executing a strategic plan that aims to expand to over 2,700 locations in 2026, nearly tripling from its current footprint.
• Investment Phase Largely Completed: THCH has completed much of its investment towards building an infrastructure, including a scalable supply chain and technology system that can support the target footprint.
• Differentiated Product Offering: We think that Tims China is well positioned to fill the role of a differentiated player in the Chinese market; by providing value on price compared with entrenched market leaders, while still offering a locally adapted food menu. Thus, we expect Tims China to grow without needing to displace or take share from other entrenched players.
• Expanding Margins: We are encouraged by several operating trends in Tims China's business, including store EBITDA margin expansion to 7.5% in the third quarter of 2023, up from 5% in the previous quarter, and growth in its loyalty program base to over 18 million (up more than 90% over the same period of 2022), which accounts for about 80% of its transactions, the majority of which are conducted online.
• Solid Financial Position: As of September 30, 2023, THCH had RMB 461.9 million ($64.9 million USD) in cash, and net debt of RMB 1.07 billion ($85 million USD). We expect continued improvement in corporate level EBITDA to improve its balance sheet over time.
• Fair Value: Based on our EV/Revenue analysis, we see a fair value of $4.00 per share.

INVESTMENT THESIS: Click Here to view full Argus Equity Research Report and Investment Thesis.

About TH International Limited (NasdaqCM: THCH)                           www.timschina.com

TH International Limited ("Tims China", or "THCH", or "the company") is the parent company of the exclusive master franchisee of Tim Hortons coffee shops for Restaurant Brands International Inc. in mainland China, Hong Kong and Macau, as well as Popeyes restaurants in mainland China and Macau. THCH offers freshly brewed coffee, tea and other beverages, bakery and sides, as well as sandwiches. The company launched its first coffee shop in China in February 2019 and had grown to more than 900 stores by the end of 2023. The company utilizes an operating model that includes company-owned stores and franchise operated locations, of various location size formats.

For more information please contact:

IR@TimsChina.com
or
Gemma.Bakx@Cartesiangroup.com
212-461-6351

About Argus Research Corp. 

Headquartered in NYC, Argus Research (www.argusresearch.com) is a leading independent equity research firm (est. 1934)  ̶  providing fundamental and quantitative research coverage on more than 1,600 companies across all 11 sectors of the S&P 500, as well as macroeconomic and equity market forecasts, thematic research, model portfolios and IPO research.  In addition, Argus has recently committed to providing a sponsored research solution for small & mid-cap companies seeking coverage.  Argus's Equity Research & earnings estimates are available on major research / earnings estimate aggregator platforms, including Bloomberg, Thomson Reuters, Factset and S&P Global.

For more Information please contact:

Darrell Stone
646-747-5438
dstone@argusresearch.com   

Argus Research Co. has received a flat fee from the company discussed in this report as part of a Sponsored Research agreement between Argus and the company. No part of Argus Research's compensation is directly or indirectly related to the content of this assessment or to other opinions expressed in this report. Please refer to the full Argus report and the disclaimer for complete disclosures.

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SOURCE Argus Research

FAQ

What market is TH International Limited (THCH) expanding in?

THCH is expanding in China's fast-growing coffee market.

How many locations does THCH aim to have by 2026?

THCH aims to expand to over 2,700 locations by 2026.

What has THCH completed in terms of investments?

THCH has completed significant investments in infrastructure.

What is the store EBITDA margin expansion for Tims China in Q3 2023?

Store EBITDA margin expanded to 7.5% in Q3 2023.

How much did the loyalty program base grow by in 2023?

The loyalty program base grew over 90% to 18 million in 2023.