thanachart mk restaurant group pcl (m...

14 OCTOBER 2013

Please see the important notice on the back page.

BUY TP: Bt 60.00

Initiation Upside: 22.4%

MK Restaurant Group Pcl (M TB)

Top food retailer play M operates the No.1 restaurant chain in Thailand with a well-established 27-year-old brand. With more than 476 outlets nationwide, M enjoys strong economies of scale, leading to high margins and ROE. We see branch expansion and urbanization as the key earnings growth drivers, leading to a 19% EPS CAGR in 2013-15F and 20-21% ROEs in 2014-15F.

KALVALEE THONGSOMAUNG 662 – 617 4900

[email protected] Four reasons to like M MK Restaurant Group (M TB) operates the “MK” Thai-style suki restaurant chain and “Yayoi” Japanese franchise restaurant. We like M for four reasons. 1) M has a strong and well-established brand, positioned to capture the growing largest mid-end market. It has a 52% share of the suki and shabu dining market, No.1 in Thailand. 2) Its well-known brand also provides a magnet for retailers. Thus, retail operators’ rapid expansions offer M hefty exposure to provincial growth. 3) Having more than 476 outlets across the country and two distribution centers in central Thailand, M enjoys superior margin and ROE through greater economies of scale. Lastly, we forecast a strong 2013-15F EPS CAGR of 19% with high ROE of 20-21% in 2014-15F.

Story of expansion We assume M opens 55 outlets in 2013 (35 MK Suki and 20 Yayoi) and another 60 in 2014 (versus M’s target of new 65 outlets p.a.). We expect this growth pace to continue over the next three years supported by robust retail growth in the provinces. This should help M to capture the rising urbanization trend in Thailand. Moreover, it plans to open another food processing factory in November this year in addition to its two existing ones. The new factory would double its processing capacity and support M’s growth plan at least over the next five years. Proceeds from M’s recent IPO should be enough to support its Bt3bn capex plan over the next three years. We believe the remainder of the proceeds would be used for M&A expansion. However, we don’t expect this to proceed rapidly as we believe finding a highly-profitable food business like its MK Suki would be quite difficult.

Growth with high ROE We see outlet expansions along with urbanization being the key growth drivers with a 2013-15F EPS CAGR of 19% and ROE of above 20%. Given weakening domestic consumption, we assume M’s same-store sales (SSS) growth of negative 2% results in negative normalized earnings growth of 3% in 2013. We forecast M’s normalized profit to rise by 22% and 16% in 2014-15 driven by branch expansion of 11-13% and SSS growth of 1-3%. Despite M’s aggressive expansion, we don’t expect dilution of its profitability and we see its ROE rising steadily from 20% in 2014F to 23% in 2016F.

Healthy food choice; valuations look attractive Based on our DCF methodology (WACC of 10.6% and 2% terminal growth), we derive a 12-month TP of Bt60.0/share. At the current price, M is trading at PE multiples of 22.5x in 2013F and 18.5x in 2014F versus the food sector’s 26.8x and 22.9x. We see M as the best food retailer play on the middle-income transition and urbanization trends in Thailand. We also like M for its strong brand and franchise value, its growth story from expansion and its high profitability. We initiate coverage on M with a BUY rating.

COMPANY VALUATION

Y/E Dec (Bt m) 2012A 2013F 2014F 2015F

Sales 12,987 14,034 16,429 18,834

Net profit 2,041 1,989 2,425 2,803

Consensus NP ⎯ 2,209 2,581 2,908

Diff frm cons (%) ⎯ (10.0) (6.0) (3.6)

Norm profit 2,041 1,989 2,425 2,803

Norm EPS (Bt) 2.8 2.2 2.7 3.1

Norm EPS grw (%) 26.1 (22.5) 21.9 15.6

Norm PE (x) 17.4 22.5 18.5 16.0

EV/EBITDA (x) 11.9 12.3 10.0 8.5

P/BV (x) 25.0 3.8 3.5 3.3

Div yield (%) 0.0 3.1 3.8 4.4

ROE (%) 149.8 30.0 19.8 21.2

Net D/E (%) 4.4 (68.6) (67.3) (69.4)

PRICE PERFORMANCE

40

44

48

52

56

Aug-13 Sep-13 Oct-13

(Bt /shr)

(12)(10)(8)(6)(4)(2)02

(%)M K RestaurantRel to SET Index

COMPANY INFORMATION

Price as of 14-Oct-13 (Bt) 49.00

Market cap (US$ m) 1,416.7

Listed shares (m shares) 905.9

Free float (%) 25.0

Avg daily turnover (US$ m) 4.9

12M price H/L (Bt) 55.5/40.0

Sector Food & Bev

Major shareholder Group of Thirakomen 74%

Sources: Bloomberg, Company data, Thanachart estimates

Thanachart

Securities

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Four reasons to like MK Restaurant Group We see MK Restaurant Group (M TB) as the best food retailer play in Thailand. Four key reasons we like M are:

First, M operates a Thai-style suki restaurant chain under the brand “MK Suki” and a Japanese franchise restaurant under the “Yayoi” brand in Thailand. M is the largest restaurant chain in the country as well as the market leader with the No.1 share of sales in suki and shabu dining in Thailand at 52%. M’s growth story is linked to the rising urbanization trend and it is positioning itself well to capture the growing mid-end market.

Secondly, given its strong brand, M is one of the customer magnets for retailers such as shopping malls and hypermarkets. We see M being offered lots of exposure to the rapid expansion of retail operators such as Central Pattana Pcl (CPN TB, Bt47.0, BUY), Big C Supercenter Pcl (BIGC TB, Bt211, HOLD), Home Product Center Pcl (HMPRO TB, Bt13.70, BUY) and Tesco Lotus (unlisted).

Thirdly, M has more than 476 outlets across the country and two factories in central Thailand. These two factories are M’s central kitchens with production lines while also being the distribution centers for its countrywide outlets. M therefore enjoys high economies of scale.

Lastly, we see M offering the stories of strong earnings growth and high profitability. We project a 2013-15 EPS CAGR of 19% which is derived mainly from new outlets along with strong retail expansion. Apart from the growth story from its expansion, M should enjoy high profitability. We forecast high ROE of 20% in 2014, rising to 21% and 23% in 2015-16.

Ex 1: Revenue Growth Story Along With Growing Urbanization

0

5,000

10,000

15,000

20,000

25,000

2009 2010 2011 2012 2013F 2014F 2015F 2016F

(Bt m)

Sources: Company data, Thanachart estimates

M – our top food retailer play in Thailand

M had a 52% share of sales in suki and shabu dining in 1H13

M enjoys exposure to the rapid expansion of retailers

M boasts economies of scale

M offers high profitability



Ex 2: Normalized Earnings And Fully Diluted EPS Growth

0

500

1,000

1,500

2,000

2,500

3,000

3,500

2009 2010 2011 2012 2013F 2014F 2015F 2016F

(Bt m)

(30)

(20)

(10)

0

10

20

30

40(%)Net profit (LHS) EPS grow th (RHS)

Dilution effect


MK Restaurant Group has strong brands

MK Restaurant Group was established 27 years ago in 1986 by Mr. Rit Thirakomen and Mr. Somchai Hanjitkasem. Mr. Rit is currently the chairman and CEO while Mr. Somchai is the director and a top executive of the company. M operates two well-recognized brands: MK Suki – a Thai-style suki restaurant and Yayoi – a Japanese franchise restaurant of Plenus Co. Ltd. (Japanese firm).

Exhibit 3 shows the revenue contribution of each brand to M. MK Suki provides the majority of revenue and profits. MK Suki contributed 87% of 2012 revenues, followed by Yayoi at 12%. On top of that, M also operates two Thai restaurant brands, two Japanese restaurant brands, one coffee shop & bakery and overseas businesses. M has overseas exposure in Japan, Singapore and Vietnam via joint venture and franchising businesses. However, these still contribute a very small portion at less than 2% of 2012 total sales.

Ex 3: Revenue Contribution By Brand

02,0004,0006,0008,000

10,00012,00014,00016,00018,00020,000

2010 2011 2012 2013F 2014F

(Bt m) MK & MK Gold Yayoi Na Siam & Le Siam Franchise Overseas Tenjin & Hakata Le Petit


Strong brands are one of its key success factors



Ex 4: MK Restaurant Group’s Business Structure

MK Restaurant Group Pcl

(M)

■ Suki restaurants : MK Suki, MK Gold■ Thai restaurants : Na Siam, Le Siam■ Japanese restaurants : Hakata, Tenjin■ Coffee shop & Bakery : Le Petit■ Franchise

MK Interfoods Co., Ltd."MKI"

MK Services Training Center Co., Ltd.

"MKST"

Plenus & MK Pte. Ltd."Plenus & MK"

Plenus MK Co., Ltd."Plenus MK"

- Japanese restaurant Yayoi

- Training services for MK group

- Restaurants in Singapore

- MK restaurants in Japan

Source: Company data

We show in Exhibit 5 on the following page the portfolio of M’s brands and operations. Basically, MK Suki serves more than a 100-item menu of fresh meats and vegetables along with its signature sauce. MK Suki offers a la carte favorite dishes of roast duck, barbecued pork, dim sum, etc., under its two brands “MK Restaurants” which targets the mid-end market and “MK Gold Restaurants” which targets the premium market. For Yayoi, which was established in 2006, it aims to capture the mid-end market. Most of MK Suki and Yayoi’s outlets are located in shopping malls and modern trade outlets across the country.

Positioned in mid-end market and countrywide



Ex 5: MK Restaurants Group’s Business Portfolio

Type of business Brand Logo Portion of

2013F revenues

No. of

branches

Location

Suki restaurants MK Restaurants

86% 361 Thailand

MK Gold Restaurants

6

Japanese restaurants Yayoi

13% 103 Thailand

Hakata

na 1

Tenjin

na 1

Thai restaurants Na Siam

0.5% 1 Thailand

Le Siam

2

Overseas restaurants Yayoi

0.4% 3 Singapore

Franchises MK Restaurants

0.1% 30 Japan

MK Restaurants

1 Vietnam

Others

Le Petit

(coffee shop & bakery)

na 1 Thailand

Catering & delivery na na Source: Company data as of August 2013

Ex 6: MK Suki’s Dishes Ex 7: Yayoi’s Menu Offerings

Source: MK Suki Source: Yayoi



MK Restaurants Group’s competitive edges

Currently, MK Suki is the dominant player in the suki and shabu dining categories in Thailand with the largest market share of 52% in 1H13. This is far ahead of the No.2 and No.3 players with 22% and 8% shares as shown in Exhibit 8. Given its aggressive expansion, we expect M to continue gaining market share over its competitors. For Yayoi, we expect the market to become more fragmented with competition heating up as we have seen a number of Japanese food brands, both franchises and new brands, penetrating the growing Japanese restaurant segment in Thailand. We therefore anticipate a higher risk of competition for the Yayoi brand than for MK Suki.

In terms of total food outlets, M is also the largest restaurant chain in Thailand with more than 476 outlets across the country. We thus see M’s strength lying with economies of scale. M is also positioning itself in the mid-income market with competitive pricing and quality food and services (exhibits 11-12).

Ex 8: MK Suki Is The Dominant Player In The Suki And Shabu Categories

Shabu Shi22%

Coca Suki2%

Sukishi8%Hot Pot

8%

MK Suki52%

Bar B Q Plaza /Joom Sap Hut

8%

Sources: Company data, Thanachart estimates Note: Figures for 1H13

Ex 9: MK Suki’s Key Competitors By No. Of Outlets Ex 10: Yayoi’s Key Competitors By No. Of Outlets

361

117 94 6927 8

0

100

200

300

400

MK

Suki

Hot

Pot

Bar B

QPl

aza/

Joom

Zap

Hut

Shab

u Sh

i

Suki

shi /

Seou

l Gril

l

Coc

a Su

ki

(outlets) 103

79

3525

0

20

40

60

80

100

120

Yayo

i

Fuji

Oot

oya

Zen

(outlets)

Source: Company data as of August 2013 Source: Company data as of August 2013

Dominant player with a market share of 52%

Enjoys economies of scale



Ex 11: MK Suki’s Competitive Edge

Restaurant Logo No. of

branches Average price (Bt per person) Type

MK Suki 367

MK Suki

361 267 A la carte

MK Gold

6 447 A la carte

Hot Pot 116

Hot Pot Inter Buffet

41 329 Buffet

Hot Pot Buffet Value

72 289 Buffet

Hot Pot Prestige

1 409 Buffet

Hot Pot Suki Shabu

2 430 A la carte

Shabu Shi

68 319 Buffet

Sukishi

22 329 Buffet

Coca Suki

8 390 Buffet, A la carte

Bar B Q Plaza / Joom Zap Hut

94 315 A la carte


Ex 12: Yayoi’s Competitive Edge

Restaurant Logo No. of branches Average price (Bt per person) Type

Yayoi

103 217 A la carte, set menu

OOTOYA


Fuji


Zen





Growth with high ROE

We see the growth story of M lying with outlet expansion along with the rapid urbanization trend in Thailand. Fast-growing retailers such as modern trade and shopping malls are M’s growth catalysts. In 2013 we expect M to open 55 outlets across the country – 35 MK Suki outlets and 20 Yayoi outlets (versus M’s plan to open 65 outlets – 40 MK Suki and 25 Yayoi outlets in 2013), with the mix being slightly more skewed towards the provinces (versus Bangkok). Our outlet expansion assumptions for 2013 are below management’s targets as Thanachart’s retail analyst Phannarai Tiyapittayarut sees some impact from the Thai floods on the expansion plans of retail operators. Looking ahead, given continuous rapid retail expansion particularly in the provinces, we anticipate M’s outlet expansion at 40 p.a. for MK Suki and 20 p.a. for Yayoi in 2014-16.

Ex 13: MK Suki Outlet Expansion Ex 14: Yayoi Outlet Expansion

280 290 314 354 389

10 2440

3540

0

100

200

300

400

500

2010 2011 2012 2013F 2014F

(Outlets) Old New

290 314 354389 429

44 51 6491

1117

13

27

20

20

0

20

40

60

80

100

120

140

2010 2011 2012 2013F 2014F

(Outlets) Old New

5164

91

111

131

Sources: Company data, Thanachart estimates Sources: Company data, Thanachart estimates

Currently, MK Suki restaurants are located countrywide with a higher proportion of outlets in the provinces versus Bangkok. We therefore see this strategic trend proceeding well with growing consumption and lifestyle changes in Thailand’s provinces. More of Yayoi’s existing outlets are located in the Bangkok area, so we therefore see lots of opportunity for Yayoi to expand to urban areas upcountry and elsewhere in the provinces.

Ex 15: Proportion Of MK Suki Outlets By Location Ex 16: Proportion Of Yayoi Outlets By Location

49 50 52 53 54

51 50 48 47 46

0

20

40

60

80

100

2010 2011 2012 2013F 2014F

(%) Provinces Bangkok

35 34 33 33 34

65 66 67 67 66

0

20

40

60

80

100

2010 2011 2012 2013F 2014F

(%) Provinces Bangkok


Outlet expansion along with the urbanization trend

Lots of opportunity to expand into the provinces



For expansion abroad, M has joined hands with Plenus Company Limited (a Japanese firm) with 50:50 stakes to set up a joint-venture company Plenus & MK Pte., Ltd. to operate restaurants in Singapore such as Yayoi and MK Suki. At present, there are three Yayoi outlets in Singapore while M plans to have 15 by 2017. In addition, M plans to launch its first MK Suki outlet in Singapore by the end of this year and hopes to have 10 MK Suki outlets there by 2017. Given that we have yet to see any successful international expansions of Thai listed food companies, there could be a risk to our investment case if M moves aggressively in expanding abroad. Apart from its equity-owned expansion abroad, M operates its franchise business model for MK Suki in Japan, Vietnam and Indonesia, though this still provides only a small contribution to total revenues.

We see outlet expansion along with urbanization being M’s key growth drivers with a 2013-15F EPS CAGR of 19% and ROEs of 20-21% over 2014-15F. For 2013, we are assuming a relatively weak domestic consumption environment and forecast M to generate SSS growth of negative 2%, resulting in negative normalized earnings growth of 3%. However, we forecast M’s normalized profit to rise by 16-22% in 2014-15, driven by SSS growth of 1.0% and branch expansion of 12% in 2014. Despite the aggressive expansion, we don’t expect dilution of its profitability and we see its ROE rising steadily from 20% in 2014F to 21-23% in 2015-16F. Exhibits 17-18 show the SSS growth of MK Suki and Yayoi for the past few years that incorporate the effects of food price adjustments which we have not yet taken into account in our assumptions.

Ex 17: Same-store Sales Growth Of MK Suki Ex 18: Same-store Sales Growth Of Yayoi

3

10

6

(2)

1

(4)(2)02468

1012

2010 2011 2012 2013F 2014F

(%) Inclusive of 5% food price adjustment

Inclusive of 6% food price adjustment

2

22

11

(1.5)

1

(5)

0

5

10

15

20

25

2010 2011 2012 2013F 2014F

(%)Inclusive of 6% food price adjustment

Inclusive of 7% food price adjustment


Ex 19: Total Sales Of MK Suki Ex 20: Total Sales Of Yayoi

02,0004,0006,0008,000

10,00012,00014,00016,000

2010 2011 2012 2013F 2014F

(Bt m)

02468101214161820

(y-y %)Sales (LHS)Grow th (RHS)

0

500

1,000

1,500

2,000

2,500

3,000

2010 2011 2012 2013F 2014F

(Bt m)

0

10

20

30

40

50

60(y-y %)Sales (LHS)

Grow th (RHS)


New outlets should help drive norm earnings growth of 16-22% in 2014-15F

Foreign outlets are a small contributor… but there are plans to expand them further



We made on-the-ground visits to MK Suki Restaurant and Yayoi in the downtown area and on the outskirts of Bangkok last week to see the traffic of both brands. The restaurants looked busy and crowded, particularly at lunch and dinner times despite a relatively weak domestic consumption environment. It was very clear during our visit that the customers targeted by MK Suki and Yayoi are quite different. Major customers of MK Suki are families and friends while those of Yayoi are teenagers and young workers. Having said that, we saw that the promotions of MK Suki and Yayoi are customized to fit with their customer segmentation.

Ex 21: Crowded At MK Restaurant Downtown … Ex 22: … And Also On The Outskirts Of Bangkok

Source: Thanachart Source: Thanachart

Ex 23: MK Is Popular Among Friends And Families Ex 24: Favorite MK A-La-Carte Dish


Ex 25: Yayoi Is Popular Among Young People Ex 26:Good Traffic At Yayoi Restaurant


Impressive traffic during our on-the-ground visits



Given the competitive advantages we see in economies of scale and cost-control management, M offers a higher margin and ROE than its peers. Despite M’s aggressive expansion, we don’t expect dilution of its profitability and we believe M can maintain gross margin from 2013 onwards at 67-68%. Also, we project its ROE (post-IPO) to increase from 20% in 2014 to 21-23% in 2015-16F.

Ex 27: M’s Gross Margin Should Be Sustained Ex 28: Highest Net Margin Among Peers

5052545658606264666870

2010 2011 2012 2013F 2014F

(%) Total gross margin MK Suki Yayoi 13.8

5.0

2.0

02468

10121416

M Shabu Shi Hot Pot

(%)

Sources: Company data, Thanachart estimates Sources: Company data as of 1H13, Thanachart estimates

Ex 29: M’s ROE To Rise From 2014F Ex 30: Highest ROE Among Peers

61 98

150

30

20 21 23

0

10

20

30

40

50

60

70

2010 2011 2012 2013F 2014F 2015F 2016F

(%)

Dilution effect

30.0

14.0

9.1

0

5

10

15

20

25

30

35

M (post-IPO) Shabu Shi Hot Pot

(%)

Sources: Company data, Thanachart estimates Sources: Company data as of 1H13, Thanachart estimates

M’s growth story via expansion

We expect M’s investment plans to come to approximately Bt3bn over the next three years fully supported by the proceeds from its August 2013 IPO. Three key investment areas are:

1) To support its business expansion in capturing the growing urbanization trend in Thailand. M targets to open 65 outlets (40 MK Suki and 25 Yayoi outlets) across the country this year. M started its aggressive expansion last year and we expect this growth pace to continue at least for the next three years, supported by robust retail growth, particularly in the provinces.

2) Building a new factory in addition to its two existing ones. The new factory should support M’s five-year expansion plan for MK Suki and Yayoi restaurants, implying a doubling of capacity. M expects the construction of its new factory to be completed in November this year.

3) To build a new office to consolidate the costs of its existing training facilities under one roof.

High ROE at 20% in 2014F, rising further to 23% in 2016F

New factory should support M’s five-year expansion plan



Healthy food choice

Based on our DCF methodology (WACC of 10.6% and 2% terminal growth), we derive a 12-month TP of Bt60/share. At the current price, M is trading at PE multiples of 22.5x in 2013F and 18.5x in 2014F versus the food sector’s 26.8x and 22.9x. We like M for its strong brand and franchise value, its growth story via expansion and high forecast profitability. We see M as one of the best plays on the middle-income transition and urbanization trends in Thailand.

Ex 31: 12-month DCF-based TP Calculation

(Bt m) 2013F 2014F 2015F 2016F 2017F 2018F 2019F 2020F 2021F 2022F 2023F 2024FTerminal

Value

EBITDA 2,986 3,621 4,168 4,732 5,332 5,982 6,551 7,100 7,812 8,474 9,159 9,898 ⎯

Free cash flow 794 1,744 2,633 2,873 3,504 4,044 4,470 4,965 4,727 5,310 5,904 5,658 67,440

PV of free cash flow ⎯ 1,739 2,155 2,126 2,346 2,448 2,448 2,459 2,117 2,151 2,163 1,875 22,346

Risk-free rate (%) 4.5

Market risk premium (%) 8.0

Beta 0.8

WACC (%) 10.6

Terminal growth (%) 2.0

Enterprise value - add investments

46,373

Net debt (2013F) (8,115)

Minority interest ⎯

Equity value 54,488

# of shares 908

Target price/share 60.0 Sources: Company data, Thanachart estimates

Note that our number of shares incorporates a 2% earnings dilution effect from 2014F onward. M has issued warrants to its executives and employees. The 20m units of warrants have an exercise price of Bt1.0 with the exercise period from 2014-18. A maximum of 10% of the total can be exercised in the first year, then 20% in the second year and 30% in the third.

Ex 32: Shareholder Structure Ex 33: Board Of Directors

74%

4%

Others22%

Group of Mr. Rit &Mrs. Yupin Thirakomen

Thongkam MKfoundation

M’s board of directors has 10 members and includes four

independent directors and three audit committee directors. Mr.

Rit Thirakomen, the chairman of the board of directors, is also

CEO. Four of 10 directors on the board are management

executives. The board has appointed two committees; the

audit committee and management committee.

Source: Company data Source: Company data

We derive a 12-month DCF-based TP of Bt60.0/share and initiate with a BUY



Risks to our investment case

Economic slowdown: Given that almost 100% of M’s business relies on domestic consumption if Thailand’s economy were to slow down, M’s sales growth at same-stores as well as newly-opened stores would be weaker than our current expectations. However, given that M is positioned toward the mid-market with affordable and strong brands such as MK Suki and Yayoi, we don’t foresee the impact being large.

Expansion plan: Given that M’s new outlet openings tag along with retail expansion such as hypermarkets and shopping malls, this could present risks to M if those retailers were to delay or halt their expansion plans in Thailand. However, based on the retail expansion plans we have seen over the next five years, we expect there to be a lot of opportunities to penetrate the provinces.

Inventory management and standardized product: As M’s raw materials are fresh meat, seafood and vegetables, the quality of those fresh ingredients are crucial. M’s purchasing division collects information on raw material selling units to estimate the proper amounts to order. In addition, M’s outlets are strategically located across Thailand, so food and services must be controlled to reach M’s high standards. Having said that, M has two factories including distribution centers in the Central region to control and distribute products throughout the country with a well-managed quality assurance and logistics system. This should reduce the risk, in our view.

Production cost volatility: Raw material costs are a major production cost for M. The company’s operation would thus be hurt by volatility in those raw material prices. However, for some raw materials whose prices fluctuate a lot, M places orders in advance with specified quantities and prices. Moreover, given M’s largest share in the food chain market in Thailand, its bargaining power with suppliers is therefore strong and this reduces the risk to M’s gross margin to some degree.

Labor costs and availability: As a service business, labor is very significant to M in terms of quality and quantity. Wage increases and labor shortages are key risks for a service business like M’s. As 30-40 staff are needed for one MK Suki outlet, M has set up a training center to accommodate its expansion plan and to build up an M culture to retain good personnel. In addition, the government’s major increase in wage rates for the whole country was already implemented early this year and we do not expect the minimum wage to be raised again over the near term.

Lease contract renewals for M’s outlets: Almost all M’s outlets have three-year lease contracts but they can be renewed three to five times, implying a certain degree of long-term rental. M is thus exposed to the risk that when contracts expire, lessors might not renew lease contracts or alternatively lift rental rates. However, we see its well-reputed brand, high market share, and being a customer magnet for modern trade stores and shopping malls resulting in strong bargaining power with retailers.

M&A activity: M is also exploring opportunities to acquire food chain businesses both in Thailand and abroad. M&As would provide both opportunities and risks to M. On the negative side, in our view, the acquisition of overseas brands is higher risk than doing so domestically because of regulatory risk, management risk, and differences in lifestyle and culture. We don’t expect the acquisitions to happen quickly as we believe it would be difficult to find highly profitable food businesses like MK Suki.

Economic slowdown

Expansion plan

Inventory management

Production cost volatility

Minimum wage rate hike

Lease contract renewal for M outlets

M&A activity



Ex 34: Valuation Comparison With Regional Peers

EPS growth —— PE —— EV/EBITDA — Div yield —

Name BBG code Country 13F 14F 13F 14F 13F 14F 13F 14F

Jollibee Foods Corp JFC PM Philippines 4.3 15.9 40.8 35.2 20.7 17.7 0.8 1.1

Cafe de Coral Holdings 341 HK Hong Kong 1.8 10.2 26.1 23.6 14.5 13.5 2.8 3.2

Tao Heung Holdings 573 HK Hong Kong 5.8 12.9 18.5 16.4 na na na na

Ajisen China Holdings 538 HK Hong Kong 10.8 23.0 32.7 26.6 13.8 11.5 1.7 1.9

Fairwood Holdings 52 HK Hong Kong (2.8) 2.3 14.7 14.4 na na 4.6 na

Beijing Xiangeqing 002306 CH China (184.3) 18.7 22.9 19.3 12.3 11.0 2.2 2.6

Central Plaza Hotel* CENTEL TB Thailand 49.3 26.2 33.6 26.6 18.4 16.0 1.1 1.4

Minor International* MINT TB Thailand 12.5 12.4 29.0 25.8 21.4 18.7 1.2 1.4

MK Restaurants Group* M TB Thailand (22.5) 21.9 22.5 18.5 12.3 10.1 3.1 3.8

Average 13.9 15.9 26.8 22.9 16.2 14.1 2.2 2.2 Source: Bloomberg Note: * Thanachart estimates, using Thanachart normalized EPS Based on 14 Oct 2013 closing prices



COMPANY DESCRIPTION COMPANY RATING

Rating Scale

Very Strong 5

Strong 4

Good 3

Fair 2

Weak 1

MK Restaurant Group Plc. (M) operates the No.1 restaurant chain in Thailand and was established 27 years ago. Its restaurant chain under the “MK Suki” brand was set up in 1986 and it presently has a 52% share of the suki and shabu dining market, No.1 in Thailand. It has more than 476 outlets nationwide. M also runs the “Yayoi” Japanese franchise restaurant in Thailand. As for international expansion, M set up a JV firm with Plenus Co., Ltd. (Japanese firm) to open Yayoi and MK Suki restaurants in Singapore. M also has a franchise business for MK Suki in Japan, Vietnam and Indonesia.

012345

*C o rp.go vernance Liquidity

R iskmanage

ment

M anagement

F inancial management

None 0

Source: Thanachart Source: Thanachart; *CG Awards, no rating

THANACHART’S SWOT ANALYSIS

S — Strength W — Weakness

Well-recognized and strong MK Suki brand.

High economies of scale through superior operations

and cost control management.

Strategically located countrywide.

Weak economy could dampen dining demand.

Aggressive store expansion could result in a shortage

of staff or good-quality workers.

Overseas expansion could lead profitability to

deteriorate.

O — Opportunity T — Threat

Growing demand upcountry.

Riding on rapid modern trade expansion along with the

urbanization trend.

Rising trend of out-of-home dining.

Increasing competition from new brands and

franchises, both locally and overseas.

CONSENSUS COMPARISON RISKS TO OUR INVESTMENT CASE

Consensus Thanachart Diff

Target price (Bt) 59.00 60.00 2%

Net profit 13F (Bt m) 2,209 1,989 -10%

Net profit 14F (Bt m) 2,581 2,425 -6%

Consensus REC BUY: 7 HOLD: 2 SELL: 0

HOW ARE WE DIFFERENT FROM THE STREET?

Our TP is 2% above that of the Street as we are more bullish on its strong brand-driven sales growth.

Our 2013-14F earnings are 6-10% below consensus, which we attribute to our expectations for relatively weak domestic consumption.

If retailers’ growth is slower than we currently expect

because of a weaker economic situation and consumption, this would impact our assumptions for M’s expansion plans.

If growth in people’s spending is below our current expectations, this would lower our SSSG assumptions.

If competition from food retailers is more intense than we now assume, it would negatively impact M’s performance.

If rising raw material and labor costs cannot be passed on, this would hurt M’s margins.

Sources: Bloomberg consensus, Thanachart Source: Thanachart



FINANCIAL SUMMARY

Incom e Statem ent Quarterly Earnings (consolidated)

FY ending Dec (Bt m) 2011A 2012A 2013F 2014F 2015F 2Q12 2Q13

Sales 10,708 12,987 14,034 16,429 18,834 Sales 3,343 3,599

Cost of sales 3,661 4,240 4,733 5,443 6,211 Cost of sales 1,099 1,205

Gro ss pro fit 7,046 8,748 9,301 10,987 12,623 Gross pro fit 2,244 2,394SG&A 4,891 6,273 6,938 8,100 9,285 SG&A 1,592 1,828

Operating pro fit 2,155 2,474 2,363 2,887 3,338 Operating pro fit 652 566Depre & amortization 458 519 624 734 830 Depre & amortization 127 145

EB IT D A 2,613 2,993 2,986 3,621 4,168 EB IT DA 779 711Other income 117 154 126 148 170 Other income 38 39

Other expenses 0 0 0 0 0 Other expenses 0 0

Interest expense (15) (23) (3) (3) (4) Interest expense (3) (8)

Pre-tax profit 2,256 2,605 2,486 3,032 3,504 Pre-tax profit 687 597

Income tax 639 565 497 606 701 Income tax 150 115

After-tax profit 1,618 2,041 1,989 2,425 2,803 After-tax profit 538 481

Equity income 0 0 0 0 0 Equity income 0 0

Minority interests 0 0 0 0 0 Minority interests 0 0

Extraordinary items 0 0 0 0 0 Extraordinary items 0 0

NET P ROF IT 1,618 2,041 1,989 2,425 2,803 NET P ROF IT 538 481No rmalized pro fit 1,618 2,041 1,989 2,425 2,803 No rmalized pro fit 538 481EPS (Bt) 2.2 2.8 2.2 2.7 3.1 EPS (Bt) 0.7 0.7

Normalized EPS (Bt) 2.2 2.8 2.2 2.7 3.1 Normalized EPS (Bt) 0.7 0.7

Balance Sheet (consolidated) Financial Ratios And Valuations

FY ending Dec (Bt m) 2011A 2012A 2013F 2014F 2015F 2011A 2012A 2013F 2014F 2015F

Cash & equivalent 441 787 7,500 9,400 8,900 Norm profit (y-y%) 31.1 26.1 (2.5) 22.0 15.6

A/C receivables 68 60 77 83 99 Normalized EPS (%) 31.1 26.1 (22.5) 21.9 15.6

Inventories 178 203 228 261 299 Net profit (y-y%) 31.1 26.1 (2.5) 22.0 15.6

Other current assets 188 284 1,291 1,306 1,321 EPS (%) 31.1 26.1 (22.5) 21.9 15.6

Investment 0 0 0 0 0 Dividend payout (%) 0.0 0.0 70.0 70.0 70.0Fixed assets 2,244 2,993 3,869 4,635 5,005

Other assets 685 715 773 905 1,037 Gross margin (%) 65.8 67.4 66.3 66.9 67.0

T o tal assets 3,804 5,041 13,737 16,590 16,661 Operating margin (%) 20.1 19.1 16.8 17.6 17.7

EBITDA margin (%) 24.4 23.0 21.3 22.0 22.1

S-T debt 945 850 (615) 843 (593) Net margin (%) 15.1 15.7 14.2 14.8 14.9A/C payables 888 1,640 1,463 1,702 2,088

Other current liabilities 551 950 875 1,113 1,225 ROA (%) 40.2 46.1 21.2 16.0 16.9

L-T debt 0 0 0 0 0 ROE (%) 98.0 149.8 30.0 19.8 21.2

Other liabilities 9 9 10 12 13 Net D/E (x) 0.4 0.0 (0.7) (0.7) (0.7)T o tal liabilit ies 2,506 3,615 1,912 3,880 2,974

Norm PE (x) 22.0 17.4 22.5 18.5 16.0

Minority interest 0 0 0 0 0 Norm PE at TP (x) 26.9 21.4 27.6 22.6 19.6

Shareho lders' equity 1,298 1,426 11,826 12,710 13,687 PE (x) 22.0 17.4 22.5 18.5 16.0

EV/EBITDA (x) 13.8 11.9 12.3 10.0 8.5

Working capital (642) (1,377) (1,158) (1,358) (1,690) P/BV (x) 27.4 25.0 3.8 3.5 3.3

Total debt 945 850 (615) 843 (593) Dividend yield (%) 0.0 0.0 3.1 3.8 4.4Net debt 504 63 (8,115) (8,557) (9,493)

Free cash flow 826 2,399 811 2,083 2,862 BV/share (Bt) 1.8 2.0 12.9 13.9 15.0

Year End Shares (m) 727 727 914 914 914 DPS (Bt) 0.0 0.0 1.5 1.9 2.1

(consolidated)




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