cfa institute research challenge · stores with 25% growth rate annually and sets a target of ......

CFA Institute Research Challenge

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CFA Society Taiwan National Taiwan University

CFA Institute Research Challenge‧NTU Team Jan 19, 2014

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� Trading Data Date Established 19-Jan-2014

52-Week Range NT$ 157-NT$ 223

Mkt Val / Shares Out (mn) NT$ 200,647/ 1,040

Avg. 3M Daily Volume (mn) 1.14

Bloomberg / Reuters 2912 TT / 2912.TW

ROE (2013F) 29.2%

Free Float 49.4%

Dividend Yield 2.5%

7,600

8,000

8,400

8,800

150

170

190

210

230

Pre. Chain Store TSE Taiex

2010 2011 2012 2013F 2014F 2015F

Revenue 169,917 189,252 208,264 217,284 232,394 248,123

Net Income 5,726 6,352 6,789 8,399 8,518 9,215

Earnings per Share 5.51 6.10 6.53 8.08 8.51 8.86

EPS Growth (%) 41.1 10.9 6.9 23.7 5.4 4.10

Dividend per Share 4.90 4.80 4.85 4.95 5.05 5.15

Dividend yield (%) 3.03 2.94 3.22 2.20 2.32 2.41

Book Value per Share 19.44 19.91 22.04 25.27 28.78 32.64

Return on Asset (%) 8.46 8.86 8.73 9.87 9.49 9.03

Return on Equity (%) 25.34 26.68 26.70 29.14 26.48 24.02

Business Description:

Slower further growth, more future risks

PRESIDENT CHAIN STORE CORP (2912.TT) Equity | Taiwan | Retail

19 January 2014

Taiwan CVS revenue growth deteriorates when competitors catch up We see limited further benefits from expanding store scale after 58% of its convenient stores (CVS) have been transformed into large store format. The conversion of remaining CVS into large store format might become profitless considering challenges from space availability and aggressive competitors adopting similar strategies. We expect the growth of CVS’s average sales per store to decrease from 8.4% in 2012 to 2% in 2018, while gross margin may become stagnated going forward.

Hard to expect sharp growth from retail subsidiaries Among the retail subsidiaries such as President Pharmaceutical and Cosmed, we only see stable growth of the persistent subsidiaries while the powerless ones still showed no signs of potential turnaround. President Pharmaceutical faces intensifying competition of facial mask industry in China and sluggish industry growth prospect in Taiwan while Cosmed will further lag behind industry leader, Watsons, due to slow expansion and the lack of innovative strategies. As a result, we see NI CAGR will tumble to 8.6% in 2014-2016 from 30% in 2010-2013.

Starbucks might disappoint the catering growth Shanghai Starbucks has seen intensifying competition along with its slowing store expansion. We are also concerned about the relatively higher expense ratios and believe market consensus could be too bullish. As for Taiwan Starbucks, the market has become more saturated compared with other Asia countries, leading to our conservative attitude toward the prospect of Taiwan Starbucks’ expansion.

SELL

Target Price:

NT$ 162 / US$5.36 Price (19 Jan 2014):

NT$ 193 / US$6.39 Upside/Downside:

-16 %

National Taiwan University

Randy Cheng [email protected]

Chris Fu [email protected]

Daniel Lai [email protected]

Tom Lee [email protected]

Wendy Lu [email protected]

This report is published for educational purposes only by students competing in the CFA Institute Research Challenge.

National Taiwan University

Randy Cheng [email protected]

Chris Fu [email protected]

Daniel Lai [email protected]

Tom Lee [email protected]

Wendy Lu [email protected]


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Business Description Best leader, but advantage narrowing President Chain Store Corporation (PCSC) was founded by Uni-President Enterprise in 1978 as a CVS brand. Nowadays, it has become the retail conglomerate operating 55 subsidiaries and its operations are divided into 3 business segments and 1 support function:

(1) Convenience store (CVS) segment, which includes 7-11 in Taiwan, Shanghai and the Philippines. (2) Retail segment, which includes Cosmed, Transnet, Pharmaceutical and others. (3) Catering segment, which includes Starbucks in Taiwan and Shanghai. (4) Logistics support function, which supports all the business segments.

Convenience store segment (CVS, 68% of revenue) 7-11 Taiwan: Core business Since the opening of the first convenience store in 1979, 7-11 Taiwan has become the leader of the convenience store industry with a market share of around 49% and reshaped Taiwanese’s daily lives. With a strong network of stores and dynamic group synergy, 7-11 Taiwan provides comprehensive products and one-stop shopping services as a representation of convenient lives.

7-11 Shanghai: Loss producing Since 7-11 entered into Shanghai market in 2009, 7-11 Shanghai has had only 75 stores with 1% market share and suffered from the strenuous burden of its operation costs. The insignificant market share and cost pressure culminate in 7-11 Shanghai’s continuous loss-making to this day.

7-11 Philippines: Rapid growth PCSC invested Philippine Seven Corporation in 2000. It has dominated 70% of the market with 1,012 stores in 2013 and it plans to expand the number of stores with 25% growth rate annually and sets a target of 2,000 stores by 2017.

Retail segment (27%) Cosmed: Slow expansion Founded in 1995, Cosmed is one of the major drugstore chains in Taiwan with 358 stores in 2012. Their competition position is weakening due to the threats from Watsons, the industry leader in Taiwan.

President Pharmaceutical: Facing fierce competition Founded in 1992, President Pharmaceutical is a retailer and wholesaler of health and beauty products in Taiwan. The company holds a portfolio of Avene, Kawai Kanyu Drops, and Nature Made brands. 50% of its revenue comes from its private label products, My Beauty Diary, which sells facial masks.

Catering segment (4%) Starbucks: Most profitable Founded in 1998 with a share of 30% in the joint venture, President Starbucks has 300 stores in Taiwan and 345 stores in Shanghai and Zhejiang Province in 2013.

Figure 1: Revenue breakdown by business

Source: Company data

Figure 2: Profit breakdown by business


Figure 3: Ownership structure of PCSC


Foreign Investor

41%

Other Institutions

1%

Corporate 46% Retail Investor

12%

Figure 4: 7-11 Taiwan Sales Breakdown


General Food

Products 10%

Non-food Products

28%

Food Services

16%

Beverages 35%

Others 11%


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Figure 6: Highest CVS density(stores/ 100K people) implies the market mature

Source: Company data and Team estimates

Figure 5: Declining GDP growth restricts domestic consumption


Industry Overview and Competitive Positioning CVS sales is highly correlated to GDP growth (Appendix 3). Taiwan GDP growth has slowed down in recent years, which might be as low as 2% in 2014 and stay lethargic until 2018. (Appendix 4.) Declining real monthly salary and the reforms of social insurance impact domestic consumption as well (Figure 5, ), which is expected to be only 1.6% in 2013 and unlikely to revive in 2014, directly restricting CVS sales growth. Saturated Taiwan CVS market, rising competition from other retailers There are already more than 10,000 convenience stores in Taiwan as of Feb, 2014. Taiwan CVS market is mature with a density of 42.8 stores per 100K people, the highest in the world, compared with 36.7 for Japan and 19.5 for Shanghai. Therefore, there is little room for new convenience stores in Taiwan. The number of CVS grows slowly in recent years (Figure 6.); with new stores mostly set up by major competitor. The boundary between CVS and other retails such as wholesale stores and department stores are diminishing. For instance, Pxmart starts to provide fresh food and initiates private-label products and ecommerce business.

Hiking operating cost In Taiwan, although most CVS have already adopted LED light to reduce utilities expense, margin will decrease as Taiwan Power Company raised the price of electricity. Besides, the rise of minimum hourly wage will further affect CVS operating margin. (Appendix 5, 6.)

Lack of new products cycle Companies are focusing on boosting the sales contribution of fresh food and converting stores to the large format, which would be beneficial to same-store-sales growth. Revenue and profit growth are currently supported by the rising sales of higher-margin products and continuous penetration of non-product services. However, these strategies are becoming less effective. E-commerce is considered as the new opportunity for CVS, while the contribution is still very little.

Food safety concerns Several food scandals broke out recently, such as tainted starch and fake cotton oil events. Many products in convenience stores were involved and thus affected CVS reputation and customers’ confidence. The share price also reflected impact of these events. (Appendix 7.) As Taiwanese people are more caring about food safety, it becomes a concern for CVS.

Competition Positioning: More future threats PCSC operates 7-11 in Taiwan, commanding 49.7% of the CVS market in terms of number of stores in 3Q13. Yet the aggressive store expansion and similar strategies of competitors may limit PCSC’s future development. 1. Family Mart: The second largest operator is catching up quickly

The market share of Family Mart has grown from 25.2% in 2008 to 28.7% in 2013, narrowing its gap by 7% with PCSC’s 52.0% to 48.5%. In addition to the more aggressive store expansion, Family Mart also enjoyed higher revenue growth in 2012-13, outperforming PCSC with the increasing benefits from economies of scale. We expect the long-cherished leading

Figure 8: Family Mart catching up in 2012-13 sales growth


-15%

-10%

-5%

0%

5%

10%

15%

20%

2008 2009 2010 2011 2012 2013PCSC Family Mart

Figure 7: Family Mart catching up in market share (in terms of stores #)


25.2% 28.7%

52.0% 48.5%

0%

10%

20%

30%

40%

50%

2008 2009 2010 2011 2012 2013

Family Mart PCSC


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advantages of PCSC to diminish gradually in the future, as Family Mart continues to improve its average store sales through better product-mix and expansion of number of stores until reaching its optimal scale in the equilibrium state. (Figure 7, 8)

In China, Family Mart has outgrown PCSC with early entry in Shanghai in 2004, and it currently owns 776 stores or 12.1% market share. Turning profitable in 3Q13, the gap between the two firms is expected to widen as PCSC suffers from the lack of scale with only 73 stores, or 1.1% market share, and therefore turnaround in the near future is unlikely. (Figure 9)

2. Pxmart: Uprising competitor with lower price and aggressive expansion Pxmart is the biggest supermarket chain in Taiwan with more than 700 stores selling products of a wider variety than CVS do but at around 20% discount compared with convenience stores. Pxmart’s consignment strategy that requires no slotting fee for suppliers endows Pxmart with a lower working capital and funding requirement. Pxmart plans to expand to 1000 stores, from 700 by 2017.

Pxmart has also been experimenting various floor plans, including the followings: (1) New-style supermarket in Taipei provides freshly-cooked food, dining environment, and more product assortments. (2)It has started to accept credit cards; customers welcome such move and have made more than NT$100mn transactions via credit cards. (3)Adjust store format according to the location, catering to customers’ appetites.

We have considered Pxmart as a potential long-term threat to PCSC, and our concern has risen after Pxmart recently announced to invite Mr. Chung-Jen Hsu, former CEO of PCSC, to be the new CEO of Pxmart. Mr. Hsu’s experience and comprehensive understanding of the retail business could bring fierce competition to traditional CVS, including PCSC. (For detailed comparison please see Appendix 8)

Investment Summary: Time to sell Core convenience store growth decelerates 1. Foresee limited enhancement in sales and margin of 7-11 Taiwan Large store format conversion (Figure 10) has brought more customers and sales to 7-11 Taiwan after store expansion is muted by saturated market for years. However, we are concerned that the conversion would be less effective in boosting sales, and may slow down. The market in Northern Taiwan accounts for 57% of Taiwan CVS stores and revenue, but it also requires much higher rent expense and has heavy competition as store density is the highest in urban areas. (Appendix 9) With limited development in 2 tiers cities (Appendix 10), we expect 7-11’s sales growth should start to decelerate going forward, as both conversion speed and effectiveness deteriorate on account of increasing difficulty of conversion and inflated base point.

As a result, we only expect 1-2% of annual conversion of existing stores into large store format, which should only increase its large store format, as a percentage of total number of stores, to 70% at 2018 instead of 80% guided by

Figure 11: Sales growth decelerates as large store format conversion slows down

Source: Company data and Team estimates.

Figure 9: Operation in China comparison

Family Mart PCSC

Operation areas Shanghai, Guangzhoe,

Suzhou, Hangzhou,

Chengdu

Shanghai

Operations Family Mart Shanghai 7-11 Shanghai

Holdings 18.3% 100%

Stores(2013) 767 73

Market share 12.1% 1.1%

Profit contribution

in 2012 (NT$ mn) (24.5) (447)


Figure 10: 7-11 large store format definition Space >100 m²

Distribution Northern: lower %( due to limited space) Other areas: Higher%(with parking & restrooms)

Fresh foods 16~17%, 1% higher than traditional store

Capex 4 mn

Large store improvement

1st-year SSSG +10~15% Gross Margin + 0.1% Profit + 5%~10%



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the PCSC (Figure 11). The slower than expected store conversion could depress growth of the average sales per store (Figure 11), decreasing from 8.4% in 2012 to 2% in 2018. We forecast 2014-18 revenue CAGR to reach 3.4%, compared with 5.6% during 2007-12.

We have assumed mild 0.2% gross margin improvement of CVS in 2014-15 respectively (Figure 12; calculation see Appendix 10), to reflect the continuous increase of higher-margin product sales. However, further increase is likely to be capped considering competition from Family Mart’s identical product mix (Appendix 11) and aggressive expansion, as well as recurring food safety crisis that we believe has turned from one-time event to structural issues. As a result, both decelerating sales growth and limited margin improvement can lead to a more challenging future for 7-11 Taiwan (70% NI, 2012).

2. 7-11 Shanghai: Heavy operation cost and fierce competition We believe the loss-making situation of Shanghai 7-11 will deteriorate and breakeven in the next 2 years will be unlikely due to the following reasons:

(1) Constrained future same store sales growth(SSSG): Despite its success in raising the penetration of fresh food into the market (40% of total sales) in the past, Shanghai 7-11 aims at increasing market share without practical plans to further boost sales, which might increase losses while still searching for the correct business model. As Shanghai 7-11 plans to expand and reach 100 stores in 2014, we hold a less optimistic view toward its future SSSG due to the uncertainty.

(2) Inefficient expansion limits further growth: (Figure 14) The number of stores of Shanghai 7-11 accounts for only 1% in the market of 6400 stores, and the situation is likely to deteriorate by the immaturity of its franchise system and the aggressive expansion of its competitors. On the other hand, Family Mart’s 12% market share alleviated their cost and breakeven is expected to be attained by increasing franchise stores and improving stores’ quality in 2013.

(3) Hiking operation cost (Figure 15, 16) : In the past, Shanghai 7-11 enjoyed better SSS level because of the higher consumption power in the business districts, but the strenuous burden of operating cost per store such as rents has incurred losses for Shanghai 7-11. The labor cost has spiked 13% p.a. in Shanghai since 2010 with rising demand fueled by rapid economic growth. Rents of commercial real estate in first-tier cities have also increased by 7% p.a. as demand of commercial real estate surged. In the future, the establishment of Shanghai Pilot Free Trade Zone in 2013 will further push the rents and wages level upward in this city.

Figure 16: Rent and salary growth


Wage CAGR 13%

Rent CAGR 6%

Figure 12: Next peak cycle will be lower by weaker higher-margin product sales%


Figure 13: 7-11 Taiwan decreasing SSSG as market becomes saturated


Figure 14: 2012 market shares in Shanghai


Figure 15: 7-11 sales cannot cover cost


As a % of sales


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Limited growth on major retail subsidiaries

President Pharmaceutical and Cosmed are major retail subsidiaries with 8.7% contribution to the consolidated income of PCSC. However, the great NI CAGR of 30% in 2010-2013 will not be seen in the future. On the contrary, we see low single digit NI CAGR, 8.6%, in 2014-2016. (Figure 17)

President Pharmaceutical offers skincare products and dietary supplements, which respectively account for 45% and 28% of total product lines. 50% of the revenue comes from facial masks, My Beauty Diary. China and Taiwan are the major markets with 70% contribution to total revenue. In Taiwan, the drug & cosmetics retail sales has grown sluggishly (Figure 18), leaving little sustainable sales growth. In the fast-growing China skincare industry, however, the competition is fierce with more than 100 players and dominating brands, posing further threats to PCSC. We see increasing difficulty in boosting sales on account of competition in China and disappointing prospect of Taiwan. Overall, we expect that President Pharmaceutical could only have a fading but stable growth rate of net profit at around 16% in the future, compared with an average of 67% in the past three years. (Appendix 12)

Cosmed is the second largest drug store in Taiwan, providing cosmetics, dietary supplements and necessities through 358 stores. Its biggest competitor, Watson’s, has 456 stores in 2013. We expect the gap of number of stores will widen in 2014 as slower expansion plan results in a falling market share. (Figure 19) Besides, Cosmed’s recent strategies of introducing professional consultants and new format stores are less effective as Watson’s has leveraged the same strategies with its greater market share before. We expect little improvement of Cosmed in both market positioning and growth momentum as NI growth falls to -10% in 2014 from its peak, 79%, in 2010. (Appendix 12, 13)

Starbucks growth might disappoint the catering growth

There were approximately 13,000 cafés in Shanghai city in 2012 tailored to satisfy all classes. Shanghai Starbucks is a leader in high-end cafés and expected to contribute around NT$500mn profit to PCSC in 2013. However, we see some future risks of Shanghai Starbucks and we believe market consensus could be too bullish.

(1) Relative lower and limited SSSG The SSSG of Shanghai Starbuck was much less than US in 2013 due to different consumption behaviors. People prefer “Stay In” rather than “To Go” in Shanghai. On the other hand, market becomes more competitive with aggressive peers: (i) MAAN Coffee provides supreme services, foods and cozy space. (ii)Costa Coffee & Pacific Coffee expanding aggressively with rents advantages pose threat to the SSSG of Shanghai Starbucks and market shares. (Figure 20)

(2) Increasing cost High rent and wage levels caused by rapid economic growth and construction activities amount to a staggering operation cost,

Figure 21: Zhejiang 3&4 tiers vs Shanghai


Figure 17: Retail business NI growth


Figure18: Taiwan Drug & Cosmetics retail sales

Source: Taiwan Institute of Economic Research

Figure19: Number of stores


3% 2%

7% 8% 8% 8% 8%

2010 2011 2012 2013 2014F

Shanghai US

Figure 20: SSSG of Starbucks


3% 2%

7% 8% 8% 8% 8%

2010 2011 2012 2013 2014F

Shanghai US


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approximately 34% total sales of Shanghai Starbucks in 2013. In the future, we believe the operation cost will keep on rising as noted before.

(3) Flattish expansion plan (Figure 21) Shanghai Starbucks is planning to expand to Zhejiang, focusing on 3-tier and 4-tier cities due to lower rent level and less competition. We expect low contribution from such plans to PCSC as GDP per capita, population density and coffee culture are not mature enough to help generate much profit to contribute to the growth of PCSC.

Taiwan President Starbucks: limited expansion capacity Taiwan President Starbucks opened its 300th store and attained their record high sales and profit contribution in 2013. However, we are much concerned that the further growth of Taiwan Starbucks might disappoint due to the following reasons:

(1) Saturated market The store density of Starbucks in Taiwan is the second highest in Asia. (Figure 20) It suggests that Taiwan is a relatively saturated market and it lacks expansion capacity.

(2) Conservative expansion (Figure 23) In Starbucks’s 2014Q1 expansion plan, the opening of only 6 new stores is considered, which is less than that in the previous year. Its conservative expansion suggests the flattish future growth of Taiwan Starbucks.

Financial Analysis: Stability might not be preferred

Return slows down after reaching peak in 2013 PCSC experienced very strong profit growth in 2013, expected EPS is NT$8.10, up 24.9% YoY, yet we expect the pace to slow in 2014F/2015F at NT$8.21/8.89. The deceleration is attributed to the rising operating expense (i.e. electricity fee and labor cost), and flattish investment income. Projected ROE will drop to 25.7%, compared with 29.2% in 2013. (Figure 24)

Excessive return narrowing Declining excessive return (=ROIC-WACC) as an indicator implies a downside correction of PCSC share price, since the return investors can earn over opportunity cost is slumping, from 21.26% in 2013 to 16.78% in 2014. Decrease in return on invested capital (ROIC) can explain the result. Both operating margin and capital investment turnover drop because sales growth cannot catch up with cost hike and asset growth. (Figure 25, Appendix 251)

Revenue grows yet fails to meet market expectation 2014F revenue is NT$232,394mn, up 7% YoY. Improvement in operation efficiency and new business expansion are key growth drivers, yet the lower-than-consensus revenue is because (Figure 26 in next page):

(1) Effects of conversion to large store format are diminishing, as the number of stores available for conversion decreases. Besides, competitors have adopted the same strategy as well.

Figure 25: Narrowing Excessive return implies downside correction


Figure 24: ROE become less attractive


Figure 22: Starbucks stores per 100K people in Asia


Figure 23: Starbucks 2014Q1 new stores in Taiwan



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Figure 28. SOTP Table and contribution pie chart

Business Parts Methodology Fair Value (mn) NAV per share (NT$) % of firm value

Convenience Store 98,670 94.9 58.6%

7-11 Taiwan DCF 82,426 79.3 49.0%

7-11 Philippines 68.0x PER 564 0.5 9.3%

7-11 Shanghai 1.0x PBR 15,680 15.1 0.3%

Retail 8.6x PER 29,100 28.0 17.3%

Logistics 3.4x PBR 3,461 3.3 2.1%

Catering 5,740 5.5 3.4%

Shanghai Starbucks 8.6x PER 3,947 3.8 2%

Taiwan Starbucks 3.4x PBR 1,257 1.2 1%

Others 1.0x PBR 536 0.5 0.3%

SOTP

Sum-of-the-Parts Value 136,971 131.8 81%

Net cash/ (net debt) 31,370 30.2 19%

Fair Value 168,341 161.9 100%

Outstanding Shares(mn) 1,040

Target Price (NT$) 161.9

(2) Saturated market and more severe competition from peers. Declining real per capita wage also offsets the upside of the recovering economy.

(3) Revenue contribution from subsidiaries will not be as good as expected. Most profitable subsidiaries contribute little to PCSC, such as Shanghai Starbucks and President Transnet, yet other subsidiaries keep suffering from losses, like Shanghai 7-11 and Coldstone.

Margins will grow slightly, lower than expected We expect gross and operating margin would reach 31.2% and 5.2% in 2013 respectively, and would be stable at 31.5% and 5.0% in 2015. Both gross and operating margins have been growing, as large store format and private-label product strategy work, while we expect the growth to slow down.

Dividend yield becomes less attractive as stock market revives Dividend yield will be low to 2% for 2014, which is lower than before, implying downside correction of the share price. (Figure 27)

Valuation:

Fully priced, trim into consensus optimism Target price NT$162 from Sum-of-the-parts (SOTP) valuation Our price target is NT$162 with 14.9% downside (currently NT$ 188.0, see Figure 28), which is derived from Sum-of-the-parts valuation and implies 19.0x 2014F P/E (Figure 29). We divides PCSC into four segments for valuation, including convenience stores, retails, logistics, and caterings. Methodologies for each part are illustrated as following:

Figure 26: Sales and OPM lower than consensus


150,000

200,000

250,000

2013F 2014F 2015F

NTUe Sales Consensus Sales

0%

2%

4%

6%

8%

2013F 2014F 2015F

NTUe OPM Consensus OPM

Convenience Store 59%

Retail 17%

Logistics 2%

Catering 3%

Net cash 19%

Per share value %

Figure 27: PCSC dividend yield down


0%

2%

4%

4.5

5.0

5.5

2010 2011 2012 2013F 2014F 2015F

Dividend Per Share Dividend Yield

Figure 29: Forward PE Band, 20-32x in the past 3 years



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Figure 29. Stock price sensitivity to WACC and all store sales growth

All store sales growth (YoY)

3% 4% 5% 6% 7%

WACC

7.9% 116 144 174 206 238

8.4% 114 140 168 196 226

8.9% 112 137 162 188 216

9.4% 111 133 157 182 207

9.9% 110 131 153 175 199

Note: Growth of average sales per store decreases 1% per

year from 5% in 2013 to 2% in 2016, and stay at 2% till 2018.

Figure 31. Cost of capital assumption

Weight Cost W x C

Equity 99.0% 8.97% 8.88%

Debt 1.0% 0.98% 0.01%

WACC 8.89%

Cost of Equity 8.97%

Risk Free Rate 1.46%

Risk Premium 11.8%

Beta 0.64x

Cost of Debt 0.98%

Source: Bloomberg and Team estimates

Convenience Store Segment: 7-11 Taiwan: DCF Our DCF model is under the assumption of 8.9% WACC (Appendix 14) (Risk-free rate: 1.46%, Beta: 0.64 (Appendix 15), Market risk premium: 13.26%) and 1.46% terminal growth rate. (Appendix 16)

(1) Revenue: We forecast 3.4% of total revenue CAGR in 2013-18, compared with 5.6% in 2007-2012. The top line growth will slow down as competition intensified and CVS market steps into a saturated stage. (Figure 30)

(2) Operating income: The operating income growth is likely to slow with gradually fading momentum of sales growth and rising operating expenses including unit labor cost, utility fees and store format conversion. (Figure 31)

(3) CAPEX& NWC requirement: According to PCSC’s guidance, the 7-11 Taiwan will incur NT$3 bn CAPEX per year, as the store conversion and re-decoration cost remain stable. We found that net working capital accounts for around -3.21% of total revenue in the past 10 years, which is used as our assumption for modeling.

7-11 Philippines: 68.0x PER We apply the current PER in Philippines stock market, considering 7-11 Philippines’ high earning growth and business expansion. The market consensus on it is over 70x PER. However, we see the future of it to remain stable due to the high base of 2013, more crowded CVS market and the lack of new strategy. Thus we discount its PER to 68x.

7-11 Shanghai: 1.0x PBR We apply the multiple of 1.0x PBR, due to the loss-making situation of 7-11 Shanghai, and we see little chance for it to turnaround in near future, as the operating cost rises while 7-11 Shanghai faces more severe competition.

Retail Business We apply 8.6x PER for retail business, considering the businesses in this segment, including President Pharmaceutical, President Transnet, President Drug Store and etc., have higher sales growth compared to CVS. The multiple is derived from declining net profit CAGR, which stands at 8.6% for 2014-16.

Logistics support function Logistics segment includes three main companies: Wisdom distribution service, Uni-president cold-chain and Retail support international. We apply 3.4x PBR which is calculated by the PB-ROE method with 32% average ROE, 8.97% cost of equity and 95% payout ratio.

Caterings segment For Shanghai and Taiwan Starbucks, we apply 5.8x PER/ 3.6x PBR respectively, referring to PEG and PB-ROE methods. For other loss-making subsidiaries we use 1.0x PBR.

Figure 30: 7-11 Taiwan forecasts

CAGR 2007-12 2013F-18F

Total revenue 5.6% 3.4%

Gross profit 4.4% 4.0%

Operating expenses 4.6% 4.5%

Operating income 3.6% 1.6%

Net income 7.4% 2.4%

Source: Company data and Team estimate


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Investment Risk: Limited upside potential Stronger-than-expected sales and gross margin recovery in Taiwan CVS CVS sales is highly correlated to the macro environment, so better domestic consumption could boost PCSC's sales growth & operating margin. If conversion into large store format speeds up more than we expected, and 7-11 Taiwan’s SSSG is lifted to high single digit growth; or the product mix enhancement progresses at a higher pace, improving the gross margin, the stock price might outperform our target price. (Figure 32)

Early turnaround in China business Shanghai Starbucks is likely to have a surging growth due to aggressive expansion in Zhejiang and a turnaround of 7-11 Shanghai operation because of better execution and location selection is another upside risk to our estimates.

Outstanding growth momentum on major subsidiaries President Pharmaceutical and 7-11 Philippines have high double digit growth steadily in recent years. Once any of them initiates new products and services, or aggressive promotion events, an unexpected growth may happen.

However, we see the aforementioned two risks as limited due to their low contribution and the uncertainty of China business model. We also have a bull and bear scenario analysis below to explain how the valuation will change based on our first risk, the core of PCSC.

Figure 32: Bull and bear scenario analysis of 7-11 Taiwan

Scenario Bearish Base Bullish

Net add store # /year 24 48 52

Gross Margin Adjustment -0.1% 0% +0.1%

All Store Sales Growth 4% 5% 5.5%

Note: For detailed assumptions and calculations, please refer to Appendix 10, 14.

119 6

24 13 162 9

13 14 198

0

50

100

150

200

250

Bearish Weak APSG Worse GM Fewer StoreNumbers

Base More StoreNumbers

Better GM Strong APSG Bullish

(NTS)

Figure 32: What we differ from consensus

Segment Our research Consensus

7-11 Taiwan

limited improvement in sales and margin

Stronger sales& gross margin recovery

7-11 Shanghai

Cannot turn around in 2014

Early turn around

Shanghai Starbucks

Income level, population density suggest that Zhejiang is not a great market

Zhejiang has much potential growth

President Pharmaceutical

China business faces fierce competition and Taiwan business grows sluggishly

Growth with new products and services by aggressive promotion events

7-11 Philippines

Metro Manila is saturated

Maintain double digit growth in the future



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A. The history of services provided by 7-11 Taiwan

1985 1990 1995 2000 2005 2010 2015

Microwaved FoodRecycling

Mail ReceivementDoor to door delivery

Cloud MallBienTang

Low temperature door to door deliveryCafé

Beauty ProductOnline purchase payment and collection

ibonTelecommunication

ClothingTuition and Fees Collection

Appendix 1: Company Profile: Best leader, but advantage narrowing

B. 7-11 TAIWAN: REMAIN THE BIGGEST CONTRIBUTOR OF FOUR MAIN BUSINESS GROUPS

Company name Ownership Main business Profit contribution Sales contribution

7-11 TAIWAN 100% CVS 82% 63%

C. Retailing : contributed 10% total profit and 16.3 consolidated sales

Major subsidiaries Ownership Main business Profit contribution Sales contribution

President pharmaceutical 74% Medicines 3% 5.6%

President drugstore 100% Drugs, cosmetics 3% 2.7%

President Transnet 70% Delivering 2% 3.0%

Philippine seven corporation 52% CVS 2% 5.0%

Total major retailing 10% 16.3%

Others 3% 10.7%

Total retailing 13% 27.0%

D. Logistics : contributed 3% total profit and 0% consolidated sales because of related party transaction

Major subsidiaries Ownership Main business Profit

contribution Sales contribution

Wisdom distribution service 100% E-commerce logistic

Magazine delivery 0% 0%

Uni-president cold-chain 60% Frozen food delivery 2% 0%

Retail support international 25% Room-temperature food

Delivery 1% 1%

Total logistics 3% 1%

E. Others : contributed 5% total profit and 9% consolidated sales

Major subsidiaries Ownership Main business Profit Sales contribution


12

contribution

President chain store (shanghai) 100% CVS -5% 1%

Shanghai President Starbucks 30% Coffee Chain 3% -

President Starbucks 30% Coffee Chain 1% -

Others major total -1% 1%

Others

(more than10 firms) - - 9% 8%

Others total 5% 9%

Source : Company data

H. Financial summary of PCSC’s major subsidiaries

NT$ mn 2008 2009 2010 2011 2012 08-13

P PRESIDENT PHARMACEUTICAL

BV 356 411 473 586 734

RECOGNIZED NI 44 66 123 203 302

ROE 12% 16% 26% 35% 41% Avg. ROE 26%

PRESIDENT DRUGSTORE

BV 549 714 755 826 782

RECOGNIZED NI 97 166 297 338 283

ROE 18% 23% 39% 41% 36% Avg. ROE 31%

PRESIDENT TRANSNET

BV 363 487 616 793 876

RECOGNIZED NI 99 124 143 163 177

ROE 27% 25% 23% 21% 20% Avg. ROE 23%

PHILIPPINE SEVEN CORPORATION

BV 411 486 557 644 703

RECOGNIZED NI 56 104 185 144 339

ROE 14% 21% 33% 22% 48% Avg. ROE 28%

F. Revenue breakdown by business


Ownership Company Name Recognized Profit Sales

100% 7-11 Taiwan 82% 62%

74% President Pharmaceutical Corp 3% 5.60%

100% Cosmed 3% 2.70%

70% President Transnet Corp 2% 3%

52% Philippine Seven Corporation 2% 5%

100% Wisdom Distribution Service Corp 0% 0%

60% Uni-President Cold-Chain Corp 2% 0%

25% Retail Support International Corp 1% 0%

100% President Chain Store (Shanghai) Ltd -5% 1%

30% Shanghai President Starbucks Corp 3% -

30% President Starbucks Corp 1% -

- Others 5% 21% Source : Company data

7-11 Taiwan

63% Retails 27%

Logistics 1%

Others 9%

G. Profit breakdown by business


7-11 Taiwan

82%

Retails 13%

Logistic 0%

Others 5%


13

WISDOM DISTRIBUTION SERVICE

BV 190 177 251 258 213

RECOGNIZED NI 48 34 102 98 47

ROE 25% 19% 41% 38% 22% Avg. ROE 29%

UNI-PRESIDENT COLD-CHAIN

BV 353 377 434 457 479

RECOGNIZED NI 86 103 155 160 180

ROE 24% 27% 36% 35% 37% Avg. ROE 32%

RETAIL SUPPORT INTERNATIONAL

BV 134 133 141 152 141


ROE 23% 23% 28% 30% 36% Avg. ROE 28%

PRESIDENT CHAIN STORE

(SHANGHAI)

BV - 382 208 568 383

RECOGNIZED NI - -89 -161 -324 -447

ROE - -23% -77% -57% -117% Avg. ROE -69%

SHANGHAI PRESIDENT STARBUCKS

BV 193 223 259 434 553

RECOGNIZED NI 50 69 113 224 324

ROE 26% 31% 44% 52% 58% Avg. ROE 42%

PRESIDENT STARBUCKS

BV 137 156 224 263 286


ROE 15% 21% 44% 48% 49% Avg. ROE 35%


14

Appendix 2: Financial Statements

Financial Summary: President Chain Store Co.(Year to Dec.31, NT$mn)

Income Statement 2012 2013F 2014F 2015F Cash Flow Sattement 2012 2013F 2014F 2015F

Net sales 208,264 217,284 232,394 248,123 Net profits 7,624 9,431 9,936 10,348 COGS (145,044) (149,491) (159,538) (170,088) Depreciation 4,317 4,531 4,767 5,032 Gross profit 63,220 67,793 72,856 78,035 Other adjustments 5,047 3,930 2,933 3,035 Operating expenses (54,493) (56,494) (60,887) (65,504) Cash flow from operating 16,987 17,892 17,636 18,415 Operating income 8,727 11,299 11,968 12,530 (Purchases) sale of FA (capex) (6,806) (6,439) (6,883) (7,416) Non-operating income 747 491 452 404 (Purchases) sale of L/T investment 984 239 1,364 241 Interest income (12) 74 217 247 Other adjustments (632) (632) (632) (632) Investment income 256 358 317 349 Cash flow from investment (6,454) (6,831) (6,150) (7,807) Disposal of investment 987 263 105 - Increase in L/T debt (1,670) (113) (43) (42) Other (484) (205) (187) (191) Cash dividends (4,990) (5,042) (5,146) (5,250) Pre-tax income 9,474 11,789 12,420 12,935 Other adjustments (23) (484) (101) 248 Income tax (1,850) (2,358) (2,484) (2,587) Cash flow from financing (6,683) (5,639) (5,290) (5,044) Minorities (834) (1,032) (1,087) (1,132) Exchange Influence (205) - - - Net income 6,789 8,399 8,849 9,215 Net change in cash 3,645 5,422 6,196 5,564 EPS (NT$) 6.53 8.08 8.51 8.86 Cash Equiv.-End 20,025 25,447 31,642 37,206

Balance Sheet 2012 2013F 2014F 2015F Financial Ratios 2012 2013F 2014F 2015FCash 20,025 25,447 31,642 37,205 MarginsMkt securities 6,163 6,163 6,163 6,163 Gross margin 30.4% 31.2% 31.4% 31.5%Accounts/Notes receivables 4,125 4,303 4,603 4,914 Expense ratio 26.2% 26.0% 26.2% 26.4%Inventory 10,610 10,690 11,294 11,910 Operating margin 4.2% 5.2% 5.2% 5.1%Others 4,209 4,352 4,566 4,788 Pretax margin 4.5% 5.4% 5.3% 5.2%Current Assets 45,131 50,955 58,268 64,979 Net margin 3.3% 3.9% 3.8% 3.7%Long-term investments 9,329 9,431 8,368 8,459 Fixed assets 21,436 23,323 25,438 27,822 YoY growthOther assets 5,317 5,355 5,393 5,431 Sales 10% 4% 7% 7%Total Assets 81,213 89,064 97,466 106,691 Gross profit 4.7% -45% -41% -6%

Opex 6% -73% -129% -35%Accounts/Notes payable 21,097 21,728 23,239 24,812 Operating profit -2% -73% -129% -35%Other S/T liabilities 27,077 27,900 29,567 31,647 Net profit 7% -72% -107% 166%Total current liabilities 48,173 49,629 52,806 56,459 EPS 7% -72% -107% 166%Other liabilities 4,142 6,262 6,739 7,256 L/T debt 2,264 2,150 2,107 2,065 Cash div. payout ratio 74% 60% 58% 57%Total liabilities 54,578 58,041 61,652 65,780 Div. yield 3.2% 2.2% 2.3% 2.4%

Liabilities / Equity 205% 187% 172% 161%Common stock 10,396 10,396 10,396 10,396 Liabilities / Assets 67% 65% 63% 62%Reserves 6,028 5,933 5,965 6,361 ROAE 27% 29% 26% 24%Retained earnings 6,825 10,277 13,948 17,517 ROAA 9% 24% 24% 24%Other equity (338) (338) (338) (338) AR/NR turnover (days) 26.0 25.1 24.9 25.7 Minority interest 3,724 4,756 5,843 6,975 AP/NP turnover (days) 52.3 51.4 51.6 53.5 Shareholders' equity 26,634 31,024 35,814 40,911 Inventory turnover (days) 7.1 7.0 7.0 7.3 Total liabilities & equity 81,213 89,064 97,466 106,691 Cash conversion cycle (days) (19.2) (19.3) (19.7) (20.6)

NTU Research


15

Appendix 3: Regression: CVS sales(Y) on GDP per capita(X)

Appendix 4: Declining purchasing power limited CVS development

Source: Government data and Team estimates

41,00042,00043,00044,00045,00046,00047,00048,000

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Declining real salary

Real Salary(basis:2011)

Equation: Y=0.016+0.873x, Adjusted R-square: 0.59, t-stat: 3.78,


-5%

0%

5%

10%

-5% 0% 5% 10%

CVS sales YoY growth

GDP YoY growth

Regress CVS sales YoY growth on GDP YoY growth


16

Appendix 5: Hiking electricity expense spikes operating cost

Appendix 6: Higher hourly wage expense spikes operating expense

Appendix 7: Food scandal affects PCSC share price

Source: Team estimates

-10%

0%

10%

20%

30%

40%

50%

PCSC TAIEX

Cottonseed oil event, PCSC -3% (TAIEX -2%)

Tainted Starch event, PCSC -7% (TAIEX -1%)

Taiwan CVS annual electricity usage (kWh) 1,660 mn

Taiwan CVS store # (2013 average) 9,937

Average annual electricity usage per store (kWh) 167 K

PCSC store # (End of 2013) 4,922

PCSC annual electricity usage (kWh) 816 mn

Electricity price (NT$/kWh) 3.5

PCSC annual electricity expense (NT$mn) 2,856

Electricity hike 5%

Annual additional electricity expense 143

Full-year impact in 2014 (NT$mn) 107


Full-year impact in 2014(NT$ MN) 500

Base salary increase(NT$/hr) 6.0

Incremental annual salary expense(NT$K/store) 102

PCSC store 4,922

Average number of time workers

Day Shift/Night Shift/Graveyard 2.1/2.1/1.6

Number of working hours 8



17

Appendix 8: Comparison of major retail competitors


7-Eleven Family Mart Pxmart

Number of Stores 4922 2894 700

Franchising (%) 89% 90.4% -

Private-Label Products Yes Yes No

Product Assortment 2,000-3,000 2,000-3,000 10,000

Target Customers Convenience first Convenience first Seek for Lower Price

Advantages Conglomerate

Number of Stores

Expand CVS business overseas

prior to PCSC

Cheaper price

Cost reduction

Strategy Focus and brand restructure

New Format;

New Business;

New Area

Replace hyper-market;

Change format

Expansion - - To 1000 in 2017

(CAGR: 9.32%)

E-Commerce Yes, 7-net. Cooperate with Yahoo and

PayEasy No, but allow credit card.

Threats to 7-11 -

Expand CVS business prior to

PCSC, and will benefit from the

growth of great China.

1. Lower price and cost

2. Hsu’s management

3. Aggressive Expansion


18

Density of 7-11, Family Mart, and Pxmart in Taipei City(Stores # per km2)


0

2

4

6

8

10

Wanhua Songshan Daan Zhongshan Shihlin Xinyi Tatung Zhongzheng Nangang Wenshan Wenshan Beitou Neihu

PCSC Family Mart Pxmart

Density of 7-11, Family Mart, and Pxmart in New Taipei City(Stores # per km2)


0

5

10

Yonghe Luzhou Banciao Sanchung Hsinchuang Zhonghe Tucheng Shulin Taishan Yingge Dan Shuei Xizhi Xindian Wugu Linkou

PCSC Family Mart Pxmart

Appendix 9: Densely populated CVS in Northern Taiwan (5 cities); high rent cost

Density of 7-11, Family Mart, and in Taoyuan City(Stores # per km2)

Density of 7-11, Family Mart, and in Hsinchu City (Stores # per km2)

Density of 7-11, Family Mart, and in Miaoli City(Stores # per km2)


0

1

2

3

4

Chungli Pingjhen Longtan Bayberry ShinWu Guanyin Taoyuan Guai Shan Bade Dasi Fuxing Dayuan Luzhu

0

0.5

1

1.5

2

2.5

3

Northern Eastern XiangshanJubei City Hukou Xinfeng Sinpu Kansa Qionglin Baoshan Zhudong Wufeng Hengshan Jianshih Beipu Emei

0

0.2

0.4

0.6

0.8

Chunan Tofen Sanwan South LionLake

Houlong Tongsiao Yuanli Miaoli Zaociao Touwu Manor Tahu Taian Gong Sanyi Lake Jhuolan


19

High rent cost in Northern Taiwan (NT$/3.3m2)

Source: Company data and 581 Ren

0

1,000

2,000

3,000

Taipei City NewTaipei City

Hsinchu Taoyuan Taichung Kaohsiung Ilan Tainan


20

Appendix 10: Forecasted gross margin calculation

Sales % 7-select City Cafe Fresh foods Total Net add sales% 2010 4.20% 4.50% 17.80% 26.50% 3.80% 2011 5.00% 6.00% 16.50% 27.50% 1.00% 2012 5.37% 7.00% 17.00% 29.37% 1.87% 2013F 5.77% 7.50% 17.50% 30.77% 1.40% 2014F 6.17% 7.75% 18.00% 31.92% 1.15% 2015F 6.57% 8.00% 18.50% 33.07% 1.15% 2016F 6.97% 8.25% 19.00% 34.22% 1.15% 2017F 7.37% 8.50% 19.50% 35.37% 1.15% 2018F 7.77% 8.75% 20.00% 36.52% 1.15% Gross margin 40% 55% 35%

Detailed calculation: (PL = private label products = high margin products = 7-Select+city café + fresh food; GM = gross margin)

PL GM % Other GM Total GM

2012 GM 11.95% 24.55% 29.28%

2012 Sales 29.37% 70.63%

Assumption: The gross margin of “others” products will remain the same as 2012 in the future.

Total

Sales

PL

Sales %

PL

Sales Others Sales

PL

GP

Others

GP

Total

GP

CVS

GM

2012 127,949 29.4% 37,579 90,371 15,287 22,182 37,470 29.28%

2013e 135,688 30.8% 41,751 93,937 17,040 23,058 40,097 29.55%

2014e 142,654 31.9% 45,535 97,119 18,589 23,839 42,427 29.74%

2015e 148,289 33.1% 49,039 99,250 20,023 24,362 44,385 29.93%

2016e 152,516 34.2% 52,191 100,325 21,315 24,625 45,940 30.12%

2017e 156,728 35.4% 55,435 101,293 22,644 24,863 47,507 30.31%

2018e 160,921 36.5% 58,768 102,153 24,010 25,074 49,084 30.50%


0%

1%

2%

3%

4%

2007 2008 2009 2010 2011 2012 2013F 2014F 2015F 2016F 2017F 2018F

Incremental % of total high-margin products sales(%)


21

66

123

203

302

402

466 90% 87%

65%

49%

32%

16%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0

50

100

150

200

250

300

350

400

450

500

2009 2010 2011 2012 2013F 2014F

President Pharmaceutical

NI(NT$, MN, LHS) YoY Growth(RHS)

166

297

338

283 297

267

70% 79%

14%

-16%

5% -10%

-40%

-20%

0%

20%

40%

60%

80%

100%

0

50

100

150

200

250

300

350

400

2009 2010 2011 2012 2013F 2014F

Cosmed

NI(NT$, MN,LHS) YoY Growth(RHS)

Appendix 11: Family catching up on private-label products

Category Family Mart 7-11

7-Select / Family Mart Collection

Readily made food 3 3

Clothing 3 3

Beverages 3 3

Daily Necessities 3 3

Coffee 3 3

Ice-cream 3 3

Microwaved Meal 3 3

Launched Date November 2013 2009

Source: Team estimate

Appendix 12: Tumbling net income growth on two major retail subsidiaries

Appendix 13: Comparison of Watson’s and Cosmed

Watson’s Cosmed

Target Customers 18-29 ladies 40 middle-aged women

Product mix 50% Cosmetics

20% Drugs 30% Daily Products

30% Drugs 30% Cosmetics

30% Daily Products

Store Format Two-floors One-floor to two

Professional Consultants Yes Yes

Source: Company Data


22

WACC assumptions:

Weight Cost W x C

Equity 99.0% 8.97% 8.88%

Debt 1.0% 0.98% 0.01%

WACC 8.89%

Cost of Equity 8.97%

Risk Free Rate 1.46%

Risk Premium 11.8%

Beta 0.64x

Cost of Debt 0.98%


Stock price sensitivity to WACC and all store sales growth

All store sales growth (YoY)

3% 4% 5% 6% 7%

WACC

7.9% 116 144 174 206 238

8.4% 114 140 168 196 226

8.9% 112 137 162 188 216

9.4% 111 133 157 182 207

9.9% 110 131 153 175 199

Note: Growth of average sales per store decreases 1% per year from 5% in 2013 to 2% in 2016, and stay at 2% till 2018.

Appendix 14: Assumption of 7-11 Taiwan DCF Valuation Appendix 15: Beta calculation

Market Model:

Result : significant level = 5%

𝑅_𝑖𝑡="0.0007"+𝟎.𝟔𝟑𝟔𝟓𝑅_𝑚𝑡

𝑡=2735

𝑅-Square=0.1951,Adj R-Square=0.1948

F = 662.8098 (Significant)

T = 2.2320, p-value = 0.025686


-7%

0%

7%

-7% 0% 7%

PCSC

's re

turn

Market return

Daily return scatter plot 2003-2013


23

Appendix16: Terminal growth calculation Appendix 17: As we forecast, the contribution to EBIT of the major retail subsidiaries in 2014 could only around 5% at most.

Appendix 18: Saturated market with limited store expansion capacity

Source: Company data, Team estimates

0

2

4

6

8

2011 2012 2013F 2014F 2015F

Major Subsidaries' NI to consolidated EBIT

Preisdent Pharmaceutical President Transnet President Drug StorePhilippine 7-11 Shanghai Starbucks


2018 growth rate forecast:ÆAssuming 2013~18 CAGR = past 5 years CAGR

Lower bound, 0.75 Weighting

Upper bound, 0.25 Weighting

Inflation: 1.1%

Terminal growth 1.5% = 2.7%*0.25 + 1.1%*0.75

GDP growth: 2.7%

According to our analysis, there is little room to expand convenience stores.

Region Stores

(A) GDP per Capita

(B) Population

(C) GDP per store

(B*C)/A

Taipei 1,726 $31,079.97 2,688,140

48,405,163 Taiwan 10,012 $20,850.00 23,377,515 48,405,163 Stores at End of 2014 10,070

*Assume Taiwan GDP per store will catch up with Taipei’s

Implied Capacity 58 Stores (*Net increase)

Assumptions:

1. Taipei’s GDP per store is the saturated point

2. Taiwan GDP per store will catch up with Taipei’s

3. “58 stores” capacity is the “net increase”

Æ With PCSC/Family Mart gaining from other players. Source: Team estimate


24

Appendix 19: PCSC is no longer a defensive stock According to rising beta and significant regression, we infer that PCSC’s stock performance and average store sales are

correlated with macro economy

.

Source: Bloomberg

0.698

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

18y 17y 16y 15y 14y 13y 12y 11y 10y 9y 8y 7y 6y 5y 4y 3y 2y 1y

Rising beta trend for PCSC

Equation: Y=0.0684X-3864.6

Adjusted R-square: 0.64

t-stat: 5.78


4,000

5,000

6,000

7,000

8,000

125,000 135,000 145,000 155,000 165,000

Aver

age

quar

terly

sa

les p

er st

ore(

NT$

K)

GDP per capita (NT$)

Regress average quarterly sales per store on GDP per capita


25

Appendix 20: Peers comparison PE Ratio PB Ratio ROE

Ticker Company Name Price(US$) 2011 2012 2013F 2011 2012 2013F 2011 2012 2013F

Taiwan

TSEC:2912 PCSC 6.40 27.46 24.96 23.70 8.64 7.59 8.17 26.68 26.70 29.14

GTSM:5903 Family Mart 5.76 26.65 36.21 38.02 6.28 7.00 9.73 24.23 18.62 25.45

Japan

TSE:3382 Seven & I 41.14 18.53 14.97 23.92 1.10 1.19 1.85 6.48 8.34 -

TSE:2651 Lawson 76.70 21.78 17.38 22.91 2.35 2.67 3.31 12.64 15.32 15.19

TSE:9946 MINISTOP 16.14 12.99 12.81 37.09 0.76 0.73 0.79 5.27 4.03 2.50

Thailand

SET:CPALL CP ALL PCL 1.21 29.16 42.00 33.52 11.72 17.21 14.22 41.75 44.54 41.17

Source: Capital IQ

Appendix 21: PCSC is the second expensive according to PEG analysis

Company Country PEG(X) EPS Growth (%)

PCSC Taiwan 1.1 23.7

Family Mart Taiwan 1.06 35

Seven & I Japan 1.02 22.48

CPALL Thailand 2.24 14.3

Source: Capital IQ

Source: Capital IQ

0

5

10

15

20

25

30

35

40

0 5 10 15 20 25 30 35 40

Price Earning to EPS Growth Analysis

PCSC Seven & I CPALL Family Mart

PCSC

P/E

EPS Growth (%)

PEG=1X Family Mart

Seven & I

CPALL 23.7

26.1


26

Appendix 22: Limited capacity analysis of future Shanghai Starbucks expansion

Main business district Shanghai

Lujiazui

Shanghai

Jingan

Shanghai

Huangpu

Taipei

Zhongzheng

Taipei

Daan

Taipei

Xinyi

Shanghai

Xujiahui

Population Density(K/KM²) 4.0 32.3 33.1 21.4 27.6 20.3 19.8

Coffee chain stores Density(N/KM²) 2.94 5.64 2.83 5.13 3.95 2.32 0.88

Potential customer(K) /Store 1.4 5.7 11.7 4.2 7.0 8.8 22.6

Total chain Stores(N) 5 43 58 39 45 26 48

Mature capacity 5 43 78 39 45 26 124

Capacity for new stores 0 0 20 0 0 0 76

Source : Company data, China government, Team estimates

The results suggest that

(1) Shanghai Xujiahui has more capacity to expand than Huangpu, and

(2) Approximately 100 new stores capacity in Shanghai major business district.

Appendix 23: Cash flow trend

Appendix 24: PB Band, 6-10x in past three years

Source: Company data, Team estimates

72 76 124

183 170 174 167 179

(56) (28) (44)

(70) (65) (62) (56) (72)

16 48

80

113 105 111 112 106

2008 2009 2010 2011 2012 2013F 2014F 2015F

CFO CFI FCF



27

Appendix 25: ROIC down as OPM and turnover drops

Appendix 26: Risk matrix

Appendix 27: E-commerce would contribute low even given high revenue growth Source: Team estimates

Significant

z Stronger-than-expected

SSSG and gross margin

recovery in Taiwan CV

Moderate

z Outstanding growth

momentum on major

subsidiaries

Minor z Early turnaround in China

business

Low Medium High

Probability

Impact

2012 29.45%

2013 30.13%

2014 29.45%

4%

5%

5%

6%

6.0 7.0 8.0 9.0

Ope

ratin

g m

argi

n

Capital Invested Turnover

Given 20% revenue yoy in 2016-2018 Source: Company data and Team estimates

0.5% 1.2%

1.6% 1.3% 1.3% 1.5% 1.6% 1.8% 2.0%

0.0%

2.0%

4.0%

0

2000

4000

2010* 2011 2012 2013F 2014F 2015F 2016F 2017F 2018F

Revenue from 7net 7net % of 7-11 Sales

Disclosures: Ownership and material conflicts of interest: The author(s), or a member of their household, of this report does not hold a financial interest in the securities of this company. The author(s), or a member of their household, of this report does not know of the existence of any conflicts of interest that might bias the content or publication of this report. Receipt of compensation: Compensation of the author(s) of this report is not based on investment banking revenue. Position as a officer or director: The author(s), or a member of their household, does not serve as an officer, director or advisory board member of the subject company. Market making: The author(s) does not act as a market maker in the subject company’s securities. Disclaimer: The information set forth herein has been obtained or derived from sources generally available to the public and believed by the author(s) to be reliable, but the author(s) does not make any representation or warranty, express or implied, as to its accuracy or completeness. The information is not intended to be used as the basis of any investment decisions by any person or entity. This information does not constitute investment advice, nor is it an offer or a solicitation of an offer to buy or sell any security. This report should not be considered to be a recommendation by any individual affiliated with CFA Taiwan, CFA Institute or the CFA Institute Research Challenge with regard to this company’s stock.

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