4 May 2018 Consumer Cyclical Restaurants

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1 May-17 Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 Vol th Japan Foods Holding Target Price: Price: Buy SGD0.63 SGD0.51 Enterprising Japanese Restaurant Chain Market Cap: USD65.8m Bloomberg Ticker: JFOOD SP Initiate coverage with a BUY and SGD0.63 TP, offering a 24% upside. We expect JFH to deliver 10-15% annual profit growth with the addition of new restaurants, launching of new brands, and continued focus on cost control, aided by a recovery in consumer sentiment. The group s multibrand concept allows it to capture wider consumer segments and continually cater to changing tastes, making its business highly adaptable. With a strong net cash balance, industry-leading dividend yield of 4% and an improving margin outlook, we believe JPH deserves to trade at least at industry average multiples. Our TP suggests FY19F P/E of 20x, putting JFH s valuation closer to its peers. An adaptable multi-brand business model. Japan Foods Holding s (JFH) multi-brand concept allows it to capture wider consumer segments and continually cater to changing consumer tastes. With its large portfolio of brands, JFH is able to mix and match food & beverage (F&B) brands, and do so quickly in response to market demand. The extensive brand portfolio also enables the group to quickly replace brands that are not doing well with ones that can yield better results. This strategy has made JFH very popular with landlords and has allowed it to maximise its revenue on a per restaurant basis. Strong profit growth outlook. We assess that JFH could open 4-5 new restaurants each year during FY19-20 (Mar). While its historical focus on cost control had boosted gross margins to an industry-leading 85%, we believe that improving revenue per store for its key brands on improving consumer sentiment should enable JFH to deliver annual earnings growth of 10-15%. Looking to grow overseas. JFH has aggressively expanded into Hong Kong and China through investments in associates during FY The number of restaurants in Hong Kong has increased to eight (FY13: five). China has witnessed much faster growth, where JFH s associates now operate 10 restaurants. It had no business presence there in FY13. It is in discussions to set up a JV in Indonesia, a market where it has not had a presence since Earnings contributions from this JV are not in our estimates. Superior financial metrics compared to its peers. JFH s dividend yield of 4% is the highest amongst SGX-listed peers. Given its strong FCF-generation ability, we believe there is potential for further upside to its dividend yield. While its net margin of 7.1% may not be the highest in the industry, it is still superior to that of most peers. We believe margins could expand further in FY Trading at undemanding valuations. JFH is trading at a FY19F P/E of 14.8x, which is at a significant discount to the industry average 2FY P/E of 19.5x. With its net cash position accounting for 23% of the group s market cap, JFH is trading at an ex-cash FY19F P/E of 11.3x. Given the strong growth outlook and superior financial metrics, we believe it deserves to trade closer to the industry average, if not higher. Our SGD0.63 TP (derived from an average of P/E, P/BV, EV/EBITDA and DCF of adjusted FCFs) implies 20x FY19F P/E. Key risks include rising labour costs and rental expenses, lower consumer spending, and non-renewal of franchise agreements. Forecasts and Valuations Mar-16 Mar-17 Mar-18F Mar-19F Mar-20F Total turnover (SGDm) Reported net profit (SGDm) Recurring net profit (SGDm) Recurring net profit growth (%) (20.3) Recurring EPS (SGD) DPS (SGD) Recurring P/E (x) P/B (x) P/CF (x) Dividend Yield (%) EV/EBITDA (x) Return on average equity (%) Net debt to equity net cash net cash net cash net cash net cash Our vs consensus EPS (adjusted) (%) Share Data Avg Daily Turnover (SGD/USD) 0.01m/0.01m 52-wk Price low/high (SGD) Free Float (%) 23 Shares outstanding (m) 173 Estimated Return 24% Shareholders (%) Kenichi Takahashi 66.2 Hin Sun Wong 5.5 Chau Mui Chan 4.7 Share Performance (%) YTD 1m 3m 6m 12m Absolute Relative (0.6) Source: Bloomberg Source: Bloomberg Japan Foods Holding (JFOOD SP) Price Close Relative to Straits Times Index (RHS) Table Of Contents Financial Exhibits 2 Investment Merits 3 Key Risks 5 Valuation 6 Financials 8 Company Background 12 SWOT Analysis 15 Analyst Shekhar Jaiswal shekhar.jaiswal@rhbgroup.com Powered by the EFA Platform 1

2 Financial Exhibits Financial model updated on: Asia Singapore Consumer Cyclical Japan Foods Holding Bloomberg JFOOD SP Buy Valuation basis We value JFH using an average of forward P/E, P/BV, EV/EBITDA and DCF of adjusted FCFs. Our TP of SGD0.63 implies 20x FY19F P/E, which puts JFH s valuation closer to that of its listed peers. Key drivers Key earnings drivers for JFH during our forecast period are: i. Growing the number of restaurants in Singapore; ii. The addition of new brands growth into international markets through JVs; iii. Expansion in profit margins. Key risks i. Rising labour costs and rental expenses; ii. Lower consumer spending; iii. Non-renewal of franchise agreements. Company Profile Established in 1997, Japan Foods (JFH) is one of the leading food & beverage (F&B) groups in Singapore, specialising in quality and authentic Japanese cuisine. As at 31 Dec 2017, the group, together with its subfranchisees, operates a total of 49 restaurants and food court outlets under various brands in Singapore, Malaysia and Vietnam. It also has interests in 18 restaurants in Hong Kong and China through associated companies. Financial summary Mar-16 Mar-17 Mar-18F Mar-19F Mar-20F Recurring EPS (SGD) EPS (SGD) DPS (SGD) BVPS (SGD) Weighted avg adjusted shares (m) Valuation metrics Mar-16 Mar-17 Mar-18F Mar-19F Mar-20F Recurring P/E (x) P/E (x) P/B (x) FCF Yield (%) Dividend Yield (%) EV/EBITDA (x) EV/EBIT (x) Income statement (SGDm) Mar-16 Mar-17 Mar-18F Mar-19F Mar-20F Total turnover Gross profit EBITDA Depreciation and amortisation (5.3) (5.2) (5.6) (6.2) (6.9) Operating profit Net interest Income from associates & JVs Pre-tax profit Taxation (0.9) (1.0) (1.3) (1.5) (1.6) Recurring net profit Cash flow (SGDm) Mar-16 Mar-17 Mar-18F Mar-19F Mar-20F Change in working capital (0.5) 1.2 (0.1) (0.0) (0.1) Cash flow from operations Capex (4.8) (3.5) (4.5) (4.5) (4.5) Cash flow from investing activities (5.0) (3.8) (4.6) (4.6) (4.6) Dividends paid (3.5) (3.5) (3.6) (3.5) (3.6) Cash flow from financing activities (3.7) (4.3) (3.6) (3.5) (3.6) Cash at beginning of period Net change in cash Ending balance cash Balance sheet (SGDm) Mar-16 Mar-17 Mar-18F Mar-19F Mar-20F Total cash and equivalents Tangible fixed assets Intangible assets Total investments Total other assets Total assets Total liabilities Shareholders' equity Total equity Net debt (16.9) (20.2) (23.0) (27.0) (32.3) Total liabilities & equity Key metrics Mar-16 Mar-17 Mar-18F Mar-19F Mar-20F Revenue growth (%) Recurrent EPS growth (%) (20.5) Gross margin (%) Operating EBITDA margin (%) Net profit margin (%) Dividend payout ratio (%) Capex/sales (%)

3 Investment Merits Growth aided by expansion and recovery in consumer sentiment We assess that JFH could open 4-5 new restaurants each year and add a few more brands to its operations over FY19F-20F. Management assessed that, if successful, a new brand could achieve full breakeven point (ie recover operating and initial set-up costs) within months. Moreover, strong economic growth and improving consumer sentiment in Singapore should enable JFH to report steady improvements in revenue growth. Strong cost control measures undertaken in the past have enabled JFH to expand its gross margin to 84% in FY17 from 78% in FY10. While the group continues to find ways to reduce costs, we believe further gross margin improvements from cost savings would not be material. However, we assess that greater control on other opex and a continued focus on improving revenues from its key brands would lead to net margin growth over FY19F- 20F. This should enable JFH to deliver 10-15% net profit growth pa during our forecast period. In Feb 2018, JFH entered into an agreement with Arena Gourmet (AG) to set up a JV for the expansion of its Menya Musashi ramen restaurant brand in Indonesia. The timeline set for the creation of the JV entity was 16 Apr However, due to the longer-thanexpected time required for the fulfilment of certain conditions precedent to the creation of the JV, the agreement s long stop date was extended to 14 May We believe the JV offers strong growth potential in a market where JFH has not had a presence since The JV would not only contribute profits for the company, but also generate cash flow as the JV agreement entails that 30% of post-tax earnings be paid as dividends from the fourth year of the JV s operation. Potential earnings and cash flow contributions from the Indonesian JV are not in our estimates yet. Strong cash balance enables addition of 4-5 new restaurants each year Revenue growth from key brands and continued focus on costs should translate into 10-15% annual profit growth Potential earnings and cash flow contributions from the Indonesia JV is not in our estimates yet Superior financial metrics compared to its peers Starting May 2017, JFH increased its target dividend payout ratio to 50% from 40%. In FY17, JFH paid a dividend of SGD0.02 per share. This translates into a dividend yield of 4% and is the highest amongst SGX-listed restaurant operators that pay dividends. While management wishes to maintain its dividend payments at SGD0.02 per share, we believe its strong FCF generation ability and limited capex requirements do point to significant upside potential for our dividend forecast, either in the form of an increase in absolute DPS or through the payout of special dividends. A historical focus on cost and quality controls via central kitchens, utilising bulk purchasing and achieving economies of scale, have enabled JFH to achieve industry-leading gross margins of more than 80%. While its net margin of 7.1% may not be the highest in the industry, it is still superior to most SGX-listed restaurants. The group has already reported 3QFY18 and 9MFY18 net margins of 13.3% and 9.4% respectively. We assess that there is scope for further expansion in its net margins during FY18F-20F. Strong FCF generation and limited capex requirements creates scope for further growth in its industry-leading dividend yield of 4% JFH reported a 3QFY18 net margin of 13.3%, which is superior to that of its peers Figure 1: JFH offers the highest dividend yield for SGXlisted restaurants Figure 2: JFH's net profit margin is superior to most SGXlisted restaurants Source: Bloomberg Source: Bloomberg 3

4 Undemanding valuations deserves to trade closer to the industry average JFH is trading at 14.8x FY19F P/E and 4.8x FY19F EV/EBITDA, which are at significant discounts to the industry multiples of 19.5x 2FY P/E and 8.6x 2FY EV/EBITDA. With a net cash position of SGD20.5m (c.23% of the group s market cap), the stock is trading at FY19F of 11.3x ex-cash P/E and 3.7x ex-cash EV/EBITDA. We believe that, given its potential to deliver strong earnings growth and superior financial metrics when compared to its SGX-listed peers, it deserves to trade closer to industry average valuations, if not higher. We value JFH using an average of forward P/E, P/BV, EV/EBITDA and DCF of adjusted FCFs. Our TP of SGD0.63 implies FY19F P/E of 20x, which puts the group s valuation closer to that of its listed peers. A resilient and adaptable multi-brand business model JFH s multi-brand concept allows the group to capture wider consumer segments and continually cater to changing tastes. With its large portfolio of brands, it is able to mix and match F&B brands and do so quickly in response to market demand. Its extensive brand portfolio also enables the group to quickly replace brands that are not doing well at a location with ones that can yield better results. This strategy has made it very popular with retail landlords and has allowed JFH to maximise its revenue on a per restaurant basis. The group s four-pronged strategy has enabled it to not only sustain but also grow its F&B business in Singapore and around the region. This strategy includes: i. Development of new concepts through franchised or self-developed brands; ii. Strong focus on cost and quality controls; iii. Overseas expansion via acquisitions, JVs or the franchise model; iv. Prudent approach, with constant rationalisation of stores or brands. 4

5 Key Risks Competitive business sector The F&B business in Singapore is a highly competitive sector as restaurants fight for a share of the consumer s pocket. Not all restaurants do well such as Soup Restaurant, Sakae Sushi and Tung Lok. The high rental costs and lack of manpower means that restaurants have to manage their operations well to survive the cut-throat competition. However, with JFH s long-term focus on cost and quality controls via central kitchens, utilising bulk purchasing, and achieving economies of scale, we believe it should enable the group to not only sustain current operations but also register growth. Relatively small float and liquidity Despite its strong business credentials and growth potential, a market cap of less than USD100m means that JFH has not been able to find its way into the equity screens of most investors. While the group does have a free float of more than 20%, very low trading liquidity could be one of the key concerns for some investors. However, we remain confident that credible management, a resilient business model, a strong balance sheet, undemanding valuations and strong earnings growth would enable JFH to grow into a credible SGX-listed mid-cap F&B operator. Non-renewal of its master franchise agreement for key brands JFH s key restaurant brands include Ajisen Ramen, Menya Musashi and Osaka Ohsho. Together, these franchise brands accounted for c.70% of FY17 revenue. While there is a likelihood of the group losing its master franchise agreement for these key brands, we see limited likelihood of such an event occurring in the near term. This is mainly because the master agreements for these key brands are signed for longer periods. The group has an exclusive licence to operate the businesses under the Ajisen Ramen brand in Singapore, Malaysia, Indonesia and Vietnam for a term of 50 years commencing Sep For Menya Musashi, the master agreement is for a period of 10 years, and the agreement is renewed automatically. Similarly, for Osaka Ohsho, the master agreement is for a period of five years, and it also gets renewed automatically. The Menya Musashi agreement was signed in Mar 2012, and the Osaka Ohsho agreement in Sep Non-renewal of sub-franchisee agreements JFH signed a sub-franchise agreement with an Indonesian partner for the promotion of the Ajisen Ramen brand in The initial validity period of the agreement was from Dec 2008 to Dec This was further extended to Aug However, after the group s sub-franchisee decided not to renew the agreement, JFH lost its business presence in Indonesia in early We do acknowledge the risk of JFH struggling to grow its key franchised brands beyond Singapore if sub-franchisees do not renew the agreements. While this may lead to slower potential for overseas growth, the financial impact on its current earnings are likely to be limited. This is because the group s total sub-franchised operations accounted for only 0.2% of revenue and 2.9% of EBIT in FY17. 5

6 Valuation TP derivation We value JFH using an average of forward P/E, P/BV, EV/EBITDA and DCF of adjusted FCFs. Our TP of SGD0.63 implies 20x FY19F P/E, which puts its valuation closer to that of its listed peers. As compared to its SGX-listed restaurant peers that have forwardlooking estimates on Bloomberg, the group offers one of the highest net profit margins and ROEs. Its dividend yield of 4% is also superior when compared to its peers. However, we do acknowledge that there are SGX-listed restaurants that have historically offered higher ROEs and net margins when compared to the group. We looked at average multiples for its peers, which are trading at 2FY P/E of 19.5x, 8.6x EV/EBITDA and 3.8x P/BV averages. Given JFH's smaller market cap and liquidity constraints, we ascribed a discount to the peer average multiples to arrive at the target multiples. We also compared our target multiples with average sector multiples for periods when Singapore witnessed an improvement in consumer sentiment (measured by the YoY rise in retail sales). These periods were , , and During these periods, the MSCI Singapore Consumer Discretionary Index traded at the multiples identified in Figure 4: Figure 3: Average multiples for MSCI Singapore Consumer Discretionary Index Source: Bloomberg Figure 4: TP derivation Source: RHB Figure 5: EV/EBITDA-based valuation Source: RHB 6

7 Figure 6: P/E-based valuation Figure 7: P/BV-based valuation Source: RHB Source: RHB Figure 8: Relative valuations Note: we have only included Singapore-listed restaurants that have consensus estimates on Bloomberg Source: Bloomberg, RHB Figure 9: DCF valuation Source: RHB 7

8 Financials Steady improvement in earnings outlook We expect F&B operators in Singapore to benefit from strong economic growth and improving consumer sentiment over the next few years. JFH, with its strong presence in mass market Japanese restaurant brands, should also witness similar benefits. Its revenue has recovered in FY17, and we expect this rebound to be sustained during the forecast period. During 3QFY18, JFH s revenue grew 11.8% YoY, while for 9MFY18 revenue grew 2.7% YoY. The first quarter of each calendar year tends to be the weakest for the group, amidst short working hours during the Lunar New Year festival. Attributing a slightly weaker YoY growth for 4QFY18, we estimate FY18F revenue to grow by 2.4% YoY. However, this growth should improve to 4.5% each in FY19F-FY20F. Figure 10: Revenue and revenue growth outlook Figure 11: EBITDA and net profit outlook Given the strong net cash position, we assess that JFH could easily open 4-5 new restaurants each year and add a few more brands to its operations during the forecast period. Management assesses that, if successful, a new brand could achieve full breakeven point (operating plus initial setup costs) within months. While we do not expect a significant expansion in gross profit margin, the group s strong operating cost control and focus on improving revenues of its key brands should enable it to report growth in EBITDA and net profit during the forecast years. We estimate recurring net profit growth of 10-15% during the forecast period, in line with management s focus to grow the bottomline by high single-digits. Potential expansion into Indonesia through JV is not in our estimates yet In February, JFH announced that it entered into an agreement with AG to setup a JV entity for expansion of its business in Indonesia. As part of the agreement, the group is to invest approximately SGD146,259 to subscribe to new shares for a 30% stake in Indonesiaincorporated Menya Musashi Indonesia (MMI, or the JV entity). At the same time, AG is purchase existing vendor shares and subscribe for new shares with a resulting majority stake of 70%. MMI is to undertake the business of managing and operating Japanese ramen restaurants under the Menya Musashi brand, including setting up restaurants at locations it identifies and selects. The JV enables JFH and AG to leverage on each other s strengths in their respective areas. The latter would also gain access to the former s experience and knowhow in managing Japanese restaurants, while JFH would be able to tap into AG s local knowledge, business network and familiarity, as well as its resources in Indonesia. AG is an established restaurant operator in Indonesia, with over 20 restaurants under eight brands including Penang Bistro, Seribu Rasa, Greyhound Café, Miyagi, Maison Tatsuya, Hong Kong Café, La Hoya and Sari Bagindo. Its brands embody various ethnic concepts, namely Malaysian, South-East Asian, Indonesian, Chinese, Japanese and Mexican. 8

9 F 2019F 2020F F 2019F 2020F Japan Foods Holding Menya Musashi is a popular ramen brand that originated in Tokyo, Japan. JFH holds the license rights to operate restaurants under the brand in Singapore, Hong Kong, China and Indonesia. The timeline set of completion creation of JV entity was 16 Apr. However, on that date, JFH announced that due to the longer-than-expected time required for the fulfilment of certain conditions precedent to creation of JV the group, along with AG and MMI, agreed to extend the agreement s long stop date to 14 May. We believe the JV offers strong growth potential in a market where JFH has not had a presence since early 2015, when a sub-franchisee arrangement for its flagship Ajisen Ramen brand expired. The JV would not only contribute profits for JFH, but also generate cash flow, as the JV agreement entails that after the third anniversary following completion MMI is to distribute dividends at 30% of its profits this is after deduction of interest, tax paid or accrued, and any other exceptional items as shown in the accounts for each financial year. High profit margins Similar to any other F&B operator, JFH faces constant challenges from the persistent uptrend in raw material costs, rental charges and labour costs. However, the group has actively looked for avenues to drive down costs without compromising on quality. Improving operational efficiency, using raw materials more effectively, building economies of scale and achieving greater bulk purchase discounts are some of the ways through which JFH has looked to mitigate the increase in costs. In 2007, the group set up its central kitchen facility to support the operations of its restaurants. It centralised the processing of certain food ingredients used by all of its restaurants at this kitchen. JFH also used this facility to store the inventory of food ingredients that are purchased centrally. In Apr 2012, the group established its own noodle production facility at its central kitchen at a cost of about SGD450,000. The main objective of the noodle production facility was to enable JFH to manage its costs better, reduce its reliance on suppliers, and improve the freshness, quality and consistency of the noodles used at its various restaurants. Figure 12: JFH s GP and GPM outlook Figure 13: JFH s net profit and NPM outlook % 84% 85% 85% 85% 85% 82% 80% 78% 78% 78% 86% 84% 82% 80% 78% 76% % 4.9% 6.6% 11.6% 10.5% 7.6% 9.0% 8.5% 8.0% 7.1% 6.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% % 72% % 0.0% Gross profit SGDm Gross profit margin (RHS) % Net profit (recurring) SGDm Net profit (recurring) margin (RHS) % Through various cost-saving initiatives, JFH has managed to improve its gross margins to 85% in FY17 from 78% in FY10. While the group continues to find ways to further enhance its profit margin, we believe further GPM growth would be miniscule in nature. However, we assess that greater control on selling and distribution expenses, continued focus on improving revenues of its key brands, and slightly higher contributions from its associates ought to lead to improvements in its NPMs during the forecast period. We estimate JFH s net margins to expand to 9% in FY20 from 7.1% in FY17. 9

10 translates into high ROEs JFH offers a high ROE of 14.9% despite having a net cash balance sheet. Although its ROE is not the highest amongst SGX-listed restaurant operators, we assess that strong growth in earnings during FY18F-20F would lead to improvements in its ROE. We estimate the group s ROEs to improve to 17.6% in FY20 from 14.9% in FY17. Figure 14: We expect ROE to gradually improve Figure 15: JFH's ROE has potential to improve further Source: Bloomberg Figure 16: DuPont analysis Net cash position accounts for 23% of market cap JFH has managed to generate SGD2-10m of annual FCFs during FY This has led to a gradual improvement in the group s net cash position to SGD20.5m as at end-dec 2017 from SGD6.1m in FY11. This net cash position accounts for about 23% of its market cap. Figure 17: Strong FCF generation should support rising net cash balance 10

11 We believe JFH may consider opening 4-5 new restaurants each year during the forecast period. This would translate into an annual capex of SGD2.5-3m. However, we have factored in a higher capex of SGD4.5m each year for FY19F-20F. Despite our conservative estimates, we assess that the group could generate SGD m in annual FCFs over FY18F-20F. Adjusting for dividend payments, its net cash balance sheet could swell to SGD32.3m by FY20 (ie about 40% of its current market cap). Superior dividend yield of 4% JFH has always focused on growing long-term shareholder value, and has been consistently rewarding shareholders with cash dividends since FY09. Excluding the special dividends paid in FY13 and FY14, total DPS has gradually increased to about SGD0.02 in FY14 from SGD0.002 in FY09. Since FY14, JFH has been consistently paying about SGD0.02 in DPS (cash) to its shareholders. Figure 18: Dividend history Figure 19: We are expecting JFH to maintain its DPS level Source: Company data Until FY16, JFH had a dividend policy to distribute not less than 40% of its consolidated net profits to shareholders annually. However, in May 2017, it announced its intention to raise the target dividend payout ratio to at least 50% of earnings annually. During our meeting with the group, we sensed that management wished to maintain its DPS around SGD0.02 over the next year. Hence, although its dividend payout ratio stood at 74-92% during FY15-17, we are forecasting a dividend payout ratio of only 55-65% for FY18F-20F, which complies with its latest dividend policy. Figure 20: Last reported full-year dividend yields for SGX-listed restaurants Source: Bloomberg 11

12 While JFH s 4% yield remains the highest as compared to its peers, we believe there could be upside to our yield estimates. With expectations of strong rise in cash balance during FY18-20, we believe higher dividends could come from either an increase in absolute DPS, or through the payment of special dividends. Company Background Company introduction Established in 1997, Japan Foods Holding (JFH) is one of the leading F&B groups in Singapore specialising in quality and authentic Japanese cuisine. As at 31 Dec 2017, the group, together with its sub-franchisees, operates a total of 53 restaurants and food court outlets under various brands in Singapore, Malaysia and Vietnam. It also has interests in 18 restaurants in Hong Kong and China through associated companies. The group s franchise restaurant brands include its flagship Ajisen Ramen brand, as well as the Menya Musashi and Osaka Ohsho brands, which together accounted for c.70% of revenue in FY17. Going beyond the traditional Japanese cuisine, in 2015, JFH launched New ManLee Bak Kut Teh, a brand franchised from Malaysia. As at 31 Dec 2017, JFH operates two New ManLee Bak Kut Teh restaurants in Singapore. Besides franchise brands, the Group has also developed its own brands including Fruit Paradise and Japanese Gourmet Town. These two restaurant brands together accounted for c.9% of JFH s revenue in FY17. Figure 21: JFH s growing brand portfolio Source: Company 12

13 Figure 22: Revenue mix between key brands Figure 23: Revenue contribution by key brands Source: Company data Source: Company data Figure 24: Key brands under JFH Source: Company JFH s network extends beyond Singapore to include Ajisen Ramen restaurants in Malaysia and Vietnam operated by sub franchisees and Menya Musashi restaurants in China and Hong Kong operated by associated companies. The group has its own production facility located at its central kitchen in Kampong Ampat, Singapore. 13

14 Management team and their history JFH s management has a long history with the group. CEO Mr Takahashi Kenichi founded JFH in Current COO Ms Chan Chau Mui has been with the group since 1999 while current CFO Mr Kenneth Liew Kian Er has been with the firm since Transparency in JFH s reporting standards have been commendable. We seldom come across companies that provide detailed information on the success and failure of their new ventures on a quarterly basis. Not surprisingly, the group won the Transparency Award for small and medium enterprises (SMEs) at the 18th Securities Investors Association (SIAS) Investors Choice Awards Figure 25: Key management Source: Company 14

15 SWOT Analysis Resilient and adaptable business model Enjoys one of the highest profit margins for listed restaurants, thanks to its strong focus on quality and cost controls JFH s existing management team has a long history with the company Rising competition from other Japanese restaurant chain managers Prior expansion into the region has been more of a hit-andmiss story Ability to grow beyond Singapore through strategic investments or through a franchise/subfranchise mode Likely expansion into Indonesia to be announced soon High dependence on few high revenue-contributing restaurant brands Recommendation Chart Price Close May-13 Aug-14 Nov-15 Feb-17 Date Recommendation Target Price Price Source: RHB, Bloomberg Source: RHB, Bloomberg 15

16 Consumer Cyclical Restaurants RHB Guide to Investment Ratings Buy: Share price may exceed 10% over the next 12 months Trading Buy: Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain Neutral: Share price may fall within the range of +/- 10% over the next 12 months Take Profit: Target price has been attained. Look to accumulate at lower levels Sell: Share price may fall by more than 10% over the next 12 months Not Rated: Stock is not within regular research coverage Investment Research Disclaimers RHB has issued this report for information purposes only. This report is intended for circulation amongst RHB and its affiliates clients generally or such persons as may be deemed eligible by RHB to receive this report and does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. 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17 Consumer Cyclical Restaurants availability of any information and are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, or for the results obtained from the use of such content. Third party content providers give no express or implied warranties, including, but not limited to, any warranties of merchantability or fitness for a particular purpose or use. Third party content providers shall not be liable for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including lost income or profits and opportunity costs) in connection with any use of their content. 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The recipient of this report should have regard to the laws of the recipient s place of domicile when contemplating transactions in the securities or other financial instruments referred to herein. The securities discussed in this report may not have been registered in such jurisdiction. Without prejudice to the foregoing, the recipient is to note that additional disclaimers, warnings or qualifications may apply based on geographical location of the person or entity receiving this report. The term RHB shall denote, where appropriate, the relevant entity distributing or disseminating the report in the particular jurisdiction referenced below, or, in every other case, RHB Investment Bank Berhad and its affiliates, subsidiaries and related companies. RESTRICTIONS ON DISTRIBUTION Malaysia This report is issued and distributed in Malaysia by RHB Research Institute Sdn Bhd. The views and opinions in this report are our own as of the date hereof and is subject to change. If the Financial Services and Markets Act of the United Kingdom or the rules of the Financial Conduct Authority apply to a recipient, our obligations owed to such recipient therein are unaffected. RHB Research Institute Sdn Bhd has no obligation to update its opinion or the information in this report. Thailand This report is issued and distributed in the Kingdom of Thailand by RHB Securities (Thailand) PCL, a licensed securities company that is authorised by the Ministry of Finance, regulated by the Securities and Exchange Commission of Thailand and is a member of the Stock Exchange of Thailand. The Thai Institute of Directors Association has disclosed the Corporate Governance Report of Thai Listed Companies made pursuant to the policy of the Securities and Exchange Commission of Thailand. RHB Securities (Thailand) PCL does not endorse, confirm nor certify the result of the Corporate Governance Report of Thai Listed Companies. 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18 Consumer Cyclical Restaurants Hong Kong This report is issued and distributed in Hong Kong by RHB Securities Hong Kong Limited ( 興業僑豐證券有限公司 ) (CE No.: ADU220) ( RHBSHK ) which is licensed in Hong Kong by the Securities and Futures Commission for Type 1 (dealing in securities) and Type 4 (advising on securities) regulated activities. Any investors wishing to purchase or otherwise deal in the securities covered in this report should contact RHBSHK. RHBSHK is a wholly owned subsidiary of RHB Hong Kong Limited; for the purposes of disclosure under the Hong Kong jurisdiction herein, please note that RHB Hong Kong Limited with its affiliates (including but not limited to RHBSHK) will collectively be referred to as RHBHK. RHBHK conducts a full-service, integrated investment banking, asset management, and brokerage business. RHBHK does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this research report. Investors should consider this report as only a single factor in making their investment decision. Importantly, please see the company-specific regulatory disclosures below for compliance with specific rules and regulations under the Hong Kong jurisdiction. Other than company-specific disclosures relating to RHBHK, this research report is based on current public information that we consider reliable, but we do not represent it is accurate or complete, and it should not be relied on as such. United States This report was prepared by RHB and is being distributed solely and directly to major U.S. institutional investors as defined under, and pursuant to, the requirements of Rule 15a-6 under the U.S. Securities and Exchange Act of 1934, as amended (the Exchange Act ). Accordingly, access to this report via Bursa Marketplace or any other Electronic Services Provider is not intended for any party other than major US institutional investors, nor shall be deemed as solicitation by RHB in any manner. RHB is not registered as a broker-dealer in the United States and does not offer brokerage services to U.S. persons. Any order for the purchase or sale of the securities discussed herein that are listed on Bursa Malaysia Securities Berhad must be placed with and through Auerbach Grayson ( AG ). Any order for the purchase or sale of all other securities discussed herein must be placed with and through such other registered U.S. broker-dealer as appointed by RHB from time to time as required by the Exchange Act Rule 15a-6. This report is confidential and not intended for distribution to, or use by, persons other than the recipient and its employees, agents and advisors, as applicable. Additionally, where research is distributed via Electronic Service Provider, the analysts whose names appear in this report are not registered or qualified as research analysts in the United States and are not associated persons of Auerbach Grayson AG or such other registered U.S. broker-dealer as appointed by RHB from time to time and therefore may not be subject to any applicable restrictions under Financial Industry Regulatory Authority ( FINRA ) rules on communications with a subject company, public appearances and personal trading. Investing in any non-u.s. securities or related financial instruments discussed in this research report may present certain risks. The securities of non-u.s. issuers may not be registered with, or be subject to the regulations of, the U.S. Securities and Exchange Commission. Information on non-u.s. securities or related financial instruments may be limited. Foreign companies may not be subject to audit and reporting standards and regulatory requirements comparable to those in the United States. The financial instruments discussed in this report may not be suitable for all investors. Transactions in foreign markets may be subject to regulations that differ from or offer less protection than those in the United States. OWNERSHIP AND MATERIAL CONFLICTS OF INTEREST Malaysia RHB does not have qualified shareholding (1% or more) in the subject company (ies) covered in this report except for: a) - RHB and/or its subsidiaries are not liquidity providers or market makers for the subject company (ies) covered in this report except for: a) - RHB and/or its subsidiaries have not participated as a syndicate member in share offerings and/or bond issues in securities covered in this report in the last 12 months except for: a) - RHB has not provided investment banking services to the company/companies covered in this report in the last 12 months except for: a) - Thailand RHB Securities (Thailand) PCL and/or its directors, officers, associates, connected parties and/or employees, may have, or have had, interests and/or commitments in the securities in subject company(ies) mentioned in this report or any securities related thereto. Further, RHB Securities (Thailand) PCL may have, or have had, business relationships with the subject company(ies) mentioned in this report. As a result, investors should exercise their own judgment carefully before making any investment decisions. Indonesia PT RHB Sekuritas Indonesia is not affiliated with the subject company(ies) covered in this report both directly or indirectly as per the definitions of affiliation above. Pursuant to the Capital Market Law (Law Number 8 Year 1995) and the supporting regulations thereof, what constitutes as affiliated parties are as follows: 1. Familial relationship due to marriage or blood up to the second degree, both horizontally or vertically; 2. Affiliation between parties to the employees, Directors or Commissioners of the parties concerned; 3. Affiliation between 2 companies whereby one or more member of the Board of Directors or the Commissioners are the same; 4. Affiliation between the Company and the parties, both directly or indirectly, controlling or being controlled by the Company; 5. Affiliation between 2 companies which are controlled, directly or indirectly, by the same party; or 18