Recommendation: BUY TP: HK$0.96 (+41%) Hung Fook Tong Group Holdings (1446.HK) 23 October SECTION 1 RESULTS BRIEFING in 1H15

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1 Recommendation: BUY TP: HK$.96 (+41%) Hung Fook Tong Group Holdings (1446.HK) 23 October 215 SECTOR: Food & Beverage HSI: 23,152 PRICE: HK$.68 EARNINGS (reported in HK$m) KEY DATA For the fiscal year ended E 216E 217E Issued Capital (m Shrs) Turnover Market Cap (HK$m) 446 Operating Profit 51 (3) Avg. 6M Turnover (HK$m) 2.7 Net Profit 36 (39) Week High/Low (HK$) 1.22 /.63 EPS (HK$).7 (.7) Net Gearing (%) (1.9) % Change n.a. (193.8%) n.a. 167.% 68.5% Book Value per Share (HK$).38 DPS (HK$) n.a Free Float (%) 3.5% Dividend yield (%) n.a..%.% 2.9% 5.9% Major Shareholder(s) Mr. Tse Po T at, Ms. Wong Pui Chu and Mr. Kwan Wang Yung (62.81%) INTERIM RESULTS (HK$m) YOY HOH For the fiscal year ended 1H14 2H14 1H15 % Chg % Chg Turnover (2.1%).1% Operating Profit 14 (43) 3 (77.%) n.a. Net Profit 5 (44) 2 (67.%) n.a. EPS (HK cents).94 (1.1).17 (81.9%) n.a. Note: Differences may arise due to rounding errors Source: Bloomberg, HKEx, Company data, Platinum estimates SECTION 1 RESULTS BRIEFING in 1H15 Strong management focused on balance sheet and tight cost control. Management focused on wholesale business model. Hung Fook Tung (HFT) reported revenue of HK$357m, a decline of 2% YoY. HK retail business accounted for 66% of revenue and registered flat YoY revenue growth. The PRC retail business accounted for 2% of revenue which recorded a fall of 15% YoY, following the closure of 3 non-performing retail stores in Shanghai. Wholesale business accounted for 32% of revenue which posted a decline of 5% YoY. SG&A totalled HK$213m, up 2% YoY and down 14% HoH. COGS totalled HK$143m, a decline of 1% YoY and 7% HoH. 1H15 net profit of HK$1.13m recovered from adjusted net losses of HK$15m (excluding listing expenses) in 2H14. Platinum Broking IMPORTANT DISCLOSURES ARE PROVIDED ON THE LAST PAGE OF THIS REPORT

2 Exhibit 1: Financial highlights Income Statement HK$m 1H13 2H13 1H14 2H14 1H15 YOY % HOH % Revenue (2%) % HK Retail (%) 4% The PRC Retail (8) 9 (15%) n.a Wholesale (5%) (7%) Cost of sales (117) (141) (144) (154) (143) (1%) (7%) Gross profit (3%) 6% Other income % 112% Other gains, net () 1 (86%) (97%) Selling and distribution costs (26) (29) (32) (41) (34) 4% (17%) Administrative expenses (129) (153) (175) (27) (179) 2% (14%) Operating profit (43) 3 (77%) n.a Finance income (82%) 69% EBIT (43) 3 (77%) (18%) Finance costs (2) (4) (3) (2) (1) (62%) (48%) Profit before income tax (45) 2 (82%) n.a Income tax expense (5) (7) (7) 2 (1) (92%) (126%) Net profit (43) 2 (67%) n.a Minority interests (1) (2) () () () 18% 484% Attributable profit (44) 1 (75%) n.a Adj. Attributable profit (excluding listing expenses in 2H14) (15) 1 (75%) n.a Adjustments for: Depreciation and amortisation (8) (9) (1) (14) (17) 66% 19% EBITDA (29) 21 (18%) n.a Gross profit margin 6% 6% 6% 57% 6% Operating margin 7% 8% 4% (12%) 1% EBITDA margin 11% 11% 7% (8%) 6% SG&A/revenue 53% 52% 57% 69% 6% Inventory turnover days Balance Sheet HK$m 1H13 2H13 1H14 2H14 1H15 Total Assets n.a Current Assets n.a Cash & ST securities n.a Inventory n.a Accounts receivable n.a Other Current Assets n.a Non Current Assets n.a LT Investments n.a Net Fixed Assets n.a Total Other Assets n.a Total Liabilities n.a Current Liabilities n.a Accounts Payable n.a Interest Bearing ST Liabilities n.a Other Current Liabilities n.a Non Current Liabilities n.a Long term debt n.a Other LT Liabilities n.a Total Equity n.a Share capital n.a 7 7 Share premium n.a Retained earnings reserve n.a Minority interests n.a Platinum Broking 2

3 Management was early to react to an anticipated slowdown in the retail business. Strong balance sheet. HFT scaled back stores expansion from an annual addition of 3 stores to 1. It strategically invested (HK$76m and HK$12m) in 2 new production facilities, one in Tai Po, HK and another one in Suzhou, China. Prudent investments in wholesale capacity have resulted in gross gearing ratio of 29%. Targeting operating margin improvements. GPM improved by 3ppts in 1H15 and will likely stabilise at 6-62%, thanks to management s incremental re-pricing in ASP to cover rising raw materials cost. Operating margin fell to -12% in 2H14 but recorded a slight positive of 1% in 1H15 due to management s stricter cost controls. As the wholesale operating profit margin averaged 1% globally, there is plenty of scope for improvements as HFT moved away from the retail business model. Lower expected rental costs in high-street retail shops will improve margins. A managed increase in turnover days due to remix towards longer-shelf life drinks. Inventory turnover days trended higher since 2H13 due to faster growth in long-shelf life products. Long shelf-life drinks grew by 12% and 14% YoY in FY13 and FY14. Exhibit 2: Operating and gross profit margins 1% 61% 5% 6% 59% % 1H13 2H13 1H14 2H14 1H15 58% -5% 57% -1% 56% -15% Operating margin (LHS) 55% Gross profit margin (RHS) Exhibit 3: Inventory turnover days (no. of days) H13 2H13 1H14 2H14 1H15 Inventory Turnover days Exhibit 4: HFT s ASP HK$/unit ASP E 216E 217E Fresh Drinks (per bottle) Chinese-style soups (per serving) Tortoise and herbal jelly (per serving) Other food (small items) Other food (bulky festive food) Long Shelf-life Drinks (per bottle) Exhibit 5: Rising sales volume on wholesale orders mn units Sales Volume mn bottles E 216E 217E Fresh Drinks (LHS) Tortoise and herbal jelly (LHS) Chinese style soups (LHS) Long shelf life drinks (RHS) Platinum Broking 3

4 SECTION 2 COMPANY BACKGROUND Leading HK herbal wellness beverage chain with 4% market share. HFT, established in 1986, primarily engages itself in the production and sales of traditional Chinese herbal drinks catering to a younger community, other non-carbonated drink products (both fresh and long-shelf life), Chinese-style soups and tortoise herbal jelly as well as convenience rice and noodles. It captures seasonal demand by offering festive food in Dragon Boat Festival, Mid Autumn Festival, Chinese New Year, etc. As of August-215, it operated 11 retail shops in HK, up from 86 in 211, located strategically in metro stations, shopping malls and street shops with high pedestrian traffic. Another 21 shops are located across malls and metros in Guangzhou and Foshan in China. The company operates two business units: (1) Direct retail sales of fresh food products and herbal drinks at self-operated stores in HK and China and (2) Wholesale distribution business of long-shelf life bottled drinks. In terms of geographic segments, Hong Kong accounted for 8% of revenue, while the PRC contributed 17%. Exhibit 6: HFT s revenue breakdown by product HK$m Revenue Breakdown E 216E 217E Drinks Soups Totoise jelly Other food Long shelf-life drinks Others Fresh products Exhibit 7: HFT s no. of stores as of 28 Aug 215 Exhibit 8: HFT s revenue and no. of stores Type TOTAL HK HK Island TOTAL KLN NT PRC Guang zhou MTR Malls Street shops Total HK$m E 216E 217E Total Revenue (LHS) Number of stores (RHS) Platinum Broking 4

5 SECTION 3 BUSINESS OUTLOOK Benign local competition from peers. Growing wholesale business is supported by sufficient spare capacity. Dominant HK market share. Currently, HFT is the market leader with 4% share. The closest competitors, Hoi Tin Tong and Healthworks have 17% and 9% respectively. The former rival has reduced its number of shops from 81 in 213 to 42 in 215 in response to food scandal issues. This is positive to HFT as it has quickly sought to snap up market share. Sunk costs leveled out and production capacity will be boosted in the years ahead. HFT has moved its local food processing plant from Tsuen Wan to Tai Po with GFA of 26,619 sqft which aims to double the size of the Tsuen Wan plant (ceased production in 215). Currently, there are six production lines at Tai Po. The Tai Po facility commenced operation end-214 whereas the facility in Suzhou came online in April 215. Suzhou s strategic location as an accessible logistics hub to Shanghai, Eastern China, Northern China and Central China will help facilitate the wholesale business of bottled drinks in those areas. Looking ahead, the company will remain focused on better utilising the newly commissioned and existing plants rather than building new ones. Exhibit 9: Production plants Location 1. Tai Po 2. Suzhou 3. Shenzhen 4. Dongguan 5. Tsuen Wan (ceased in 215) Types of products Units (Otherwise specified) Fresh Drinks Soup (' (' bottles) packs) Dessert Long Long Tortoise Tortoise & shelf-life shelf-life jelly jelly congee drinks drinks (' packs) (' packs) (' cups) (' bottles) (' bottles) Fresh drinks (' (' bottles) bottles) Long PET bottle shelf-life facility drinks (' bottles) Fresh Drinks Soup (' (' bottles) packs) Tortoise jelly (' packs) Tortoise jelly Max. daily capacity Annual operation (days) Max. annual capacity 16,848 9,672 2,184 1,56 6,552 68,64 27, 9,568 83,122 46,75 8,28 4, ,168 (' cups) Actual annual production 8,3 3, , 27,456 1,8 6,234 62,78 36,2 6,642 3, ,47 Utilisation rate (%) 49% 34% 37% 34% 31% 4% 4% 65% 75% 77% 8% 71% 33% 78% GFA (square feet) 26,619 1,14 37,674 18,837 Production lines Six One Four One 12,712 Four Exhibit 1: Production capacity of long-shelf life drinks is increased by 115%. 215 onwards Additional capacity % Chg Before 215 Total designed capacity Total designed capacity fresh drinks 26,416 (' bottles) +8, % fresh drinks 17,848 (' bottles) long shelf- life drinks 178,762 (' bottles) +95, % long shelf- life drinks 83,122 (' bottles) Utilisation Rate Utilisation Rate fresh drinks 55% fresh drinks 72% long shelf- life drinks 56% long shelf- life drinks 75% GFA 93,27 (sqft) +24,47 +35% GFA 69,223 (sqft) No. of production lines % No. of production lines 9 Platinum Broking 5

6 Utilization will pick up as execution of wholesale strategy delivers. Strategy shifts from Retail to Wholesale, adding the future growth driver. The utilisation rates of Tai Po and Suzhou facilities ranged from 31%-49% versus 65%-77% at the existing mature plants. Two-pronged model to drive up utilisation: HK Retail and Wholesale. HK Retail: o The new Tai Po facility with more stringent food quality controls as a response to food hazard incidents last year has ample room to handle new product lines which will hasten the progress of products rollout. In 2H15, a new product line dedicated to the fresh Deluxe Drink series ( 甘露系列 ) will be launched. Set to benefit from greater health awareness Wholesale: o HFT will secure wholesale orders in China to better utilise spare capacity. o New plants are automated and more efficient, as evidenced by the 7% HoH savings on COGS in 1H15 when both plants in Tai Po and Suzhou gradually commenced operations. o Changing lifestyles and unbalanced diets are exacerbating health problems among the Chinese population. Compounded by growing disposable incomes and consumer preference for quality products, these factors are driving the growth of China's health and wellness market. o Although competition in the packaged beverage market is fairly keen in China, the real potential in the niche market of wellness drinks still remains untouched as it is currently filled with homogenous herbal teas. HFT offers more choices in specialty health drinks. Depreciation is seen as a neccessary cost of driving the future wholesale strategy. Depreciation rose 66% YoY and will stay high during the early stage of production. This weighed on EBIT but the effect will gradually lessen on the back of larger sales. Exhibit 11: Total sales of Packaged Beverage and Tea wholesalers in China Exhibit 12: HFT s Depreciation & Amortisation in comparison with EBITDA US$b Sales of Beverage and Tea Wholesalers in China (HK$m) 5-2 EBITDA Total sales -4 Depreciation and amortisation Source: IBISworld China Industry Reports H13 2H13 1H14 2H14 1H15 Platinum Broking 6

7 SECTION 4 VALUATION TP: HK$ % BUY. Based on forward earnings, HFT is currently trading at 13.6x FY16E P/E, at the low end of its historical P/E, and a 55% discount to peer, Vitasoy in terms of P/E. We value HFT at 18x FY16 P/E with FY16E EPS of HK$.53, arriving at a TP of HK$.96, representing a maximum upside of 41%. BUY. Key downside risks on our turnaround call. Below optimal same-store sales growth. Slower pace in securing wholesale orders for the PRC business. Competition from the Northern China-based wellness drinks manufacturers. We note that managements total remuneration is running at approximately HK$1.7m annually. Whilst this seems high as compared with operating income, the strategy being implemented justifies their fees but we are keeping a close eye. Exhibit 13: Directors remuneration FY12A FY13A FY14A FY15E Directors' renumeration Independent directors' renumeration Amounts due from directors Amounts due to directors (9.4) (9.8) Managements' total renumeration % of operating income 56% 77% (35%) 48% Operating income (29.6) 22.3 Source: Company data, Bloomberg, Platinum estimates Exhibit 14: HFT s 1 year share price chart Hung Fook Tong Group Holding (1446.HK) Last price (Oct 22,15) = HK$.68 SMA(5) =.69 SMA(1) =.79 SMA(2) = Share price (HK$) Volume (m shares) Volume (Oct 22,15) =.2m 6M avg. = 2.6m Jul-14 Jul-14 Aug-14 Sep-14 Sep-14 Oct-14 Nov-14 Nov-14 Dec-14 Jan-15 Jan-15 Feb-15 Mar-15 Mar-15 Apr-15 May-15 Jun-15 Jun-15 Jul-15 Aug-15 Aug-15 Sep-15 Oct-15 Source: Company data, Bloomberg, Platinum estimates Platinum Broking 7

8 Exhibit 15: Peer group valuation comparison Name Ticker Mkt cap (HK$m) EV (HK$) Closing price (HK$) Source: Company data, Bloomberg, Platinum estimates 52-week High/Low (HK$) 6M Vol. (m shrs) 6M Turnover (HK$m) Local F&B companies 1 Hung Fook Tong 1446 HK / Vitasoy INTL 345 HK 12,956 12, / Simple avg Mkt cap wtd avg Overseas diversified F&B companies 1 Seven & I Hldgs 3382 JP 36, , / Yakult Honsha 2267 JP 72,598 74, / Lotte Chilsung Beverage 53 KS 18,277 23, / Simple avg Mkt cap wtd avg Overall avg Overall mkt wtd avg FY15E P/E (x) FY16E P/E (x) FY17E P/E (x) FY15E P/B (x) FY16E P/B (x) FY17E P/B (x) FY15E Yield (%) FY16E Yield (%) FY17E Yield (%) FY15E ROE (%) FY16E ROE (%) FY17E ROE (%) Platinum Broking 8

9 SECTION 5 APPENDIX Exhibit 16: MTR stations - coverage of HFT s retail stores in HK Source: Company data, MTRC, Platinum estimates Platinum Broking 9

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