TH International in need of more cash commitment

The operator of the Tim Hortons chain in China is falling behind its aggressive expansion plans amid disagreement with the brand’s owner about new investment

Key Takeaways:

  • TH International needs to ‘commit more capital’ to expand its Tim Hortons business in China “in an exciting way,” according to the CEO of Tim Hortons brand owner RBI
  • Previous company data showed TH International had 909 Tim Hortons stores in China in mid-January, short of the 1,000 it had previously targeted by the end of 2023


By Doug Young

Donut anyone?

You won’t find many of those – if any – at Tim Hortons restaurants in China these days, after the chain’s local operator decided to drop one of the brand’s signature items from the menu last year. Now, it seems cash is also an increasingly endangered item on the menu for the chain’s China operator, TH International Ltd. (THCH.US), which is taking a bite out of the company’s aggressive expansion plans for the market.

That’s a key takeaway from several comments in the earnings call last week for Restaurant Brands International (QSR.US), owner of the Tim Hortons brand and a partner in TH International, a joint venture whose other stakeholders include Cartesian Capital and local partners Tencent and Wumart. During the call, Restaurant Brands International (RBI) CEO Josh Kobza made several comments hinting of an unexpected slowdown for Tim Hortons in China.

The separately-listed TH International has yet to report its own fourth-quarter results. A spokeswoman told Bamboo Works the company had no comment on Kobza’s remarks, which we’ll review shortly.

But that didn’t stop investors from making their own opinions known in the form of a 5.6% decline for TH International’s New York-listed shares the day RBI released its fourth-quarter results and made its China-related comments. The stock is now down 22% so far this year, and has lost more than 80% of its value from when it listed through a merger with a special purpose acquisition company (SPAC) in September 2022.

Somewhat symbolically, the latest selloff pushed TH International’s price-to-sales (P/S) ratio below the psychologically important 1 level, dropping it to 0.97 by the end of last week. By comparison, Yum China (YUMC.US; 9987.HK), operator of the KFC and Pizza Hut chains in China, trades at a P/S of 1.54, while DPC Dash (1405.HK), China operator of the Domino’s (DPZ.US) pizza chain, trades at 3.75.

We first flagged that something might be amiss last month, when some new store-count data given out by TH International seemed to show the company was falling behind its aggressive new store-opening goals for the Tim Hortons chain in China. The data indicated the company had 909 Tim Hortons restaurants in China in early January, which was well behind the 1,000 it had targeted for the end of last year in a forecast given out in mid-2023.

The big culprit behind the slowdown is probably a double-whammy of China’s slowing economy, combined with weaker-than-expected performance for the Tim Hortons chain in China. The slowing economy is hitting everyone. But on a company-specific basis, the Tim Hortons chain also seems to be still finding its footing after entering China in 2018, and launching an aggressive expansion several years later.

Kobza hinted at the issue when he referred to “softening performance in China” as a factor that had a negative impact on RBI’s overall comparable-store sales in the fourth quarter. He didn’t mention the Tim Hortons chain in China specifically, and we should also note that Burger King, one of RBI’s other major brands, also has a major presence in China through a different partner.

Weak international performance

All that said, we’ll take a closer look at some of Kobza’s comments that hint at a funding shortfall that’s causing Tim Hortons to miss its targets.

“On the Tims business, we believe our partner is going to need to commit more capital to grow that business in an exciting way, and we believe it’s critical that they do so,” he said of the Tim Hortons business in China. “We are working with them both to lay the foundations needed to meet the growth aspirations that we know we are capable of.”

Several analysts asked about China in the call’s Q&A session, and Kobza later added: “We also do believe that there needs to be some more capital put into that business to really realize its potential.”

Those comments both appear to show that TH International is hesitating about pumping money into the Tim Hortons chain in China as aggressively as it had previously planned. It’s also quite possible the company may be having trouble accessing capital lately, as many banks and other funding sources are reining in their China investments on concerns about the slowing economy and also geopolitical risks related to U.S.-China tensions.

As a result of the slower-than-expected China expansion, RBI said it was downgrading its global forecast for 5% growth in its restaurant count this year to the mid-4% range.

The “softening performance” Kobza alluded to in his comments on China shows up in the company’s comparable-store sales data for its international Tim Hortons business. Those sales fell 6.3% in the fourth quarter, accelerating from a 4.3% decline a year earlier, even as the Burger King chain’s international operation posted comparable-store growth.

Concurrent with its latest quarterly results announcement, RBI unveiled a five-year plan with a target for 7,000 Tim Hortons restaurants globally by 2028, up more than 50% from the 4,525 at the end of last year. The chain’s China operation is an important part of that expansion, since the Tim Hortons China store count of 909 in January was roughly 70% of the brand’s total of 1,308 international stores at the end of last year.

In addition to its 1,000-store target by the end of last year, TH International previously said it aimed to have 3,000 Tim Hortons in China by the end of 2026. Those plans mirrored similar aggressive expansions by Yum China, which is aiming for 20,000 China stores by 2026, and DPC Dash, which aims to have 1,500 stores in the market by that year.

TH International’s revenue rose 42.7% year-on-year in last year’s third quarter to 436 million yuan ($61 million). That may look good on the surface, until you consider that most or all of that growth probably came from new store openings, which rose by an even larger 57% over the same period. All this shows that TH International is facing headwinds in its China expansion plans, and may either need to scale them back unless RBI is willing to step in and provide more assistance.

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