TH International reaches Popeyes goal, but falls short on Tim Hortons

The operator of the two Western fast food chains in China said it has 919 stores, trailing its previously announced goal for 1,000 stores by the end of 2023

Key Takeaways:

• TH International said it currently has 919 stores in its network, including 10 Popeyes and the remainder from its main Tim Hortons chain
• The fast food operator opened about 156 stores in the fourth quarter, more than the total for the previous three quarters combined

By Doug Young

Chinese fast food operator TH International Ltd. (THCH.US) recorded its strongest-ever growth for new store openings in last year’s fourth quarter, according to new data released by the company to mark the opening of its 10^th Popeyes store in the Mainland market. At the same time, China’s slowing economy appeared to take a bite out of the company’s core Tim Hortons chain, which fell noticeably behind its expansion goals disclosed midway through last year.

TH International, the master franchisee for Tim Hortons and Popeyes in China, said it now has 919 stores, according to an announcement this week to mark the Popeyes 10-store milestone since the brand’s relaunch in China last August. That means the company opened a record 156 stores during the quarter, more than the 146 it opened in the previous three quarters combined.

But the latest figure was also noticeably short of the 1,000 stores that TH International aimed to have in operation by the end of last year, according to a company announcement midway through last year. TH International didn’t comment further on the number, and will undoubtedly discuss any shortfalls when it announces its official fourth-quarter results later this year.

Investors weren’t noticeably moved by the latest announcement, whose main focus was progress on the Popeyes chain since its official launch last year. The stock was largely unchanged the day of the announcement on its second-lowest trading volume in the last month. Since then it has edged down by about 3%. Investors may have been slightly encouraged by the strong fourth-quarter store openings, following three far weaker quarters for the expansion-minded company.

TH International is just one of a number of major Western fast food operators that are aiming to grow rapidly in China, seizing on appetite from the nation’s growing middle class. Others with similarly aggressive plans include Yum China (YUMC.US; 9987.HK), which recently opened its 10,000^th KFC in the market, and DPC Dash (1045.HK), operator of the Domino’s Pizza chain in China, which aims to have 1,500 stores in the market by 2026.

TH International is a joint venture between venture capital firm Cartesian Capital, internet giant Tencent, local retailer Wumart and Restaurant Brands International (QSR.US), owner of the Tim Hortons and Popeyes brands. It opened its first Tim Hortons in China in 2018, and began an aggressive expansion several years later. In addition to the 1,000-store target by the end of last year, the company previously said it aimed to have 3,000 Tim Hortons in China by the end of 2026.

But the latest shortfall shows that China’s economy might have other ideas about such aggressive expansion plans. After two decades of explosive growth to become the world’s second largest, China’s economy has begun slowing sharply in recent years. An expected post-pandemic rebound has failed to materialize, leading many consumers to rein in their spending. Sellers of big-ticket items like cars, property and even smartphones have felt the pain of that slowdown most acutely. But now it’s slow trickling down the food chain to affect sellers of lower-cost products like cosmetics and restaurant food.

Investor skepticism

TH International has yet to really win over investors with its story of finding the same success in China like that seen by KFC, McDonald’s (MCD.US) and Starbucks (SBUX.US). The company made a backdoor listing using a special purpose acquisition company (SPAC) in 2022, and has seen its shares move steadily downward ever since, losing about 80% of their value from the time of the listing’s completion in September 2022.

The company currently trades at a price-to-sales (P/S) ratio of 1.22, trailing the 1.53 for Yum China and well behind the 3.98 for DPC Dash. Restaurant Brands International trades even higher with a P/S of 5.22.

At least part of the reason for the low valuation is probably that big institutional investors have yet to discover the company. That appeared to be the case initially for DPC Dash, which listed in Hong Kong in March last year, and whose shares languished for their first five months before suddenly jumping nearly 50%. TH International also has yet to earn a profit, which is increasingly important for investors buying China stocks as the nation’s economy slows.

The company’s revenue rose 42.7% year-on-year in the third quarter to 436 million yuan ($61 million), which looks good on the surface, but was sharply slower than the 130% growth in the previous quarter when China was rebounding from the pandemic. One factor behind the growth slowdown is the company’s gradual shift to using more franchise partners to achieve its aggressive new store opening targets. Such partners help to boost store counts, but provide far less revenue than self-operated stores.

The company is definitely moving towards profitability, with its adjusted store EBITDA, equivalent to gross profit excluding depreciation and amortization costs, roughly doubling to 29.3 million yuan in the third quarter from 15.3 million yuan a year earlier. Its adjusted store EBITDA margin also improved to 7.5% from 5.3% a year earlier. On the bottom line, its net loss narrowed to 160 million yuan from a 195 million yuan loss a year earlier.

The company’s stock initially jumped after its announcement of the Popeyes licensing deal last year, though it quickly returned to its downward track after that. It has moved relatively quickly with Popeyes brand, reaching the 10-store goal just a half year after gaining China rights to the brand. In its latest announcement, it reiterated its previously stated goal of opening 500 Popeyes in the next five years, and 1,700 over the next decade.

At the end of the day, big investors that could create some excitement for TH International’s stock appear to be staying on the sidelines for now. They’re most likely waiting for the company to show it can operate profitably, especially in the face of China’s slowing economy. They also probably want to see if the company can have more success with Popeyes in China, following two earlier failed attempts with the brand by other operators.

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