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Long: Ajisen (China) Holdings Limited

|Includes: Ajisen China Holdings, Ltd. (AJSCF)

Ajisen (China) Holdings is a fast casual restaurant chain operator in the mainland China and Hong Kong. The company serves Japanese ramen and Japanese-style dishes under the Ajisen brand under a sole, exclusive and perpetual franchise from Shigemitsu Industry Co., Ltd., which is subject to a review every 38 years (franchise fee of HK$7,000 per restaurant in Hong Kong and RMB3,500 per restaurant in China) from February 2006.

Founded as a noodle factory in Shenzhen, the company currently has 664 restaurants in over 100 cities across China. (In comparison, Pizza Hut has 1,400 restaurants in over 400 cities, Yoshinoya - another Japanese fast casual restaurant - has 400 restaurants across the country and Starbucks operates over 1,800 company-operated and license outlets in China.) In addition, the company has established production bases in Shanghai, Chengdu, Tianjin and Dongguan, as well as seven food manufacturing and processing throughout China.

In addition to restaurant operations, the company also has 8,000 distribution points across 30 cities for selling packaged noodles, including with major retailers such as Wal-Mart, Carrefour, Metro, China Resources Vanguard and Century Lianhua.

Ajisen China completed its IPO in Hong Kong in 2007. The major insider shareholders of the company are its founder, Ms. Poon Wai (46.44%) and Mr. Katasukai Shigemitsu (2.97%). The major institutional shareholders are Invesco Hong Kong (6.13%) and T. Row Price Associates (5.16%).

Ajisen does have the propensity to get itself into trouble from time to time. In mid-2011, Ajisen China was accused of using concentrates and flavoring powders to make it soup base, instead of using actual pork bone stock - the company apologize for the incident and undertook certain reform measures to improve food safety, quality control and PR management. In September 2012, the company's sales were impacted by the Diaoyu Island incident (general anti-Japanese sentiment in China). In July 2013, Ajisen China appointed Mr. Joseph Lau as COO, but the executive was forced to leave after he was exposed to have been jailed for corruption in 2009 as Managing Director of McDonald's Restaurants (Hong Kong), and that Mr. Lau did not graduate from CalTech as claimed. However, in each case, its core business remain largely intact.

2015 proved to be a very challenging year for Ajisen, same store sales declined by 1.6% (China: 6%), 3.9% (China: 10.1%), 6.4% (China: 9.2%) and 7.2% (China: 6.6%) in Q1-4 2015. The company's stock price declined nearly 40% from HK$5.70 per share to HK$3.42 per share.

Ajisen's share price is currently trading at HK$3.00 per share, which is 6.4% above its 52-week low of HK$2.82 per share. From a valuation perspective, the company is currently valued at 3.3x LTM EV/EBITDA (June 30, 2015), while comparable companies are trading at 6-13x.

In October 2015, Ajisen China invested US$60 million in Baidu's takeout dining service, Baidu Waimai. In December 2015, Ajisen acquired a 9.44% in a Chinese egg producer, Jiangsu Hong Xuan Agriculture, for RMB43.35 million.

Ajisen has a strong balance sheet, built up from years of cash flow generating earnings (cash flow from operations has been above HK$400 million since 2009) - as of June 30, 2015, Ajisen had HK$1.9 billion in cash and HK$133 million in debt. The stock currently yields approximately 5.8% cash dividend. Additionally, the company also holds nearly HK$500 million of non-owner-occupied investment properties (generated over HK$20 million of rental income for the company in 2014).

Long Ajisen shares at HK$3.00 per share with a stop loss of HK$2.70.

Catalysts

  • Turnaround of a declining SSS, which we believe is in the works as the company continues to refine its store strategy by closing underperforming stores, refurbishing new stores (including adding and focusing on tier one cities and eastern China (Jiangsu, Zhejiang and Anhui provinces) where it is strongest
  • O2O mobile commerce strategy (including investment in Baidu Waimai and collaboration with Daojia (JD.com affiliate)) driving additional revenue stream from take-out business

Disclosure: I am/we are long AJSCF.