Local brand; regional success. BreadTalk Group Limited started out in 2000 as a local bakery chain best known for its signature floss buns, before firmly establishing its brand name and evolving into a major food retailer in less than 10 years. It currently operates in three main segments: bakery, food court and restaurants. It entered the restaurant segment in 2003 after acquiring the Singapore franchise rights to the renowned Din Tai Fung restaurant brand. The food court business soon followed in 2005. The group was listed on SGX in 2003. China - to spearhead the next growth phase. From Singapore, it moved to the rest of the region and China is currently one of its key markets outside of Singapore. Given the sheer size of the consumer market in China, we believe that it will be the future catalyst for BreadTalk's growth. While Singapore currently remains the largest revenue contributor to the Group, BreadTalk's diverse brands of various food offerings and established foothold in Beijing and Shanghai should allow it to take advantage of rising disposable incomes as well as react quickly to new consumer trends in China. In terms of number of outlets, China already outnumbers Singapore with 20 food courts, 3 Carl's Jr fast food restaurants, 3 RamenPlay restaurants and 184 bakery outlets. Rising costs, an issue, but manageable. We believe that BreadTalk will be able to maintain a gross profit margin of about 55%, which is in line with its margins over the past five years despite potential hike in food costs. Previous fluctuations in raw material prices had not resulted in any significant impact on gross profit margins, and the group also plans to improve its margins by shortening its supply chain and bulk sourcing globally for its supplies. Initiate with BUY and fair value estimate of S$0.74. We project revenue growth of 26% YoY for FY2011F on the back of outlet expansions and stronger sales from existing stores. Backed by strong sales projections, its...
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