I Purchased This Counter At Last!

Recently, rather than bottom fishing for counters, I decide maybe I can try to find the next counter that has the possibility of doubling in share price within the next 2 years. I had a few good picks in the past, such as PNE Industries Ltd, Hock Lian Seng Holdings Ltd, Ellipsiz Ltd and Captii Ltd, that has gain significantly - doubling or almost doubling in share price over a 2 to 3 years period.

One of the counters I come across is Japan Foods Holding Ltd (deem as JF for the remainder of the post below). 

This was a counter I had been eyeing for the longest time. This counter is like the restaurant you never entered before, even though you walk past it everyday and know it serves very good food and has been wanting to try their food. But you just find the price a bit too expensive.

In past, I already knew this counter has a great business model with a strong balance sheet. It also gave up great dividends. However, I didn't purchase this counter because its PE is always too high for my liking. Nevertheless, I decided to do a review on it and see if I should purchase the counter.

On the other hand, during my trip in Hong Kong, I saw a few of the Ajisen outlets and was trying to find out who owns them. I was wondering if it is JF. I eventually found out that these outlets in Hong Kong were owned by Ajisen (China) Holdings Ltd (deem as AC for the remainder of the post below) listed in Hong Kong stock exchange.

Since I have also started looking at counters in Hong Kong stock exchange, I decided to compare both of the counters to find out which one should I be investing in.

Profile of JF and AC

Both JF and AC got their franchise from Shigemitsu Industry Co., Ltd. (“Shigemitsu Industry”), the main franchiser of Ajisen Ramen.

Katsuaki Shigemitsu, the President and Chief Executive Officer of Shigemitsu Industry since 1997, has been the non-executive director of the JF and AC since their respective listing.

	JF	AC
Established in	1997	1996
Listed in	2009	2007
No. of Brands	Numerous Brands	Mainly Ajisen Ramen
Business Activity	Restaurants	Restaurants; Manufacturing of Noodles and related products
Number of Restaurants	70 (50 in Singapore, 4 in Malaysia, 2 in Vietnam, 9 in Hong Kong, 5 in China)	650 Restaurants (35 in Hong Kong, 1 in Rome, the rest in China)
Location	Singapore, Malaysia, Vietnam, Hong Kong and China *Malaysia and Vietnam are sub-franchisee.	China, Hong Kong and Rome
Other Investments	No investment other than other restaurants brands.	Had quite a few other investments in the IT space such as Baidu Takeout Delivery.
Insider ownership	Above 66% - Takahashi Kenichi (CEO)	43% - Ms. Poon Wai (CEO)
Exclusive Franchise	Within South East Asia (deem from its location)	Within China, Hong Kong and Macau (as per annual report)

Anyway I decided to use the Super Scorecard on both of the counter and here is the summary:

Both companies scored 7 pointers and have many similarities!

The main differences between the 2 companies are (1) AC has much lower PE (x 3.8) as compared to JF whose PE ratio is 16.8, (2) JF last 3 year trend is on an improving trend while AC is on a down trend, and finally (3) the alternative methods valued JF closer to its current price as compared to AC.

Nevertheless, I will deem that JF to have passed the super scorecard while AC failed it. This is because JF is a Singapore counter and AC is a Hong Kong counter. I will require Hong Kong counters to score at least 10 points in order to pass since it is a foreign counter (with currency risk) so I will want a bigger margin of safety. 

(Do note that the counter I bought within Hong Kong stock exchange has scored above 10 points.)

Comparing Franchise fee between JF and AC

As per AC’s 2015 annual report – “Pursuant to the Franchise Agreements, the franchise fees and technical fees are payable by the Group to Shigemitsu. The franchise fee is calculated with reference to the number of restaurants and the technical fee is an annual payment for the business of manufacturing and distributing noodles under the “Ajisen” trademark.”

As per JF’s 2016 Annual Report – “The royalty, franchise and licence fees paid to Shigemitsu Industry in FY2016 comprise: (i) fees paid for the use of the “Ajisen Ramen” brand amounting to S$341,000 (such fees relating to the “Ajisen Ramen” brand are deemed to have been specifically approved by Shareholders at the time of the Company’s initial public offering in February 2009 and are not subject to Rule 905 and Rule 906 of the Catalist Rules to the extent that there is no variation or amendment to the terms of the relevant franchise agreement); (ii) fees paid for the use of the “Keika Ramen” brand amounting to S$47,000; and (iii) the right to use the technique for the production of noodles amounting to S$18,000.”

Franchise Fee Paid by AC and JF

Counters	Breakdown	2014	2015	2016
AF	Shigemitsu Industry	HK$33,510,748 (About S$6.09 Million)	HK$32,794,486 (About S$5.9 Million)	Unable to find out any information
JF	Shigemitsu Industry	S$412,000	S$478,000	S$406,000
	Other Brands	S$599,000	S$484,000	S$697,000

Number of Restaurants

Counters	Breakdown	2014	2015	2016
AF	Ajisen Ramen	669	673	650
JF	Ajisen Ramen (Including Keika Ramen)	21	19	18
	Other Brands (Excluding sub-franchise and associate companies restaurant)	22	27	30

Franchise Fee per Restaurant (SGD)

Counters	Breakdown	2014	2015	2016
AF	Ajisen Ramen	Est $9,107	Est $8,859	NA
JF	Ajisen Ramen	$19,619	$25,157	$22,555
	Other Brands (Excluding sub-franchise and associate companies restaurant)	$17,285	$17,925	$23,233

Revenue per Restaurant (Based on Segment Results and solely from Restaurants, excludes manufacturing Income, rental income and sub-franchisee income)

Counters	Breakdown	2014	2015	2016
AF	Revenue (HKD’000)	3,177,710	2,988,535	2,500,866 (Actual RMB 2,219,230)
	Number of Restaurants – Owned and Managed	669	673	650
	Revenue/Restaurant (HKD’000)	4,750	4,440	3,847
	Revenue/Restaurant (SGD’000)	863	807	699
JF	Revenue (SGD’000)	62,553	62,509	62,697
	Number of Restaurants – Owned and Managed	43	46	48
	Revenue/Restaurant (SGD’000)	1,454	1,359	1,306

With that, I will conclude that I prefer JF than AC, even through their franchise fee were more expensive, due to the following:

- JF has higher insider ownership.

- JF passed the Super Scorecard.

- JF owns more brands.

- JF's revenue per restaurant is almost twice that of AC.

- I do not even need to worry about currency risk!

But how about other F&B Restaurant Counters?

As per SGX Stockfacts (Dated 6/4/17)

	Debt to Equity	PE Ratio	Dividend Yield	PB Ratio
ABR Holdings Limited	0.18%	26.766	3.47%	1.454
Soup Restaurant Group Limited	0.3%	52.301	1.37%	5.65
Kimly Limited	0.3%	19.719	0	23.729
Jumbo Group Limited	1.27%	28.771	1.39%	6.843
Japan Foods Holding Ltd.	1.55%	16.622	4.6%	2.398
Katrina Group Ltd.	15.33%	19.634	2.77%	3.495
Tung Lok Restaurants (2000) Ltd	41.18%	38.098	0	2.374
ChasWood Resources Holdings Ltd.	44.17%	0 (Made Losses)	0	0.808
Sakae Holdings Ltd.	60.21%	0 (Made Losses)	0	1.445

While comparing across all the F&B restaurant counters in SGX, JF did not fare badly. In fact, it score well - with the lowest PE ratio and the highest dividend. It is also not drastically overpriced in terms of PB ratio and it also has a very low Debt to Equity ratio.

Anyway I also decided to compare the revenue per restaurant for each counter. Do note that we are only comparing the Singapore restaurant operations and Singapore revenue since JF's revenue is mainly from restaurants in Singapore.

This is based on best effort basis - Mostly FY2016 Revenue:

	ABR	Soup Rest	Kimly	Jumbo	JF	Katrina	Tung Lok	Sakae
Revenue	89,611	38,353	98,154	116,781	62,697	54,941	82,984	54,243
No. of Restaurant	32	16	121	16	48	33	25	46
Rev/Res	2,800	2,397	811	7,298	1,306	1,664	3,319	1,179

*Chaswood Resources is ignored as there are no Singapore Revenue.

By comparing Revenue per Restaurant, I am quite stunned that JF is one of the lowest! Even Katrina has a higher Revenue per Restaurant.

Nevertheless, you have to remember that JF has the lowest PE ratio (despite having a low Revenue per Restaurant)! This meant that JF is working very efficiently. Remember all the IPAD bookings on each table when you visit an Ajisen Ramen outlet in Singapore? Thus, if only the remaining counters review their operating expenses and worked as efficiently as JF, I will still prefer JF! 

But why choose JF in a bull market and on an Up-Trend?

Other than all the information stated above, there is 2 more important piece of information.

95.25% of the shareholding are held by top 20 shareholders. Therefore, for the shares to have a drastic drop in share price, one of the 20 shareholders have to be selling. But from the recent company announcements, there are only insider buying and share buy-back. Therefore, I believe there is more strength in share price currently.

Furthermore, there is a new substantial shareholder (from deem shares) - Wong Hin Sun, Eugene - owning about 5.44%. If you compare via the annual report 2016, he only own 4.12% via Sirius Venture Capital Pte Ltd and 0.73% of Chin May Yee, Emily, whom is his wife. His recent increase in shareholding is due to his wife purchasing more shares. 

So why did his wife purchase the shares in Jan 2017 - at such a near time when they are announcing full year financials?

In addition, do note that Wong Hin Sun, Eugene WAS also a director for AC. But he left in Feb 2016. Why? Maybe to concentrate on his job in JF? Do note that he has also sold some Neo Group Limited shares in August 2016.

These questions led to to believe that JF will be announcing a very good year ahead and maybe more dividends.

However, there are some worries too. Other than the low Revenue per restaurant, the company also has a very high dividend payout (above 90%). Unless they maintain their dividend payout ratio, the share price maybe affected negativity. Moreover, JF's share price is very near 52 weeks high. If the market have some negative overall news (maybe due to Trump), the share price will be easily negativity impacted.

In Short

Despite the possible negativity, I decided to purchase the counter due to it passing the super scorecard, high dividend yield, high insider ownership, a high probability of stability in its share price, restaurant business model with numerous brands, clean balance sheet with significant cash percentage and finally a focus growth strategy. 

Do also note that I deem this as a counter I expect to rise significantly and I will be holding on to it for 2 to 3 years.

Current Price: $0.440 as of 6 April 2017.

Please do your own due diligence before you invest in this stock. 

Do note the author is vested in this counter/company at $0.440. 

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