An-Shin Food Services 1259
July 25, 2016 - 6:24am EST by
jt1882
2016 2017
Price: 73.30 EPS 6 0
Shares Out. (in M): 32 P/E 12 0
Market Cap (in M): 2,375 P/FCF 6 0
Net Debt (in M): -1,968 EBIT 267 0
TEV: 407 TEV/EBIT 1.5 0

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  • Restaurant
 

Description

Summary:

            An-Shin Food Services安心食品 (www.mos.com.tw) is the Taiwan-listed arm of Mos Burger, the island’s largest westernized fast-food chain (243 self-operated stores) behind McDonalds (404 stores) with a 25-year track record of making Taiwanese customers happy. 

An-Shin’s market cap today is only slightly higher than its liquid assets per share (i.e. 1x 2015 EV/FCF, 6x 2015 price/FCF) despite:

A) achieving the very respectable track record below,

B) taking market share from competitors: in the past three years, of the top 6 western fast food chains in Taiwan, only Mos Burger expanded while McDonalds, KFC, Burger King, and two local competitors contracted

C) enjoying customer-funded new-store growth: we estimate 25-36% of new stores since the 2011 IPO were effectively paid for via cash deposits into the sticky “MOS Card” pre-paid loyalty program

D) distributing dividends worth 70% of cumulative after-tax profit since the IPO (current dividend yield: 3.9%)

E) delivering +6% sales growth from January-June 2016 via organic improvements (i.e. Mos Burger’s mobile app order/pick-up/pay system now generates +18% of sales, up from 13% a year ago) with near-zero new store expansion.  

(TWD millions)

 

 

 

 

 

 

Market cap

         2,336

 

 

 

 

 

 

Liquid assets

1,968

 

 

 

 

 

 

EV

368

 

 

A

B

A / B

 

 

 

 

 

 

 

Return on

 

(Parent-level figures)

 

 

EBITDA

 

Incremental

ROE ex

 

Locations

Sales

EBITDA

Increase

Capex

Capex

Cash

2015

243

  4,276

      370

          28

     (66)

42%

849%

2014

237

  4,088

      343

          (2)

     (84)

-3%

50%

2013

235

  4,144

      345

         (36)

    (123)

-29%

18%

2012

233

  4,171

      381

          (8)

    (259)

-3%

22%

2011

217

  3,982

      389

          47

    (267)

18%

68%

2010

179

  3,400

      343

          67

    (218)

31%

103%

2009

159

  2,933

      275

          19

    (165)

12%

117%

2008

150

  2,634

      256

          27

    (136)

20%

95%

2007

130

  2,298

      230

        230

    (130)

177%

147%

2006

115

  1,830

 

 

 

 

 

2005

103

  1,596

 

 

 

 

 

 

We believe the stock market has 3 relatively weak excuses for giving this company away for free with a secure ~4% dividend yield:

 

1)      Obscurity: 

Even though the “Mos Burger” brand enjoys universal recognition in Taiwan, An-Shin Food Services the listed company is very obscure since it only trades on Taiwan’s OTC market, where institutional ownership is less common (note: not even Google Finance has any information on the company).  Like Japanese investors that care about whether a company is listed on the Tokyo Stock Exchange 1st section / 2nd section / Mothers, Taiwanese investors care about whether a company is listed on the more prestigious “mainboard” Taiwan Stock Exchange (TWSE or上市to locals) or on the less prestigious “over-the-counter” Taipei Exchange (TPEx or 上櫃/興櫃/創櫃to locals).  Our experience is these are often distinctions without a difference: good/bad, small/large companies exist on both markets.  

As a result, 99.7% or 8,127 of the company’s 8,154 total shareholders were domestic individual retail investors as of April 9, 2016.  An-Shin’s top 10 shareholders only include founders, management, and we suspect friends of the former.  Only 6 of An-Shin Food’s 8,154 total shareholders were foreign.  Excluding the company’s Japanese co-founder/franchisor Mos Japan (25%) and Humax (4%), a Japanese restaurant peer, we estimate we own almost all of the remaining foreign-owned shares as of today.  

Though the company IPO’d to some fanfare five years ago at a premium valuation, it quickly disappointed most investors and now sells for less than half of its IPO price thanks to a temporary product quality crisis in 2014 and terrible overseas results.

 

 

2)      P&L consolidation and depreciation policy obscures true parent-level cash profitability

 

The rosy historical financials above only reflect parent-level performance from Taiwan, An-Shin’s dominant home market and ignores two overseas operations – Mos Burger China (40%-owned consolidated subsidiary) and Mos Burger Australia (25%-owned equity-method affiliate) – still mired in start-up losses. 

 Including start-up losses from China/Australia, An-Shin’s consolidated operating profit looks much worse (i.e. TWD 136m consolidated EBIT vs. TWD 195m parent-only EBIT in 2015) and does not resemble anything close to actual free cash flow, which has been well over TWD 300m for the last few years. 

In addition, thanks to a more cautious new-store expansion mentality in recent years, cumulative depreciation from 2013-2015 exceeded actual capex by more than 2:1, averaging TWD 205m annually.  At this rate, net fixed assets will be fully-depreciated in just a few years and EBIT could more than double.  This would be purely cosmetic, but could force An-Shin to pay out even more dividends than they have in the past to keep up the high after-tax payout ratio (70% on average since the 2011 IPO). 

To eyeball the true cash earnings from An-Shin’s Taiwan-only operations, take the non-consolidated P&L (this excludes China consolidation effects) and ignore all income/expenses below EBIT (which still includes below-the-line losses from Australia) and make your own judgement as to the fair working capital, depreciation, capex, and effective tax rate.  The final result should look similar to the non-consolidated operating cash flow minus capex of TWD 370m in 2015.

 

 

3)      Concerns that management will throw good money after bad in China/Australia:

We visited the management of An-Shin’s co-founder and franchisor, Mos Food Services, in Japan (twice).  We also had one-one-one meetings with An-Shin’s management in Taiwan (twice) and personally attended their annual shareholders meeting in June 2016.  We even visited one of An-Shin’s Mos Burger outlets in mainland China in 2015.  All of this left us with the impression that the company’s overseas start-up losses would probably not balloon out of control. 

Why?  Management seemed like sensible people (more on this below), but more importantly, there is a small footnote in the 2015 audit (PDF p. 71 of the English version) which confirmed An-Shin is not legally allowed to invest beyond a certain absolute quota in mainland China, the country that has caused the most losses to date.  This approval/quota system stems from the historical political tensions that Taiwan has maintained with mainland China, and explains why most Taiwanese-listed companies that derive most of their P&L in China are incorporated in offshore jurisdictions.  Generally speaking, Taiwan’s Ministry of Economic Affairs will not permit any Taiwan-incorporated company to invest more than 60% of net assets in mainland China. 

An-Shin’s mainland China investment quota – a cap that can’t be breached without obtaining further government approval – is not only small relative to the size of An-Shin’s cash balance and annual free cash flow, but a significant percentage of it has already been used up.  Specifically, Xiamen An-Shin Food Management Co. Ltd, the mainland Chinese subsidiary operating Mos Burger China, has already used up TWD 206m of its TWD 226m approved investment quota, with an absolute maximum investment ceiling allowed of TWD 995m (of which 21% has already been used up).  None of these numbers are meaningful relative to the TWD 2 billion of liquid assets and TWD 300-400m of free cash flow that An-Shin’s parent-level Mos Burger Taiwan operations generate annually.

In addition to the regulated investment ceiling, future downside from China/Australia is also limited by the simple fact that An-Shin is only a minority investor in China (40%) and Australia (25%) – so any downside will be majority-owned by other investors. 

We would also highlight that Mos Burger China (primarily in Fujian province) is not a complete failure.  The stores are attractive, and in certain locations business is booming/profitable.[1]  The key challenge for management now is to rationalize the store network (just 12 outlets as of December 2015) and learn from the profitable stores that they already have.  So far in 2016, this seems to be working, as 1Q2016 losses from China shrank 26% over last year.

 

Conclusion:

We believe investors in An-Shin Food Services today are well-compensated for the above issues at just 1x EV/FCF with a 3.9% dividend yield (that will probably increase given how strong 2016 has been so far).  Opportunistic investors should be adopting a “glass is half-full” view of this company instead of obsessing over its lack of overseas success.  At this rate of free cash flow generation in Taiwan alone retained cash will exceed An-Shin’s current market cap in a few years or less. 

Either An-Shin will become one of the very few dividend-paying companies listed in Taiwan to trade below net cash – according to Bloomberg, today there are only 10 dividend-paying negative enterprise value stocks in Taiwan out of 2,012 total – or its stock price will move higher as free cash flow builds up.

According to Bloomberg, there are 26,726 publicly listed companies in Asia.  Of these 26,726 companies, An-Shin is one of only 14 as of July 21, 2016 with these basic characteristics of cheapness/quality:

EV/market cap <0.3x,

Price/cashflow <7x,

5-year average ROE > 6%, and

Dividend yield >3.5%. 

See Bloomberg’s screen of 14 here: https://www.dropbox.com/s/sukfccvotqrrrtg/20160721%20asia%20total.pdf?dl=0

 

 

Useful documents:

2016Q1 results (English, consolidated): https://www.dropbox.com/s/nd2c2izam1okcvy/2016q1%20english%20consolidated.pdf?dl=0

2015 audit by PWC (English, non-consolidated): https://www.dropbox.com/s/jp56n3mvwhdvbsv/2015ar%20English%20parent.pdf?dl=0

2015 audit by PWC (English, consolidated): https://www.dropbox.com/s/yf11k9zjmqxbgyo/2015ar%20English%20consolidated.pdf?dl=0

2014 audit by PWC (English, non-consolidated): https://www.dropbox.com/s/6kmjip166i6o1cc/2014ar%20english%20parent.pdf?dl=0

2014 audit by PWC (English, consolidated): https://www.dropbox.com/s/yeh1wcwmfywjvzm/2014ar%20english%20consolidated.pdf?dl=0

Daiwa IPO report from 2011 (English):  https://www.dropbox.com/s/c4lcdy0kjb10s3i/daiwa%20initiate.pdf?dl=0

IPO presentation (Chinese):  https://www.dropbox.com/s/fqlvxob49ptcm02/2011%20presentation.pdf?dl=0

 

 

 

 

Frequently asked questions:

 

What is Mos Burger?

            “Mos” (acronym: Mountain Ocean Sun) Burger is the flagship fast food brand of Tokyo-listed Mos Food Services.   Mos Burger, founded in Tokyo in 1972, is the #2 chain of hamburger shops in Japan (1,370 stores) today behind only McDonalds.  In recent decades Mos Burger has also expanded in Asia ex-Japan (326 stores).[2]  

The Mos Burger brand concept is based on freshness (i.e. locally sourced, frequently organic ingredients) and above-average service (i.e. made-to-order burgers delivered to your table) with a Japanese twist (think burgers made with rice, teriyaki, tsukune, etc.). 

As per the official website (http://www.mos.co.jp/global/corporateinfo/activities/): “MOS BURGER is a hamburger shop chain established in Japan. Ever since its founding, we have placed the utmost emphasis on taste. In order to offer a fresh eating experience straight out of the kitchen, we have adopted an after order method that entails the preparation of products after receiving each order. Moreover, we have incorporated Japanese food culture into the development of products, and continue to deliver an excellent taste using carefully selected ingredients based on our motto of "Good Food for Good Health."”  

If you were to randomly ask any consumer in Japan or Taiwan, the average perception of the Mos Burger brand would be better than that of McDonalds, especially since the latter experienced several serious food quality scandals in China/Japan recently (i.e. a human tooth was found in the fries at McDonalds Japan http://www.bbc.com/news/world-asia-30706243).

 

 

How does the Mos Burger franchise system work?

Of Mos Burger’s 1,370 Japan stores, 275 are self-operated and the rest are franchised to a fragmented base of 450 small franchisees.  In Asia ex-Japan, 75% of the stores are located in Taiwan and operated by An-Shin Food Services, a regional master-franchisee (Taiwan/China/Australia) founded in 1991 in which Mos Food Services also owns a 25% stake with 3/9 board seats.  

According to Mos Burger Japan’s new franchisee marketing brochure https://www.dropbox.com/s/vgj3vhoc4ibosb3/MOS%20franchise%20economics.pdf?dl=0, a top-performing franchisee could generate JPY 84m (TWD 25 m) in annual unit sales, with a 63% gross margin and a 12% EBITDA margin.  The total upfront cost of a new franchise would typically be JPY 33.5 million for a ~1,000 square foot store, and the franchisee would be responsible for all expenses, including a 2% of sales royalty/marketing fee to Mos Food Service.  Mos Food Services makes money from the franchise royalties and also from the exclusive wholesaling of food ingredients.  In our chats with Mos Burger Japan management, they concede that the above figures are a bit on the high side – most of their franchisees (small businessmen with an average of 3 stores) would be happy to earn an 8-9% EBITDA margin on JPY 72m in annual sales.

 

 

Why do Taiwanese people like Mos Burger?

First, it’s important to highlight that Mos Burger is not just another burger chain – it’s a Japanese burger chain, and the average Taiwanese person loves Japan.  According to official statistics, Taiwan is the #2 source of inbound tourists to Japan behind only mainland China, and the rate of Taiwanese visitation has been increasing at double digits year on year for many months.[3]  A recent survey by Japan’s de facto embassy in Taiwan shows more than 80% of Taiwanese are fond of Japan and more than half of them consider it to be their favorite foreign country.[4] The Taiwan/Japan bond is intense on a person-person level, business-business level, and government-government level.[5]  An entire generation of Taiwanese people, including former president Lee Teng-hui, received a full Japanese education when the island was a colony of Japan from 1895-1945.  Many of that generation passed down their love for Japan to their children and grandchildren.  

So it’s not hard to understand why that Taiwanese customers took to Mos Burger, which first opened all the way back in 1991 (just 7 years after the first McDonalds) with a completely differentiated Asian-themed menu priced competitively yet based on fresher ingredients (i.e. burgers made from New Zealand beef with Taiwanese-grown rice) and better service.[6]  By 2005, Mos Burger Taiwan’s success forced McDonalds Taiwan to create launch a copycat rice patty burger.[7]  By 2015, McDonalds announced plans to withdraw from self-operating in Taiwan altogether by selling out to a new franchisee.[8]  Of the top 6 western fast food chains in Taiwan, only Mos Burger has added outlets in recent years while the other 5 peers have shrank (see below).

 

Western fast food competitive landscape in Taiwan (# of outlets):

2015: McDonalds (404), Mos Burger (243), KFC (129), Burger King (21), TKK Fried Chicken (42), 21 Century (29)

2014: McDonalds (414), Mos Burger (237), KFC (128), Burger King (25), TKK Fried Chicken (43), 21 Century (32)

2013: McDonalds (414), Mos Burger (235), KFC (135), Burger King (27), TKK Fried Chicken (43), 21 Century (33)

 

 

Why is Mos Burger a better business in Taiwan than in Japan?

Mos Burger Taiwan has done a superb job adapting to local tastes.  Menu-wise, Mos Burger Taiwan is only 70% identical to Mos Burger Japan, while the other 30% is made up of locally innovated Taiwan-only products.  In Taiwan, consumer preference for Asian-themed menu choices is much more pronounced: the rice-based burgers account for 3 of the 5 top-selling items.  In Japan, however, the rice burger is only the 10th or 11th best-selling item.  Also, Mos Burger Taiwan was quick to recognize that Taiwanese people are more accustomed to eating out all three meals of the day, so they earn much more revenue during breakfast hours than Mos Burger does in Japan (where breakfast = just 11% of sales, lunch = 40%, afternoon tea = 23%, and dinner = 26%).

In Taiwan, the average Mos Burger Taiwan outlet costs TWD 3-7m upfront (including rental deposits) depending on store size, generates TWD 18m in sales (TWD 19 million in Taipei, the #1 region) with a 64% gross profit margin and a ~10% consolidated cash profit margin (including all head office expenses).  The store level EBITDA margins reach as high as 20% in the best locations, which in recent years have been inside the Taiwan High Speed Rail (bullet train) stations.  An-Shin management is coy about the exact level of annual royalties paid to Mos Food Services Japan.  We estimate that An-Shin’s actual royalty/marketing costs are higher than the 2% that Japanese franchisees pay because Taiwan marketing costs are 100% borne by An-Shin, not Mos Food Services. 

What’s most interesting about the unit economics of Mos Burger Taiwan is that even though absolute unit sales values are lower than in Japan, the per unit customer traffic is actually meaningfully higher in Taiwan (~500 guests/day) than in Japan (~400 guests/day).  In other words, lower menu prices in Taiwan accounts for the gap in absolute sales, but since Mos Burger Taiwan has been raising prices (i.e. twice in the last four years), that gap could gradually close over time.

Why is Mos Burger Taiwan able to generate higher customer traffic than in Japan?  Because it earns a higher percentage of sales from loyal repeat customers.  For example, the number of MOS Card loyalty members in Taiwan is higher both on a per store basis and in terms of sales contribution (MOS card members in Japan equal 4-5% of sales vs. 20% of sales for Taiwan Mos Card members).  A modern extension of the MOS Card, the highly successful Mos Burger mobile/order/pay app was first innovated/implemented in Taiwan, where it now accounts for 18% of sales (up from nothing a few years ago) then taught to Mos Burger Japan later on.  Unlike McDonalds, where the food is pre-cooked, Mos Burger guests need to wait for their food to be cooked.  As a result, wait times can feel a little long – an issue that the Mos app mobile order/pay/pickup solves beautifully.

 

 

Why is the growth of the pre-paid float on the Mos Card a big deal?

An-Shin Food’s website actually publishes a daily update of its pre-paid MOS card “float,” a large, growing number – 13% of equity and 5% of sales – that we think serves as a nice real-time indicator of sales activity (see http://www.mos.com.tw/member/cardGuide.html).  But what the MOS Card float really tells us is that this is a unique customer-funded business.

In other words, the TWD 202m of absolute pre-paid card float stored up since the MOS Card program started in 2007 has actually been enough to pay for as many as 36% or 40 of the 113 net new stores built in Taiwan over that period (i.e. 202 / 5 = 40).  As a percentage of the total capex since 2007, the amount raised by the MOS Card accounted for 14% of the total capex.  The growth in the Mos Card float has continued in 2016, too.  We check the number every day, and there has not been a single day this year where the float dipped below where it ended on December 31, 2015.  The Mos Card float even increased slightly in early July 2016, when the historically strong Typhoon Nepartek struck the island.[9]

 

TWD mil

 

  pre-paid

increase

 total

 

% of

card

in card

 active

date

sales

value

value

 cards

2009

2.5%

         74.3

   

2010

3.0%

       102.9

         28.6

 

2011

3.4%

       135.4

         32.6

   308,529

2012

3.8%

       159.1

         23.6

   487,844

2013

4.6%

       190.7

         31.7

   590,782

2014

4.8%

       196.0

            5.3

   661,584

2015

4.7%

       201.7

            5.7

   718,763

Total

   

       201.7

 

 

 

How much more can Mos Burger grow in Taiwan?

In terms of new store expansion, management believes Mos Burger Taiwan can eventually support at least 350 or 400 total outlets.  Mos Food Service’s latest investor relations presentation indicates that they would like Taiwan to have at least 258 stores by 2018.[10]

In our opinion, An-Shin management appears more focused on organic sales growth from bottom-up initiatives like the MOS app mobile order/pay/pickup (which has driven higher per ticket order values) and increased high-margin coffee/tea sales (now 10% of sales).  These are the reasons why Mos Card loyalty members are at all-time highs while sales growth and profit growth have been very strong year to date. 

An-Shin also benefits this year from some low-hanging fruit: the company’s worst-performing 20-30 stores have made enough store-level improvements to turn around profitability this year.[11]

 

 

Sounds like McDonald’s Taiwan is for sale – for how much? Does it mean anything for Mos Burger Taiwan?

            According to http://www.businessweekly.com.tw/, McDonald’s is getting out of the business of operating restaurants in Taiwan and is actively looking to sell long-term exclusive Taiwan franchise rights to a new operator for TWD 30 billion (USD 933 million), which include the existing store base of 404 outlets.[12]  This asking price includes ownership of the underlying real-estate for 20 of the most prime locations. 

According to unnamed sources, the negotiations with potential buyers have been hung up over a few issues: 1) McDonalds wants a final sale price no less than TWD 10 billion, 2) the new franchisee must operate the business for at least 20 years, and 3) the family behind the new franchisee must ensure the second generation is ready to participate in the business and succeed one day.

Since the above are only rumors at this point, it’s difficult to draw conclusions for Mos Burger Taiwan other than to say it’s yet another benchmark that An-Shin Food Services is trading at a ridiculously cheap valuation.  Whether the final transaction price is TWD 10 billion or TWD 30 billion (TWD 25-75 million per outlet), with or without underlying real estate, An-Shin Food Service’s current market cap of only TWD 2.3 billion (below TWD 10 million per outlet) is laughable by comparison.

 

 

What were the food safety scandals of 2013-2014 all about?

            A series of food safety/quality scandals involving some of Taiwan’s biggest food companies erupted in 2013-2014 and seriously eroded consumer trust in Taiwanese brands.[13]  At the heart of these scandals was tainted cooking oil discovered at even large food companies including the Wei family’s Ting Hsin, a “blue chip” multinational consumer products group most famous for their shareholding in Tingyi (322 HK, mainland China’s largest instant noodle company) and Dicos (a top fried chicken chain in mainland China). 

Mos Burger Taiwan did not make it through the nationwide crisis unscathed, and was found by regulators to have had traces of the tainted oil in their food products.[14]  Mos Burger Taiwan also suffered from leftover consumer anxiety regarding the 2011 Fukushima Earthquake and its impact on Japanese produce.[15] 

The above scandals were the major reason why Mos Burger Taiwan posted a 2% sales decline despite adding some new branches from 2012-2014.  Fortunately, consumer confidence in the Mos Burger brand seems to have completely revived since then and sales are back to hitting new highs, especially in 2016 (+6% Jan-June sales growth despite almost no new store expansion).

 

 

Who is the control shareholder?  Does he care about minority investors and the stock price?

The three major shareholders of An Shin Food Services control over 61% of the total shares outstanding. The largest shareholder at 27.6% is Kuang Yuan Industrial光元實業, a private company +50% owned by Lin He Hui和惠, the wife of An-Shin Food’s Chairman Theodore Huang黃茂雄.  The second largest shareholder with a 25% stake is Magic Food 魔術食品, a wholly-owned subsidiary of Mos Food Services (publicly listed franchisor, 8153 JP).  The third largest shareholder with an 8.6% stake is An-Tai International Investment 安台國際投資, a wholly-owned subsidiary of Teco Electric (publicly listed, 1504 TT).

An-Shin’s Chairman, Theodore Huang, is the big boss and control shareholder.  Huang, who is fluent in Chinese/Japanese/English, has one of the most enlightened and worldly backgrounds of any Chairman you will come across in Taiwan and is frequently invited abroad to give talks and lobby for Taiwanese business.[16]  Huang (ethnically Chinese) was born in Taiwan in 1939 but grew up in Japan, where he graduated from Keio University in 1962 before going onto graduate from Wharton (MBA) in 1964.[17]  He had the good fortune of marrying Lin He Hui, the only daughter of the founder of Teco Electric東元電機 (1504 TT), an up-and-coming industrial motors manufacturer.[18]  Before long, Huang was put in charge of Teco and grew it into a multi-billion USD market cap industrial conglomerate with multinational operations and at least four separate listed companies before retiring from that position in 2007.[19] 

Teco Electric is in several lines of businesses that we have no expertise in, but it is the biggest piece of Huang’s CV so it’s worth looking at what was broadly achieved for minority shareholders there.  Thanks to a generous dividend policy Teco Electric’s 371% total return over 25 years (1/1991-6/2016) has outpaced the 115% generated by the benchmark Taiwan Stock Exchange Weighted Index.  In the last 10 years, Teco Electric has paid 57% of cumulative net income to shareholders as cash dividends or repurchases.  Since 1991 (the oldest financials we can find), 48% of Teco’s cumulative net income through 2015 was paid out as cash dividends.  Interestingly, the vast majority of Teco’s share repurchases occurred during 2001-2007, the final years of Huang’s Chairmanship, when Teco’s market cap was often less than half of what it is today.  At no point in Teco’s history did we find the company operating debt-free and hoarding obscene amounts of cash relative to its market cap or business scale. 

We observed Huang run the show at An-Shin Food’s 2016 annual shareholders meeting in Taipei on June 7, and we were pleasantly surprised to his response to a question from an individual investor.   Mr. Li Yuankai, top 10 shareholder with a 1.5% stake, said “as a frequent customer I love what you’re doing in the stores, but our company’s stock price has been so cheap and it’s getting cheaper relative to retained cash – what are you going to do about the stock price?” 

In front of an auditorium of shareholders, Huang replied something to the effect of “I agree, but let’s focus on perfecting the business first... we can repurchase shares if stock is too cheap… next year’s dividend should be higher…we can improve in many ways, we are confident long term investors won’t lose out… I’m a shareholder too, I also want the stock price to rise… our cash is very high, we know and are working on it… our shops in tourist areas doing better now, the store in Penghu will make profit soon.”

As far as we can tell, Huang is not prone to making empty promises.  Back in mid-November 2015, we noticed an interview he gave to a major newspaper hinting that business should be markedly better at Mos Burger Taiwan in 2016.[20]  So far, he’s been right: even including negative drag from mainland China losses, 1Q2016 consolidated EBIT grew 65% over last year thanks to a 1 ppt increase in gross margins on top of strong organic sales growth.   Jan-June 2016 sales grew +6% from organic improvements, so it wouldn’t surprise us if that EBIT growth trend continued.  

            Huang also checks out well with other companies we have interacted with previously.  For example, in the same year he started Mos Burger Taiwan, he also started the Taiwan business of Royal Host, a Japanese version of Denny’s owned by publicly listed Royal Holdings (8179 TT).  We know the top management at Royal Holdings decently well since they are the single largest shareholder in Hub (3030 JP), a Japanese chain of British pubs that we have followed for years and think highly of.   

 

 

Are interests aligned with minority shareholders? Is compensation and governance reasonable?

            The good news is the clear control shareholder, Theodore Huang, makes a lot more money as a shareholder than as an employee of An-Shin Food Services.  According to the 2015 annual report, Huang’s compensation as Chairman was disclosed as ranging between just TWD 2-5 million (USD  62,375 – 155,938).  This pales in comparison to the TWD 24.9 million in cash dividends received by Kuang Yuan Industrial (major shareholder: Huang’s wife) out of 2015 profit.  This could explain the pattern of high dividend payout ratios since the company's IPO in 2011. 

            The not so good news is the #2 shareholder Mos Food Services, in their role as brand franchisor and ingredients supplier – the crux of their franchise business model, as they don’t earn much profit from franchisee royalties/marketing fees – makes more money as a wholesaler than as a shareholder in An-Shin Food Services.  According to their 2016 annual report, Mos Food Services generated roughly JPY 3 billion (TWD 900 million) wholesaling supplies to An-Shin Food Services for the year.  This is worth much more to Mos Food Services than their latest TWD 22.7 million cash dividend from An-Shin Food Services out of 2015 profit.  One positive way to look at this dynamic, however, is that Mos Food Services will only make more money as supplier if An-Shin Food can generate more sales in Taiwan, which would ultimately be good for everyone including minority stockholders.

We don’t think An-Shin minority shareholders should worry much about cash being tunneled out in the form of inflated salaries, as management runs a very tight ship even by Taiwan standards, where salaries are famously low.  Combined, the top two managers at An-Shin Food (Messrs. Kao Shun Shing and Atsushi Takifuka, both directors) earned just TWD 4,098,000 (USD 127,806) between the two of them.  Unfortunately, neither of them are large shareholders in An-Shin Food: Kao personally owns 82,000 shares while Takifuka – seconded from Mos Foods Japan – owns none. 

The board is comprised of 9 directors: 3 from Huang’s group, 3 from Mos Food Services Japan, and 3 independent directors.  Huang is the only member of the board that makes more than TWD 2 million per year in compensation.  Though there is ostensibly equal representation at the board level, our sense is that Mos Food Services views An-Shin Food as a long-term joint-venture in which they are the clear junior partner with deference to Huang.  Of the 7 total board meetings in 2015, only the directors appointed from Mos Food Services missed any. 

The major governance risk as far as we can see is external: the significant web of business and social commitments that Chairman Huang, a 77-year old “mogul” within certain circles of Taiwanese business, has involved himself in.  Though he is clearly still energetic and committed to An-Shin (he has had perfect attendance at board meetings for years), we can’t help but worry that his portfolio of other ventures will erode his limited bandwidth.  The silver lining, however, is that there seem to be a deep bench of experienced non-board level managers working in the company day to day, some of which have been sent to Taiwan by Mos Food Services.  We met several of these lower tier managers at An-Shin and got the impression that they are extremely focused on customer satisfaction and bottom-line.  For example, An-Shin’s staff work in very modest/cramped offices and were eager to let visitors try new menu items like seasonal drinks for taste tests.  

 



I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

Increased dividends in line (or maybe ahead of) with profit growth,

Share repurchses (a big maybe),

Valuation uplift from a completed McDonalds Taiwan transaction,

Analyst / institutional / foreign attention

2       sort by   Expand   New

    Description

    Summary:

                An-Shin Food Services安心食品 (www.mos.com.tw) is the Taiwan-listed arm of Mos Burger, the island’s largest westernized fast-food chain (243 self-operated stores) behind McDonalds (404 stores) with a 25-year track record of making Taiwanese customers happy. 

    An-Shin’s market cap today is only slightly higher than its liquid assets per share (i.e. 1x 2015 EV/FCF, 6x 2015 price/FCF) despite:

    A) achieving the very respectable track record below,

    B) taking market share from competitors: in the past three years, of the top 6 western fast food chains in Taiwan, only Mos Burger expanded while McDonalds, KFC, Burger King, and two local competitors contracted

    C) enjoying customer-funded new-store growth: we estimate 25-36% of new stores since the 2011 IPO were effectively paid for via cash deposits into the sticky “MOS Card” pre-paid loyalty program

    D) distributing dividends worth 70% of cumulative after-tax profit since the IPO (current dividend yield: 3.9%)

    E) delivering +6% sales growth from January-June 2016 via organic improvements (i.e. Mos Burger’s mobile app order/pick-up/pay system now generates +18% of sales, up from 13% a year ago) with near-zero new store expansion.  

    (TWD millions)

     

     

     

     

     

     

    Market cap

             2,336

     

     

     

     

     

     

    Liquid assets

    1,968

     

     

     

     

     

     

    EV

    368

     

     

    A

    B

    A / B

     

     

     

     

     

     

     

    Return on

     

    (Parent-level figures)

     

     

    EBITDA

     

    Incremental

    ROE ex

     

    Locations

    Sales

    EBITDA

    Increase

    Capex

    Capex

    Cash

    2015

    243

      4,276

          370

              28

         (66)

    42%

    849%

    2014

    237

      4,088

          343

              (2)

         (84)

    -3%

    50%

    2013

    235

      4,144

          345

             (36)

        (123)

    -29%

    18%

    2012

    233

      4,171

          381

              (8)

        (259)

    -3%

    22%

    2011

    217

      3,982

          389

              47

        (267)

    18%

    68%

    2010

    179

      3,400

          343

              67

        (218)

    31%

    103%

    2009

    159

      2,933

          275

              19

        (165)

    12%

    117%

    2008

    150

      2,634

          256

              27

        (136)

    20%

    95%

    2007

    130

      2,298

          230

            230

        (130)

    177%

    147%

    2006

    115

      1,830

     

     

     

     

     

    2005

    103

      1,596

     

     

     

     

     

     

    We believe the stock market has 3 relatively weak excuses for giving this company away for free with a secure ~4% dividend yield:

     

    1)      Obscurity: 

    Even though the “Mos Burger” brand enjoys universal recognition in Taiwan, An-Shin Food Services the listed company is very obscure since it only trades on Taiwan’s OTC market, where institutional ownership is less common (note: not even Google Finance has any information on the company).  Like Japanese investors that care about whether a company is listed on the Tokyo Stock Exchange 1st section / 2nd section / Mothers, Taiwanese investors care about whether a company is listed on the more prestigious “mainboard” Taiwan Stock Exchange (TWSE or上市to locals) or on the less prestigious “over-the-counter” Taipei Exchange (TPEx or 上櫃/興櫃/創櫃to locals).  Our experience is these are often distinctions without a difference: good/bad, small/large companies exist on both markets.  

    As a result, 99.7% or 8,127 of the company’s 8,154 total shareholders were domestic individual retail investors as of April 9, 2016.  An-Shin’s top 10 shareholders only include founders, management, and we suspect friends of the former.  Only 6 of An-Shin Food’s 8,154 total shareholders were foreign.  Excluding the company’s Japanese co-founder/franchisor Mos Japan (25%) and Humax (4%), a Japanese restaurant peer, we estimate we own almost all of the remaining foreign-owned shares as of today.  

    Though the company IPO’d to some fanfare five years ago at a premium valuation, it quickly disappointed most investors and now sells for less than half of its IPO price thanks to a temporary product quality crisis in 2014 and terrible overseas results.

     

     

    2)      P&L consolidation and depreciation policy obscures true parent-level cash profitability

     

    The rosy historical financials above only reflect parent-level performance from Taiwan, An-Shin’s dominant home market and ignores two overseas operations – Mos Burger China (40%-owned consolidated subsidiary) and Mos Burger Australia (25%-owned equity-method affiliate) – still mired in start-up losses. 

     Including start-up losses from China/Australia, An-Shin’s consolidated operating profit looks much worse (i.e. TWD 136m consolidated EBIT vs. TWD 195m parent-only EBIT in 2015) and does not resemble anything close to actual free cash flow, which has been well over TWD 300m for the last few years. 

    In addition, thanks to a more cautious new-store expansion mentality in recent years, cumulative depreciation from 2013-2015 exceeded actual capex by more than 2:1, averaging TWD 205m annually.  At this rate, net fixed assets will be fully-depreciated in just a few years and EBIT could more than double.  This would be purely cosmetic, but could force An-Shin to pay out even more dividends than they have in the past to keep up the high after-tax payout ratio (70% on average since the 2011 IPO). 

    To eyeball the true cash earnings from An-Shin’s Taiwan-only operations, take the non-consolidated P&L (this excludes China consolidation effects) and ignore all income/expenses below EBIT (which still includes below-the-line losses from Australia) and make your own judgement as to the fair working capital, depreciation, capex, and effective tax rate.  The final result should look similar to the non-consolidated operating cash flow minus capex of TWD 370m in 2015.

     

     

    3)      Concerns that management will throw good money after bad in China/Australia:

    We visited the management of An-Shin’s co-founder and franchisor, Mos Food Services, in Japan (twice).  We also had one-one-one meetings with An-Shin’s management in Taiwan (twice) and personally attended their annual shareholders meeting in June 2016.  We even visited one of An-Shin’s Mos Burger outlets in mainland China in 2015.  All of this left us with the impression that the company’s overseas start-up losses would probably not balloon out of control. 

    Why?  Management seemed like sensible people (more on this below), but more importantly, there is a small footnote in the 2015 audit (PDF p. 71 of the English version) which confirmed An-Shin is not legally allowed to invest beyond a certain absolute quota in mainland China, the country that has caused the most losses to date.  This approval/quota system stems from the historical political tensions that Taiwan has maintained with mainland China, and explains why most Taiwanese-listed companies that derive most of their P&L in China are incorporated in offshore jurisdictions.  Generally speaking, Taiwan’s Ministry of Economic Affairs will not permit any Taiwan-incorporated company to invest more than 60% of net assets in mainland China. 

    An-Shin’s mainland China investment quota – a cap that can’t be breached without obtaining further government approval – is not only small relative to the size of An-Shin’s cash balance and annual free cash flow, but a significant percentage of it has already been used up.  Specifically, Xiamen An-Shin Food Management Co. Ltd, the mainland Chinese subsidiary operating Mos Burger China, has already used up TWD 206m of its TWD 226m approved investment quota, with an absolute maximum investment ceiling allowed of TWD 995m (of which 21% has already been used up).  None of these numbers are meaningful relative to the TWD 2 billion of liquid assets and TWD 300-400m of free cash flow that An-Shin’s parent-level Mos Burger Taiwan operations generate annually.

    In addition to the regulated investment ceiling, future downside from China/Australia is also limited by the simple fact that An-Shin is only a minority investor in China (40%) and Australia (25%) – so any downside will be majority-owned by other investors. 

    We would also highlight that Mos Burger China (primarily in Fujian province) is not a complete failure.  The stores are attractive, and in certain locations business is booming/profitable.[1]  The key challenge for management now is to rationalize the store network (just 12 outlets as of December 2015) and learn from the profitable stores that they already have.  So far in 2016, this seems to be working, as 1Q2016 losses from China shrank 26% over last year.

     

    Conclusion:

    We believe investors in An-Shin Food Services today are well-compensated for the above issues at just 1x EV/FCF with a 3.9% dividend yield (that will probably increase given how strong 2016 has been so far).  Opportunistic investors should be adopting a “glass is half-full” view of this company instead of obsessing over its lack of overseas success.  At this rate of free cash flow generation in Taiwan alone retained cash will exceed An-Shin’s current market cap in a few years or less. 

    Either An-Shin will become one of the very few dividend-paying companies listed in Taiwan to trade below net cash – according to Bloomberg, today there are only 10 dividend-paying negative enterprise value stocks in Taiwan out of 2,012 total – or its stock price will move higher as free cash flow builds up.

    According to Bloomberg, there are 26,726 publicly listed companies in Asia.  Of these 26,726 companies, An-Shin is one of only 14 as of July 21, 2016 with these basic characteristics of cheapness/quality:

    EV/market cap <0.3x,

    Price/cashflow <7x,

    5-year average ROE > 6%, and

    Dividend yield >3.5%. 

    See Bloomberg’s screen of 14 here: https://www.dropbox.com/s/sukfccvotqrrrtg/20160721%20asia%20total.pdf?dl=0

     

     

    Useful documents:

    2016Q1 results (English, consolidated): https://www.dropbox.com/s/nd2c2izam1okcvy/2016q1%20english%20consolidated.pdf?dl=0

    2015 audit by PWC (English, non-consolidated): https://www.dropbox.com/s/jp56n3mvwhdvbsv/2015ar%20English%20parent.pdf?dl=0

    2015 audit by PWC (English, consolidated): https://www.dropbox.com/s/yf11k9zjmqxbgyo/2015ar%20English%20consolidated.pdf?dl=0

    2014 audit by PWC (English, non-consolidated): https://www.dropbox.com/s/6kmjip166i6o1cc/2014ar%20english%20parent.pdf?dl=0

    2014 audit by PWC (English, consolidated): https://www.dropbox.com/s/yeh1wcwmfywjvzm/2014ar%20english%20consolidated.pdf?dl=0

    Daiwa IPO report from 2011 (English):  https://www.dropbox.com/s/c4lcdy0kjb10s3i/daiwa%20initiate.pdf?dl=0

    IPO presentation (Chinese):  https://www.dropbox.com/s/fqlvxob49ptcm02/2011%20presentation.pdf?dl=0

     

     

     

     

    Frequently asked questions:

     

    What is Mos Burger?

                “Mos” (acronym: Mountain Ocean Sun) Burger is the flagship fast food brand of Tokyo-listed Mos Food Services.   Mos Burger, founded in Tokyo in 1972, is the #2 chain of hamburger shops in Japan (1,370 stores) today behind only McDonalds.  In recent decades Mos Burger has also expanded in Asia ex-Japan (326 stores).[2]  

    The Mos Burger brand concept is based on freshness (i.e. locally sourced, frequently organic ingredients) and above-average service (i.e. made-to-order burgers delivered to your table) with a Japanese twist (think burgers made with rice, teriyaki, tsukune, etc.). 

    As per the official website (http://www.mos.co.jp/global/corporateinfo/activities/): “MOS BURGER is a hamburger shop chain established in Japan. Ever since its founding, we have placed the utmost emphasis on taste. In order to offer a fresh eating experience straight out of the kitchen, we have adopted an after order method that entails the preparation of products after receiving each order. Moreover, we have incorporated Japanese food culture into the development of products, and continue to deliver an excellent taste using carefully selected ingredients based on our motto of "Good Food for Good Health."”  

    If you were to randomly ask any consumer in Japan or Taiwan, the average perception of the Mos Burger brand would be better than that of McDonalds, especially since the latter experienced several serious food quality scandals in China/Japan recently (i.e. a human tooth was found in the fries at McDonalds Japan http://www.bbc.com/news/world-asia-30706243).

     

     

    How does the Mos Burger franchise system work?

    Of Mos Burger’s 1,370 Japan stores, 275 are self-operated and the rest are franchised to a fragmented base of 450 small franchisees.  In Asia ex-Japan, 75% of the stores are located in Taiwan and operated by An-Shin Food Services, a regional master-franchisee (Taiwan/China/Australia) founded in 1991 in which Mos Food Services also owns a 25% stake with 3/9 board seats.  

    According to Mos Burger Japan’s new franchisee marketing brochure https://www.dropbox.com/s/vgj3vhoc4ibosb3/MOS%20franchise%20economics.pdf?dl=0, a top-performing franchisee could generate JPY 84m (TWD 25 m) in annual unit sales, with a 63% gross margin and a 12% EBITDA margin.  The total upfront cost of a new franchise would typically be JPY 33.5 million for a ~1,000 square foot store, and the franchisee would be responsible for all expenses, including a 2% of sales royalty/marketing fee to Mos Food Service.  Mos Food Services makes money from the franchise royalties and also from the exclusive wholesaling of food ingredients.  In our chats with Mos Burger Japan management, they concede that the above figures are a bit on the high side – most of their franchisees (small businessmen with an average of 3 stores) would be happy to earn an 8-9% EBITDA margin on JPY 72m in annual sales.

     

     

    Why do Taiwanese people like Mos Burger?

    First, it’s important to highlight that Mos Burger is not just another burger chain – it’s a Japanese burger chain, and the average Taiwanese person loves Japan.  According to official statistics, Taiwan is the #2 source of inbound tourists to Japan behind only mainland China, and the rate of Taiwanese visitation has been increasing at double digits year on year for many months.[3]  A recent survey by Japan’s de facto embassy in Taiwan shows more than 80% of Taiwanese are fond of Japan and more than half of them consider it to be their favorite foreign country.[4] The Taiwan/Japan bond is intense on a person-person level, business-business level, and government-government level.[5]  An entire generation of Taiwanese people, including former president Lee Teng-hui, received a full Japanese education when the island was a colony of Japan from 1895-1945.  Many of that generation passed down their love for Japan to their children and grandchildren.  

    So it’s not hard to understand why that Taiwanese customers took to Mos Burger, which first opened all the way back in 1991 (just 7 years after the first McDonalds) with a completely differentiated Asian-themed menu priced competitively yet based on fresher ingredients (i.e. burgers made from New Zealand beef with Taiwanese-grown rice) and better service.[6]  By 2005, Mos Burger Taiwan’s success forced McDonalds Taiwan to create launch a copycat rice patty burger.[7]  By 2015, McDonalds announced plans to withdraw from self-operating in Taiwan altogether by selling out to a new franchisee.[8]  Of the top 6 western fast food chains in Taiwan, only Mos Burger has added outlets in recent years while the other 5 peers have shrank (see below).

     

    Western fast food competitive landscape in Taiwan (# of outlets):

    2015: McDonalds (404), Mos Burger (243), KFC (129), Burger King (21), TKK Fried Chicken (42), 21 Century (29)

    2014: McDonalds (414), Mos Burger (237), KFC (128), Burger King (25), TKK Fried Chicken (43), 21 Century (32)

    2013: McDonalds (414), Mos Burger (235), KFC (135), Burger King (27), TKK Fried Chicken (43), 21 Century (33)

     

     

    Why is Mos Burger a better business in Taiwan than in Japan?

    Mos Burger Taiwan has done a superb job adapting to local tastes.  Menu-wise, Mos Burger Taiwan is only 70% identical to Mos Burger Japan, while the other 30% is made up of locally innovated Taiwan-only products.  In Taiwan, consumer preference for Asian-themed menu choices is much more pronounced: the rice-based burgers account for 3 of the 5 top-selling items.  In Japan, however, the rice burger is only the 10th or 11th best-selling item.  Also, Mos Burger Taiwan was quick to recognize that Taiwanese people are more accustomed to eating out all three meals of the day, so they earn much more revenue during breakfast hours than Mos Burger does in Japan (where breakfast = just 11% of sales, lunch = 40%, afternoon tea = 23%, and dinner = 26%).

    In Taiwan, the average Mos Burger Taiwan outlet costs TWD 3-7m upfront (including rental deposits) depending on store size, generates TWD 18m in sales (TWD 19 million in Taipei, the #1 region) with a 64% gross profit margin and a ~10% consolidated cash profit margin (including all head office expenses).  The store level EBITDA margins reach as high as 20% in the best locations, which in recent years have been inside the Taiwan High Speed Rail (bullet train) stations.  An-Shin management is coy about the exact level of annual royalties paid to Mos Food Services Japan.  We estimate that An-Shin’s actual royalty/marketing costs are higher than the 2% that Japanese franchisees pay because Taiwan marketing costs are 100% borne by An-Shin, not Mos Food Services. 

    What’s most interesting about the unit economics of Mos Burger Taiwan is that even though absolute unit sales values are lower than in Japan, the per unit customer traffic is actually meaningfully higher in Taiwan (~500 guests/day) than in Japan (~400 guests/day).  In other words, lower menu prices in Taiwan accounts for the gap in absolute sales, but since Mos Burger Taiwan has been raising prices (i.e. twice in the last four years), that gap could gradually close over time.

    Why is Mos Burger Taiwan able to generate higher customer traffic than in Japan?  Because it earns a higher percentage of sales from loyal repeat customers.  For example, the number of MOS Card loyalty members in Taiwan is higher both on a per store basis and in terms of sales contribution (MOS card members in Japan equal 4-5% of sales vs. 20% of sales for Taiwan Mos Card members).  A modern extension of the MOS Card, the highly successful Mos Burger mobile/order/pay app was first innovated/implemented in Taiwan, where it now accounts for 18% of sales (up from nothing a few years ago) then taught to Mos Burger Japan later on.  Unlike McDonalds, where the food is pre-cooked, Mos Burger guests need to wait for their food to be cooked.  As a result, wait times can feel a little long – an issue that the Mos app mobile order/pay/pickup solves beautifully.

     

     

    Why is the growth of the pre-paid float on the Mos Card a big deal?

    An-Shin Food’s website actually publishes a daily update of its pre-paid MOS card “float,” a large, growing number – 13% of equity and 5% of sales – that we think serves as a nice real-time indicator of sales activity (see http://www.mos.com.tw/member/cardGuide.html).  But what the MOS Card float really tells us is that this is a unique customer-funded business.

    In other words, the TWD 202m of absolute pre-paid card float stored up since the MOS Card program started in 2007 has actually been enough to pay for as many as 36% or 40 of the 113 net new stores built in Taiwan over that period (i.e. 202 / 5 = 40).  As a percentage of the total capex since 2007, the amount raised by the MOS Card accounted for 14% of the total capex.  The growth in the Mos Card float has continued in 2016, too.  We check the number every day, and there has not been a single day this year where the float dipped below where it ended on December 31, 2015.  The Mos Card float even increased slightly in early July 2016, when the historically strong Typhoon Nepartek struck the island.[9]

     

    TWD mil

     

      pre-paid

    increase

     total

     

    % of

    card

    in card

     active

    date

    sales

    value

    value

     cards

    2009

    2.5%

             74.3

       

    2010

    3.0%

           102.9

             28.6

     

    2011

    3.4%

           135.4

             32.6

       308,529

    2012

    3.8%

           159.1

             23.6

       487,844

    2013

    4.6%

           190.7

             31.7

       590,782

    2014

    4.8%

           196.0

                5.3

       661,584

    2015

    4.7%

           201.7

                5.7

       718,763

    Total

       

           201.7

     

     

     

    How much more can Mos Burger grow in Taiwan?

    In terms of new store expansion, management believes Mos Burger Taiwan can eventually support at least 350 or 400 total outlets.  Mos Food Service’s latest investor relations presentation indicates that they would like Taiwan to have at least 258 stores by 2018.[10]

    In our opinion, An-Shin management appears more focused on organic sales growth from bottom-up initiatives like the MOS app mobile order/pay/pickup (which has driven higher per ticket order values) and increased high-margin coffee/tea sales (now 10% of sales).  These are the reasons why Mos Card loyalty members are at all-time highs while sales growth and profit growth have been very strong year to date. 

    An-Shin also benefits this year from some low-hanging fruit: the company’s worst-performing 20-30 stores have made enough store-level improvements to turn around profitability this year.[11]

     

     

    Sounds like McDonald’s Taiwan is for sale – for how much? Does it mean anything for Mos Burger Taiwan?

                According to http://www.businessweekly.com.tw/, McDonald’s is getting out of the business of operating restaurants in Taiwan and is actively looking to sell long-term exclusive Taiwan franchise rights to a new operator for TWD 30 billion (USD 933 million), which include the existing store base of 404 outlets.[12]  This asking price includes ownership of the underlying real-estate for 20 of the most prime locations. 

    According to unnamed sources, the negotiations with potential buyers have been hung up over a few issues: 1) McDonalds wants a final sale price no less than TWD 10 billion, 2) the new franchisee must operate the business for at least 20 years, and 3) the family behind the new franchisee must ensure the second generation is ready to participate in the business and succeed one day.

    Since the above are only rumors at this point, it’s difficult to draw conclusions for Mos Burger Taiwan other than to say it’s yet another benchmark that An-Shin Food Services is trading at a ridiculously cheap valuation.  Whether the final transaction price is TWD 10 billion or TWD 30 billion (TWD 25-75 million per outlet), with or without underlying real estate, An-Shin Food Service’s current market cap of only TWD 2.3 billion (below TWD 10 million per outlet) is laughable by comparison.

     

     

    What were the food safety scandals of 2013-2014 all about?

                A series of food safety/quality scandals involving some of Taiwan’s biggest food companies erupted in 2013-2014 and seriously eroded consumer trust in Taiwanese brands.[13]  At the heart of these scandals was tainted cooking oil discovered at even large food companies including the Wei family’s Ting Hsin, a “blue chip” multinational consumer products group most famous for their shareholding in Tingyi (322 HK, mainland China’s largest instant noodle company) and Dicos (a top fried chicken chain in mainland China). 

    Mos Burger Taiwan did not make it through the nationwide crisis unscathed, and was found by regulators to have had traces of the tainted oil in their food products.[14]  Mos Burger Taiwan also suffered from leftover consumer anxiety regarding the 2011 Fukushima Earthquake and its impact on Japanese produce.[15] 

    The above scandals were the major reason why Mos Burger Taiwan posted a 2% sales decline despite adding some new branches from 2012-2014.  Fortunately, consumer confidence in the Mos Burger brand seems to have completely revived since then and sales are back to hitting new highs, especially in 2016 (+6% Jan-June sales growth despite almost no new store expansion).

     

     

    Who is the control shareholder?  Does he care about minority investors and the stock price?

    The three major shareholders of An Shin Food Services control over 61% of the total shares outstanding. The largest shareholder at 27.6% is Kuang Yuan Industrial光元實業, a private company +50% owned by Lin He Hui和惠, the wife of An-Shin Food’s Chairman Theodore Huang黃茂雄.  The second largest shareholder with a 25% stake is Magic Food 魔術食品, a wholly-owned subsidiary of Mos Food Services (publicly listed franchisor, 8153 JP).  The third largest shareholder with an 8.6% stake is An-Tai International Investment 安台國際投資, a wholly-owned subsidiary of Teco Electric (publicly listed, 1504 TT).

    An-Shin’s Chairman, Theodore Huang, is the big boss and control shareholder.  Huang, who is fluent in Chinese/Japanese/English, has one of the most enlightened and worldly backgrounds of any Chairman you will come across in Taiwan and is frequently invited abroad to give talks and lobby for Taiwanese business.[16]  Huang (ethnically Chinese) was born in Taiwan in 1939 but grew up in Japan, where he graduated from Keio University in 1962 before going onto graduate from Wharton (MBA) in 1964.[17]  He had the good fortune of marrying Lin He Hui, the only daughter of the founder of Teco Electric東元電機 (1504 TT), an up-and-coming industrial motors manufacturer.[18]  Before long, Huang was put in charge of Teco and grew it into a multi-billion USD market cap industrial conglomerate with multinational operations and at least four separate listed companies before retiring from that position in 2007.[19] 

    Teco Electric is in several lines of businesses that we have no expertise in, but it is the biggest piece of Huang’s CV so it’s worth looking at what was broadly achieved for minority shareholders there.  Thanks to a generous dividend policy Teco Electric’s 371% total return over 25 years (1/1991-6/2016) has outpaced the 115% generated by the benchmark Taiwan Stock Exchange Weighted Index.  In the last 10 years, Teco Electric has paid 57% of cumulative net income to shareholders as cash dividends or repurchases.  Since 1991 (the oldest financials we can find), 48% of Teco’s cumulative net income through 2015 was paid out as cash dividends.  Interestingly, the vast majority of Teco’s share repurchases occurred during 2001-2007, the final years of Huang’s Chairmanship, when Teco’s market cap was often less than half of what it is today.  At no point in Teco’s history did we find the company operating debt-free and hoarding obscene amounts of cash relative to its market cap or business scale. 

    We observed Huang run the show at An-Shin Food’s 2016 annual shareholders meeting in Taipei on June 7, and we were pleasantly surprised to his response to a question from an individual investor.   Mr. Li Yuankai, top 10 shareholder with a 1.5% stake, said “as a frequent customer I love what you’re doing in the stores, but our company’s stock price has been so cheap and it’s getting cheaper relative to retained cash – what are you going to do about the stock price?” 

    In front of an auditorium of shareholders, Huang replied something to the effect of “I agree, but let’s focus on perfecting the business first... we can repurchase shares if stock is too cheap… next year’s dividend should be higher…we can improve in many ways, we are confident long term investors won’t lose out… I’m a shareholder too, I also want the stock price to rise… our cash is very high, we know and are working on it… our shops in tourist areas doing better now, the store in Penghu will make profit soon.”

    As far as we can tell, Huang is not prone to making empty promises.  Back in mid-November 2015, we noticed an interview he gave to a major newspaper hinting that business should be markedly better at Mos Burger Taiwan in 2016.[20]  So far, he’s been right: even including negative drag from mainland China losses, 1Q2016 consolidated EBIT grew 65% over last year thanks to a 1 ppt increase in gross margins on top of strong organic sales growth.   Jan-June 2016 sales grew +6% from organic improvements, so it wouldn’t surprise us if that EBIT growth trend continued.  

                Huang also checks out well with other companies we have interacted with previously.  For example, in the same year he started Mos Burger Taiwan, he also started the Taiwan business of Royal Host, a Japanese version of Denny’s owned by publicly listed Royal Holdings (8179 TT).  We know the top management at Royal Holdings decently well since they are the single largest shareholder in Hub (3030 JP), a Japanese chain of British pubs that we have followed for years and think highly of.   

     

     

    Are interests aligned with minority shareholders? Is compensation and governance reasonable?

                The good news is the clear control shareholder, Theodore Huang, makes a lot more money as a shareholder than as an employee of An-Shin Food Services.  According to the 2015 annual report, Huang’s compensation as Chairman was disclosed as ranging between just TWD 2-5 million (USD  62,375 – 155,938).  This pales in comparison to the TWD 24.9 million in cash dividends received by Kuang Yuan Industrial (major shareholder: Huang’s wife) out of 2015 profit.  This could explain the pattern of high dividend payout ratios since the company's IPO in 2011. 

                The not so good news is the #2 shareholder Mos Food Services, in their role as brand franchisor and ingredients supplier – the crux of their franchise business model, as they don’t earn much profit from franchisee royalties/marketing fees – makes more money as a wholesaler than as a shareholder in An-Shin Food Services.  According to their 2016 annual report, Mos Food Services generated roughly JPY 3 billion (TWD 900 million) wholesaling supplies to An-Shin Food Services for the year.  This is worth much more to Mos Food Services than their latest TWD 22.7 million cash dividend from An-Shin Food Services out of 2015 profit.  One positive way to look at this dynamic, however, is that Mos Food Services will only make more money as supplier if An-Shin Food can generate more sales in Taiwan, which would ultimately be good for everyone including minority stockholders.

    We don’t think An-Shin minority shareholders should worry much about cash being tunneled out in the form of inflated salaries, as management runs a very tight ship even by Taiwan standards, where salaries are famously low.  Combined, the top two managers at An-Shin Food (Messrs. Kao Shun Shing and Atsushi Takifuka, both directors) earned just TWD 4,098,000 (USD 127,806) between the two of them.  Unfortunately, neither of them are large shareholders in An-Shin Food: Kao personally owns 82,000 shares while Takifuka – seconded from Mos Foods Japan – owns none. 

    The board is comprised of 9 directors: 3 from Huang’s group, 3 from Mos Food Services Japan, and 3 independent directors.  Huang is the only member of the board that makes more than TWD 2 million per year in compensation.  Though there is ostensibly equal representation at the board level, our sense is that Mos Food Services views An-Shin Food as a long-term joint-venture in which they are the clear junior partner with deference to Huang.  Of the 7 total board meetings in 2015, only the directors appointed from Mos Food Services missed any. 

    The major governance risk as far as we can see is external: the significant web of business and social commitments that Chairman Huang, a 77-year old “mogul” within certain circles of Taiwanese business, has involved himself in.  Though he is clearly still energetic and committed to An-Shin (he has had perfect attendance at board meetings for years), we can’t help but worry that his portfolio of other ventures will erode his limited bandwidth.  The silver lining, however, is that there seem to be a deep bench of experienced non-board level managers working in the company day to day, some of which have been sent to Taiwan by Mos Food Services.  We met several of these lower tier managers at An-Shin and got the impression that they are extremely focused on customer satisfaction and bottom-line.  For example, An-Shin’s staff work in very modest/cramped offices and were eager to let visitors try new menu items like seasonal drinks for taste tests.  

     



    I do not hold a position with the issuer such as employment, directorship, or consultancy.
    I and/or others I advise hold a material investment in the issuer's securities.

    Catalyst

    Increased dividends in line (or maybe ahead of) with profit growth,

    Share repurchses (a big maybe),

    Valuation uplift from a completed McDonalds Taiwan transaction,

    Analyst / institutional / foreign attention

    Messages


    SubjectShare repurchase plan announced
    Entry08/10/2016 09:31 AM
    Memberjt1882

    An-Shin Food Services just announced a board resolution to repurchase of up to 3% of total outstanding shares between Aug 11 and Oct 10, 2016 with an upper bid price limit of 112.65/share (vs. 82.20/share today).  

    Some shares repurchased will be transferred to deserving employees as incentive awards. 

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