TH International Ltd (THCH, Financial), also known as Tims China, is the parent company of the exclusive master franchisee of Tim Horton's coffee shops for Restaurant Brands International Inc. (TSX:QSR, Financial) (QSR, Financial) in China, Hong Kong and Macau. Tims China was founded by Cartesian Capital Group and Tim Horton's Restaurants International, a subsidiary of Restaurant Brands International, which also owns the Burger King, Tim Horton's and Popeye's brands worldwide.
Tims China aims to build the premier coffee and donut chain in China. It offers freshly brewed coffee, tea and other beverages, bakery, sides and sandwiches and is an emerging coffee champion that is most popular for coffee. The brand's philosophy is rooted in world-class execution, data-driven decision making and convenience.
The origin story of Tims China
Tims China opened its first coffee shop in China in February 2019 and has grown dramatically since then, with the aim of opening a profitable network of over 2,750 stores by 2026. It recently opened its 700th store.
Restaurant Brands International, along with controlling shareholders Cartesian Capital Group, Sequoia Capital China and Tencent (TCEHY, Financial), formed Tims China as a collaborative effort to expand the Tim Horton's brand in the Chinese market. Through this joint venture, Restaurant Brands provides expertise, resources and support to Tims China, enabling the adaptation and growth of the Tim Horton's (and now also the Popeye's) brands in China.
The company went public through a merger with Silver Crest Acquisition Corp., a special purpose acquisition company (SPAC), around September 2022.
Strategies for success in the Chinese market
The partnership between Restaurant Brands and Tims China allows for the localization of the Tim Horton's menu and business model to cater to Chinese preferences, while leveraging the global recognition and success of the Tim Horton's brand. Tims China strategy to succeed in the Chinese market is by leveraging technology, localizing productsa nd forming partnerships. It aims to open and operate stores efficiently while catering to local preferences.
The goal is to establish 2,750 stores by implementing strategies such as using big data for store operations, building a strong online customer base and selecting optimal store locations. Tims China also focuses on localizing its offerings and adapting coffee and donuts to Chinese tastes with unique flavors. Partnerships with companies like Sinopec and Wumart provide additional support.
Challenges and opportunities
China is not an easy market for many U.S. companies. Many expansion plans in China have failed due to foreign fast food chains being overly aggressive and opening stores in less profitable areas without sufficient support. Additionally, a challenge lies in getting coffee and donuts to become more popular, as these are not traditional in Chinese taste. Numerous chains, such as Caffe Bene (Korea), Costa (U.K.) and more, have faced difficulties or have struggled in China despite their initial ambitious plans.
Prospects for the future
The coffee market in China is projected to reach 157.9 billion yuan ($23.4 billion) in sales this year, with an annual growth rate of 39% between 2013 and 2023, according to Tims China. Despite this optimistic growth estimate, the average Chinese citizen bought only around 20 cups of coffee a year in 2020, compared to 700 cups per capita in countries like Canada, Germany, Brazil and the U.S. This indicates a significant potential for further expansion and growth in the Chinese coffee market if coffee can become more popular there.
Recent developments and earnings results
Tims China's parent company, Restaurant Brands, recently combined Popeye's China into the Tims China portfolio. With over 3,900 stores worldwide, Popeye's brings a natural synergy to Tims China. The move positions Tims China to potentially copy the remarkable success of Yum China Holdings Inc. (YUMC, Financial), which operates over 13,000 restaurants across renowned brands like KFC, Pizza Hut and Taco Bell.
Tims China's recent results for the fourth quarter and full year of 2022 show significant growth and positive performance. Total revenues increased by 34.6% year-over-year for the quarter and 57.2% for the full year. The company achieved a net new store count of 131 in the quarter, resulting in a total of 617 system-wide stores by the end of the year. The loyalty club membership also saw substantial growth, with 11.3 million registered members, representing an 88.5% increase compared to the previous year.
Conclusion
Tims China's stock has been undervalued in my opinion due to a poorly timed SPAC transaction and economic decline. However, as China's economy reopens, I expect improved financial results in 2023. The recent addition of Popeye's to Tims China's brand portfolio provides diversification, which I consider a positive.
China is also serious about stimulating domestic consumption to reduce the dependence of its economy on exports. Inflation is also low in China as compared to Western economies, as China is stimulating its economy to recover from Covid.
The risks to investors are that, given the low stock price, the controlling shareholders could take the company private or otherwise dilute the current shareholders with large equity issuance. In the long-term, the brand may not resonate with Chinese customers and the company may be forced to retrench.
