06 tsui wah sum zero write up sid choraria e871a8be60 95f63f1b4d

Tsui Wah (SEHK: 1314)

Hong Kong Milk Tea

Style

Flat Rice Noodles with Fish

Cakes and Fish Soup

Sizzling King Prawns with

Fried Noodles

Crispy Bun with Sweet

Condensed Milk

Jumbo Frankfurter Hot

Dog

Efficient, Exquisite and Desirable

Author: Siddharth (Sid) Choraria ** Email: [email protected]

(** Note: Author pictured above in June 2014 on a Tsui Wah delivery scooteradmittedly, the author is a loyal and captive customer)

Key Statistics (as of June 21, 2014) all in US$ unless, otherwise specified

Ticker SEHK: 1314 (Hong Kong) Share Price: HK$3.97 Market Cap US$719mm Interest Bearing Debt $0.0mm Cash & ST Investments US$120.4mm Enterprise Value US$598.8mm 52 Week Low HK$ 3.62 (May 2014) 52 Week High HK$ 5.75 (Nov 2013) Dividend Yield 1.0%

Disclaimer: This investment write-up is being submitted solely for the purposes of a Research Idea Contest: International (ex-US) Top Idea

Contest sponsored by Sum Zero and FactSet. It is not an offer or recommendation of a security or a fund of any type at any time.

Tsui Wah (SEHK: 1314) Investment Write up by Sid Choraria

*** Please note s tatistics are in US$ unless specified. Please refer to the attached PDF for the full wri te up with footnotes, tables, charts and formatting. Readers to look through (and try some of) the 170 dishes and drinks in the Tsui Wah Hong Kong and Shanghai menu ***

Take a Simple Idea and Take it Seriously Charlie Munger

Investment Summary Tsui Wah (SEHK: 1314, market cap: US$719mm1) is an iconic fast-casual Cha Chaan Teng restaurant chainwith over 412 stores across Hong Kong, China and Macau serving up delicious, quality foodfast. The company has competitive advantages with exceptional unit store productivity and return metrics, i.e. approx US$5mm annual revenue per store, 1-2 months breakeven3 and average, 18 months payback4 with some stores having a 12 month payback. Per store revenue is higher than legendary brands (McDonalds, Chipotle, etc..refer to QSR 50 list in Appendix B) which sell approx US$2.0-2.5mm per store annually. Tsui Wah operates with ruthless efficiency with 5 year median metrics of US$1,187 per sq ft, US$27,227 per seat and US$55,238 per employee and high seat turnover (12 customers per seat per day). Tsui Wah serves food 24 hours a day at many stores with customers happy to wait in long lines to try the 170 dishes despite premium prices (which go up every year). Admittedly, as captive customers, I have dined at several restaurants over 24 months and multiple visits confirm that Tsui Wah has wide customer appeal beyond existing markets and stores are packed during all meals - breakfast, lunch, dinner, tea, dessert and past midnight, maximizing operating efficiency. Tsui Wah is a franchise with a five decade history earning high returns on invested capital (5 year median of 90.6%), strong revenue growth (5y CAGR of 27.3%), operating and net income up ~2.5x in 3 years, consistently higher margins than peers with 5 year median c. 69.9% gross, 14.6% EBIT and 12.1% net margins with positive same store sales (SSSG). The business is a prodigious cash flow generator (5 year OCF CAGR of 22.4%) requiring limited capital intensity (US$1.15mm per new store, approx. 18 month payback) to grow with negative working capital and a sizeable net cash pile and practically debt-free balance sheet. Tsui Wah recently boosed its dividend payout ratio to 62.8% versus 53.4% last year. Management have persisted on their core, are value-oriented vs. scale-oriented, with a religious focus on return on capital. Indeed, Chairman, Lee Yuen Hong, founded Tsui Wah with a simple idea: serve delicious, fresh food fast with attentive service in an inviting dining atmosphere. I believe Tsui Wah is at a key inflection point with higher earnings power and multiple catalysts while Mr. Market is yet to catch on. The company is in the early innings of efficiently replicating its stores in China, where the business is earns high revenue per store and efficiency metrics relative to global QSRs, low payback of approx. 18 months, positive SSSG and nearly 12% higher ASP than its core market, Hong Kong. I estimate metrics and margins to gradually expand as the company ramps up and benefits from economies of scale. As a result, revenue in China jumped 74.3% for March 2014 as Tsui Wah profitably doubled store count and completed strategic long-term investments with its central kitchen, to support multiple restaurants over the long run. In Hong Kong, Tsui Wah diversified sales channels, which will lead to higher market share while requiring limited capital to grow. Insiders eat their own cooking and have bought stock recently at higher prices, while Mr. Market has taken a short-term view with shares at 52 week lows declining over 30% in less than 9 months from a high of HK$5.75 to HK$3.97. Tsui Wah will nearly double its March 2013 revenue and EBITDA by March 2015 and by March 2017, grow to 80 restaurants in Hong Kong, China and Macau, further doubling 2014 revenue and EBITDA while earning high returns on capital. Tsui Wah can replicate its tested formula to broader Asian markets, providing a free call option, which I currently attribute no value to. At current levels of 10.8x 2016 EBITDA less maintenance capex, Tsui Wah offers meaningful upside to investors, with a 2-3 year horizon. The positive presence of catalysts and incentivized management with a focus on return on capital will materially drive shareholder value.

Source: Annual report, IPO prospectus, filings. 1 As of June 21, 2014. FX: US$1 = HK$7.75. Please note that this FX rate is used across the write-up. All figures in US$, unless otherwise s tated.

2 As of March 2014, excluding the Causeway s tore, which was completed in April 2014. 3 Point at which monthly revenue is at least equal to monthly expenses (cost of goods, staff costs, depreciation, property rentals, fuel and utility

expenses, advertising and marketing expenses and other operating expenses) . 4 Amount of time it takes for the accumulated net profit from a restaurant to cover the costs of opening and operating the restaurant up to that point, including incurred capital expenditures and ongoing cash and non -cash operating expenses.


Why is Tsui Wah Worth Your Attention? Exceptional Efficiency with High Returns on Invested Capital and Amongst Lowest Unit Store Payback Periods in

Sector: Tsui Wah operates with ruthless efficiency: you order, eat, pay and go. The company has exceptional unit store productivity and return metrics in the region and perhaps globally approx. US$5.0mm revenues per store per year, 1-2 months breakeven, approx 18 months payback with some stores having a payback of approx. 12 months. Tsui Wah earns approx US$1,187 per sq ft, US$55,238 per employee and US$27,227 per seat on a 5 year median with high seat turnover (customer/seat per day of 12) and net margins of c. 11-14%. Each new restaurant in Hong Kong and China requires, total capital expenditure of approx. HK$9mm (US$1.15mm) with approx 18 month payback. Tsui Wahs efficient operations consist of: communal seating to minimize idle seats (avg number of invoices per table is 25), around the clock operations (stores operate 16-24 hours a day), speed of service (high customer/seat per day turnover of 12 per day), central kitchen processing, standardized food preparation process and a modern IT system which management deploy to carefully scrutinize and react to customer spending data. I am also inspired by the book, The Dhandho Investor and turn to a quote on page 31 of Chapter 4, Mittal Dhandho: A final note on the Marwaris5 and their ingrained Dhandho ways. Recently, I (Mr. Pabrai) had dinner with a good Marwari friend of mine, and asked him how the stereotypical Marwari approaches investing capital in a venture? He said quite nonchalantly, that Marwari business people, even with only a basic education, simply expect all their invested capital to be returned in the form of dividends in no more than 3 years. They expect that, after having gotten their money back, their principal investment continues to be worth at least what they invested in it. They expect these to be ultra low-risk bets. Now, folks, this is really good stuff they dont teach this at Harvard Business School. As best as I can tell, Tsui Wahs moat is here to stay and it is efficient even when compared to legendary quick service brands, which sell between US$2.5-3.5mm per store. The company offers 170 dishes and drinks in the main menu (attached PDF of Hong Kong menu - https://www.dropbox.com/s/o0x4thkvstuxj68/Tsui%20Wah%20Hong%20Kong%20Full%20Menu.pdf ). This means, customers can have all meals - breakfast, dinner, lunch, tea, dessert, drinks and post midnight snack under one roof.

Iconic Brand with Loyal and Captive Customers Providing Multitude of Free PR and Word of Mouth: With a rich history spanning nearly five decades, Tsui Wah has an iconic brand and renowned for maintaining an exceptional quality standard that prioritizes safety, freshness of food and efficient service across all of its stores, at all times . In spite of the long lines (often well past midnight, customers (including the author) remain loyal and captive and are only delighted to pay up for the premium prices (Tsui Wah raises prices every year). For readers, that have not visited a Tsui Wah store, the companys brand equity is evidenced by a multitude of gratis positive recommendation and customer word of mouth, a key indicator to a companys brand and pricing power. CNN6 reports #12: All-hours dining: Tsui Wah is fast becoming an institution in Hong Kong, serving popular dishes such as Hong Kong-style curries, fish ball noodles, pork cartilage in soy sauce, and satay beef noodles. But what really endears the restaurant and compels customers to buy souvenir Tsui Wah T-shirts - is the fact that Tsui Wah stays open 24 hours a day, even during Hong Kong typhoon signal number 87. Time Magazine8 in the Top 10 Things to Do in Hong Kong writes Try the perennially popular Tsui Wah. New York Times9 reports you should head to Tsui Wah on Wellington Street, open 24 hours. The time to turn up is between 2am and 4am, because thats when Hong Kongs most beautiful people and celebrities, will be there, itching their scratch for naai cha and peanut butter toast. If you see Donald Tsang10, Hong Kongs Chief Executive Officer and (Past) President in the next booth, slurping

5 The author i s admittedly biased hailing from the Marwar region.

6 http://travel.cnn.com/hong-kong/none/worlds-greatest-city-hong-kong-576599 7 Even winds of 100+ mi les per hour that normally result in canceled flights and closed universities will not prevent Tsui Wah. 8 http://content.time.com/time/travel/cityguide/article/0,31489,1850110_1850124_1850915,00.html 9 http://www.nytimes.com/2008/01/30/travel/30webcomfort.html?_r=0 10 http://en.wikipedia.org/wiki/Donald_Tsang


a bowl of noodles, be sure to say hello. CNN11 reports on Secret Eating Habits of Famous Shanghai Chefs When Peninsula hotel chef in Shanghai is not manning Peninsula hotel kitchens, he secretly dines at Tsui Wah... Yahoo12 writes in 5 Snacks You need to Eat at the Hong Kong Airport It may be considered fast food, but Tsui Wah fish balls are actually made fresh every day with eel and 10 other kinds of fish. Not convinced? Tsui Wah is also prominently featured in a number of films, with popular hits like Perfect Couples (1993), Love in a Puff (2007), Love in the Buff (2011), and Lan Kwai Fong (2011) all providing free PR for Tsui Wahs brand.

Free Cash Flow Generation, Strong Balance Sheet and Track Record of Profitability Over Several Economic Cycles: Under the founders, Tsui Wah has transformed itself from one humble tea shop to the largest operator of Cha Chaan Teng (meaning: Hong Kong style tea restaurant) quick service restaurant based on revenue and number of seats in Hong Kong. For the financial years ended March 31, 2010, 2011, 2012, 2013 and 2014, the groups turnover was US$56.8mm, US$77.2mm, US$98.4mm, US$139.9mm and US$190.2, growing 35.9%, 27.5%, 42.2% and 35.9% annually respectively. Due to Tsui Wahs efficiency (high revenue/store and seat turnover, 24 hour dining, 170+ menu item list, etc.), net margins have been consistently higher than peers, c. 11%- 14% (5 year median of 12.1%) over the last 5 years. The business has been free cash flow positive every year requiring limited capital intensity (US$1.2mm per new restaurant, approx. 18 month breakeven). Operating cash flow has grown at 22.4% over 5 years with March 2014 cash flow from operations of US$28.9mm, growing 21.5%. Tsui Wahs stores in Hong Kong and China, grew SSSG by an average 12.5% and 16.2% respectively as of March 2012 and 8% and 5% in March 2013 and 2014 respectively. Tsui Wah has a strong balance sheet, with a sizeable and growing cash pile with a near debt-free balance sheet. The company generates significant cash flow, that more than exceeds new store capex requirements. As of March 2014, Tsui Wah boosed its dividend payout ratio to 62.8% versus 53.4% in March 2013.

Tangible Catalysts as Tsui Wah Rolls Out Stores in China, a Market Where It is Critically Profitable with High Return Metrics and Where It Enjoys Higher Average Pricing Than Core Market: Tsui Wah has a target of reaching 80 restaurants in Hong Kong and China by March 2017. The company has already laid the building blocks by investing long-term in 2 new central kitchens in China and 1 in Hong Kong, which alone can serve over 110 restaurants. Moreover, Tsui Wah has over the last year doubled stores in China to 13 from 7 in March 2013, and has a successful long track record in operating chain Cha Chaan Tengearning high returns on capital. Critically, the business is profitable with high revenue per store and efficiency metrics relative to global QSRs, low payback periods of approx. 18 months, positive SSSG and nearly 12% higher average selling prices in its top 10 selling items than its core market. Tsui Wah strategy in China is to open one or more flagship stores in high-traffic locations with a central kitchen to support restaurants in the area. Just prior to IPO in Nov 2012, the company operated 3 flagship restaurants in Shanghai, each 7000 sq. ft. with an average 65-84 seats. For the year ended March 2013, Tsui Wah opened 5 restaurants (4 in Shanghai and 1 in Wuhan). In March 2014, the company doubled its store count in China, by opening a further 6 restaurants in high-traffic locations leading to revenue growth of 74.3%. In China, I estimateTsui Wah will open approx. 9 stores in March 2015 and 8 stores each in 2016 and 2017. This is conservative as management have stated in the IPO prospectus a target of opening 11 stores in March 2015 in China. Each new store requiring HK$9mm (US$1.15mm) capex, which means US$9-13mm annually with avg payback 18 months. In Hong Kong, Tsui Wah will open between 4-6 stores for the next 3 years. I expect revenue % contribution of Tsui Wah stores in China to rise to nearly 40% by March 2015 and approx. 45% by March 2017. Revenue contribution from China has jumped from 8.0% in March 2010 to 24.1% by March 2014. The table below illustrates the historical mix of stores and revenue in China. Note that despite ramping in a new market, stores in China sell higher revenue per store than even the most efficient global QSRs.

11 http://travel.cnn.com/shanghai/eat/secret-eating-habits-shanghai-chefs-350064 12 https ://www.yahoo.com/travel/5-snacks-you-need-to-eat-in-the-hong-kong-airport-now-87928247667.html


Historical Store Count Mar 2011 Mar 2012 Mar 2013 Mar 2014

Total Tsui Wah Stores 18 22 32 41

Mainland China 2 2 7 13

% of TW stores in China 11.1% 9.1% 21.9% 31.7% Source: Company filings, IPO prospectus.

New Store Opening in China Mar 2011 Mar 2012 Mar 2013 Mar 2014

Yangtze River Delta (primarily Shanghai) 113 0 4 3

Southern China (Shenzhen/Guangzhou) 0 0 0 2

Central China (Wuhan) 0 0 114 1 Total New Store Opening in China 1 0 5 6

Source: Company filings, IPO prospectus.

China Revenue Breakdown Mar 2011 Mar 2012 Mar 2013 Mar 2014

China Revenue (US$ mm) $7.4 $10.4 $26.1 $45.9

Total Tsui Wah Revenue (US$ mm) $76.7 $97.8 $139.0 $190.2 China % of Total Revenue 9.6% 10.6% 18.8% 24.1%

China Revenue Per Store (US$ mm) $3.7 $5.2 $3.7 $3.5 Source: Company filings, IPO prospectus.

I expect metrics and margins which are temporarily lower than average to improve as the company starts reaping fully the benefits of economies of scale from having laid the long-term foundation in China. Tsui Wah charges an 12.4% higher on its top 10 selling items in China. Please see below pricing comparision in Hong Kong and China.

HK Menu: https://www.dropbox.com/s/o0x4thkvstuxj68/Tsui%20Wah%20Hong%20Kong%20Full%20Menu.pdf China Menu: https://www.dropbox.com/s/8enb0bml92tn7mg/Tsui%20Wah%20Shanghai%20Menu.pdf The unique Cha Chaan Teng in Hong Kong offered by Tsui Wah has gained immense popularity among customers (see Chinese customer reviews later in write-up). The growth is in part as the menu appeal to traditional Chinese tastes, while Tsui Wah also serve Western food or fusion food for customers, adding more variety to their menus.

Tsui Wahs food have wide customer appeal, beyond Hong Kong, China and Macau, as dishes are not dissimilar to Asian cuisine, which provide tangible growth catalysts for the company in the future

13 Opening of second Tsui Wah restaurant in Shanghai, PRC. The first Tsui Wah s tore in Shanghai opened in April 2009 (March 2010 fi scal year). 14 Opening of the first Tsui Wah restaurant in Wuhan, PRC.

Top 10 Items in Tsui Wah China Menu Tsui Wah China Menu Price Tsui Wah Hong Kong Menu Price

Name RMB HK$ equivalent HK$ % Premium

Hainanese Chicken Rice 52 64.8 61 6.3%

Swiss Style Chicken Wings 46 57.3 53 8.2%

Signature Homemade Fish Balls w/ Rice 33 41.1 32 28.6%

Kagoshima Pork Cartilage 49 61.1 46 32.8%

Milk Tea 17 21.2 18 17.7%

12-inch French Hotdog 26 32.4 30 8.0%

Special crispy bun served w/ condensed milk 15 18.7 17 10.0%

Malaysian Beef Briskey Curry 53 66.1 61 8.3%

Shredded Pork & Mushroom w/ Fried Noodles 43 53.6 58 -7.6%

Sizzling King Prawns w/ Fried Noodles 69 86.0 77 11.7%

Average 40.3 50.2 45.3 12.4%


Insiders Have Been Buying Stock With Significant Skin in the Game and Substantial Experience in the Sector Aligning Interests with Shareholders: Tsui Wah is run by disciplined management who have been religiously focused on return on capital and profitability. Admittedly, the founders have been very focused on profitability and have grown judiciously. The company was founded by Chairman, Lee Yuen Hong in 1989 by acquiring the San Po Kong Tsui Wah Restaurant together with the founding partners listed below. As of April 2014, Tsui Wah has significant insider ownership with approx. 62.6% owned by the founding partners who have successfully grown the business together for 25 years since 1989 and cumulatively have over 190 years of experience in the industry. Notably, insiders have been recent buyers of the stock in April, acquiring 3.664mm shares and 3.336mm shares on the secondary market at average prices of

HK$4.1097 and HK$4.1935 on 22 & 23 April respectively15. Management also recently boosted its shareholder dividend payout ratio to 62.8% versus 53.4% last year.

Name Title Industry Experience Approx. Ownership16 Lee Yuen Hong, 59 Chairman and Co-Founder 42 years 26.4% Ho Ting Chi, 51 Executive Director 34 years 20.5% Cheung Yu To, 57 Executive Director 35 years 7.9% Cheung Wai Keung, 63 Executive Director 45 years 4.7% Cheung Yue Pui, 52 Executive Director 36 years 3.1% Total 192 years 62.6%

Source: Company Filings, IPO Prospectus.

15 Cui Fa , a company incorporated in the BVI and controlling shareholder, owned approx. 48.19% by Chairman, Lee Yuen Hong, 37.35% by Executive Director, Ho Ting Chi and 14.46% by Executive Director, Cheung Yu To. Post the purchase, Cui Fa shareholding as of April 2014 increased to 54.83%. 16 Ownership % as of April 2014 as per ownership in Cui Fa, Ample Favour and Victor Leap.

Management have bought shares recently at

higher prices and have skin in the game


Origins of Tsui Wah: Iconic Asian Brand with a Rich Four Decade History with Humble Roots The birth of Tsui Wah meant customers facing increasingly fast lifestyles could have all meals breakfast, lunch, tea,

dinner and even late-night snacks Tsui Wah Co-Founder, Lee Tsui Wah traces its roots to humble beginnings in Hong Kong in 1967 from a simple tea shop in the streets of Mong Kok to a legendary brand today with chains across Hong Kong, China and Macau. The caf would serve hot-dogs, cakes and refreshing drinks such as milk tea, coffee and red bean drinks to locals. Today, Tsui Wah serves over 170 dishes including the famous milk tea, fish ball noodles, curry chicken, crispy buns with condensed milk and Hainanese chicken rice . The brand expanded in the 1970s by adding restaurants in To Kwa Wan, San Po Kong and Tuen Mun, which marked the genesis of modern Tsui Wah restaurants.

During the 1960s, Tsui Wahs current co-founder and current Chairman, Lee Yuen Hong, worked as a young delivery boy and cook at the caf. Often waking up at three in the morning to learn how to cook and bake, Lees humble upbringings, sheer hard work and perseverance from a young age are boasted by those who know him closely.

The operations of the Tsui Wah Group began in 1989 when core shareholders founded the Group 25 years ago by acquiring the Tsui Wah restaurant in San Po Kong. The companys core Shareholders had been co-workers at this restaurant prior to 1989 and, through their

extensive working relationship, developed close personal and business ties with each other. Under Lees capable management, Tsui Wah pursued its next expansionary stage. The 1990s marked a transformation in Tsui Wah with the rollout of several restaurants in densely populated and prominent districts such as Central (Hong Kongs financial services district), Causeway Bay, Jordan and Tuen Mun. The premier locations of these restaurants allowed Tsui Wah to maximize revenue and strengthen brand image.

In 1998, the company opened its iconic 24 hour store at Wellington Street, Central strategically located next to Hong Kongs famous nightlife district, Lan Kwai Fong. The 3 story, c.5,000 square foot Central store can be found bustling late into nights. Tsui Wahs

popularity flourished further after the landmark Central branch began receiving visits from local celebrities ranging from singing sensations to the Managing Director of Hutchison Whampoa. From just one in 1998, Tsui Wah today boasts eight 24 hour eateries. As Tsui Wahs popularity grew, the company featured as a Hong Kong cultural phenomenon and in local blockbuster films such as Love in a Puff (2007), Love in a Buff (2012), Perfect Couples (1993) and Lan Kwai Fong (2011). Indeed, cha Chaan Teng cuisine has grown to become so iconic of Hong Kongs culture that a political officer proposed it be recognized by UNESCO as a cultural heritage of humanity.

By the 2000s, Tsui Wah established a premium reputation for serving delicious signature dishes, including the champagne style milk tea, crispy bun with condensed milk, jumbo frankfurter hotdog and king prawns in XO sauce, in an efficient and lively setting. Tsui Wahs restaurants were packed with long lines as its brand had become ingrained in the Hong Kong customer.

Its 170 simple menu offerings had customers repeatedly returning no matter what the time of the day, or night.

Tsui Wah in 1960s in Mongkok

Co-Founder, Lee Yuen

Hong started his career as a delivery boy in the 1960s

Tsui Wah in Hong Kongs business district

UNESCO recognition

Signature Dish: Champagne Milk Tea


To cater to the surging demand, the company built a c.10,000 sq. ft. central kitchen in 2008 that would serve up to 25 stores. This central kitchen was the first of its kind in the heavily fragmented cha Chaan Teng industry which today comprises over 6,000 smaller restaurants. The central kitchen procured semi-processed ingredients and conducted non-essential cooking processes (e.g. fish balls, meat cutting, sauce creation) in a location separate to the restaurant floor. Lees central kitchen initiative boosted efficiency and quality control for Tsui Wah group.

In 2009, Tsui Wah began to replicate its success outside of Hong Kong by opening its first store in Mainland China. Within 5 years, the number of stores in Mainland China has grown to 13 locations across 5 cities including Shanghai, Shenzhen and Guangzhou. In 2011, the company continued to expand outside of Hong Kong through an exclusive joint venture with the Galaxy Hotel in Macau. The company has commissioned for the establishment of several central

kitchens in China to complement its expansion plan.

More recently, Tsui Wah pursued initiatives to deliver its cha Chaan Teng menu offerings in innovative formats. Tsui Wah opened a c.12,000 sq. ft. self-service eatery at the Hong Kong International Airport in 2010 and a delivery service catering to upper-middle class Hong Kong residents in 2012. In November 2012 Lee took Tsui Wah public. Remarkably, Tsui Wah, the once small tea caf became the first cha Chaan Teng operator to IPO. At time of IPO, the company operated 2617 restaurants, including 21 in Hong Kong, 4 in China and 1 in Macau. As of March 2014, the company operates 41 branches in Hong Kong, Macau

and China. I anticipate that by March 2017, Tsui Wah will have nearly 80 stores in Hong Kong and

China. As best as I can tell, the IPO has positioned the company to multiply its stores ad business over the coming years given the wide appeal for its brand and food.

History of Tsui Wah

Tsui Wahs journey started off with humble beginnings in 1967. The company went through a business transformation in the 1990s and has immense potential to multiply stores, profitably.

17Includes one restaurant in Hong Kong and one restaurant in Macau owned by Jointly-Controlled Entities.

Tsui Wah in China

Tsui Wah Delivery

Tsui Wah goes public


Cha Chaan Teng: Tsui Wah is Hong Kongs Version of McDonalds (Except The Food Is Great)

Tsui Wah epitomizes Cha Chaan Teng efficiency and is often reversed by customers as Hong Kongs version of McDonalds through its focus on efficiency, customer service and food quality (except the food is great)

Tsui Wahs primary cuisine style, Cha Chaan Teng (meaning tea restaurant) is an iconic representation of Hong Kong dining culture and traces its roots back to the 1950s.Cha Chaan Teng cuisine combines traditional Cantonese fare with Western and Asian elements. Colonial British culture began influencing the introduction of western cuisine which was then only served in high-end restaurants. Western food was catered mainly toward

foreigners and was considered a luxury at the time. Seeking to offer such a culinary luxury at an inexpensive price that would cater to a wider audience, local Chinese residents began opening small cafes called bing sutt (translated as ice chambers). Such traditional neighborhood cafs offered light refreshments including sandwiches, buns, French toast and cold drinks. By the 1960s, such cafes became popular spots for local working class residents. A typical bing sutt featured vintage furniture, hanging electric fans and handwritten menus to add to its community feel. Over the decades, Bing Sut evolved into Cha Chaan Teng and became a local and authentic dining Hong Kong culture that combines traditional Cantonese fare with both Western and Asian elements. Tsui Wah has perfected the Cha Chaan Teng formula for creating the McDonalds of Hong Kong through its focus on efficiency, central to understanding Tsui Wah. Tsui Wahs efficient and standardized operations consist of the following:

Around the Clock Operations (Even During Hong Kongs Wild Typhoon 8 Season): Tsui Wah is always open for business (even during Typhoon 8 for anyone that has experienced Hong Kong typhoon season , that is impressive). See #12 on CNNs review on 50 Reasons Hong Kong is the Worlds Greatest City (http://travel.cnn.com/hong-kong/none/worlds-greatest-city-hong-kong-576599). Several Tsui Wah branches serve breakfast, lunch, dinner and late night dinner through 24 hour, 7 days a week. Hong Kong stores are open a median of 19 hours, while China stores are open at least 14 hours. Catering to customers needs throughout the day allows Tsui Wah to maximize revenues (indeed Tsui Wah makes more revenue per restaurant than most restaurants globally that I know of). Across Tsui Wah restaurants, average daily revenue per comparable restaurant is HK$124,000 or US$16,000. This is higher than even the most efficient players (http://www.qsrmagazine.com/reports/top-50-sorted-average-sales-unit) globally.

Speed of Service Without the Fast Food Experience: Speed of service is crucial to understanding Tsui Wah. The Tsui Wah philosophy is simple: serve up authentic, distinctive, finger-licking food quick so that customers can enjoy their food slowly. Tsui Wah uses a formula of using high-quality ingredients, signature dishes, simple but elegant restaurant design and friendly employees to take care of customers. In terms of preparation, the use of a central kitchen enables Tsui Wah to shorten significantly the amount of time needed to prepare most dishes. The company maintains appropriate waiting staff -to table ratios and

adopt a set of strict table service standards designed to meet the expectations of customers and to enhance the speed of service. Tsui Wah has implemented a set of modern management information systems to standardize restaurant management. Table staff uses electronic personal data assistants to take orders, which reduces errors and enhances the speed of service. The computerized point-of-sale system at Tsui Wah restaurants captures consumer spending data, which is closely monitored and analyzed by management. Tsui Wah has approximately 25 average number of invoices per table per day per comparable restaurant.

Speed of Service Without the Fast Food Experience

Cha Chaan Teng is ingrained in the Hong Kong

and Chinese culture


Communal Seating: Having visited Tsui Wah over 50 times in the last 12 months, I note that although Tsui Wah offers full service dining, many customers very willingly share tables with other customers. This maximizes sales efficiency per square foot and minimizes idle seats and increases average daily seats turnover. It is difficult to spot an empty seat at Tsui Wah particularly during rush hours.

Tsui Wah Has Perfected and Standardized the Cha Chaan Teng Template to Operating a Scalable Business Model of Chain Restaurants: Tsui Wah has established a scalable business model of chain Cha Chaan Teng restaurants by developing and implementing standardized operations. The company has a set of standard operating procedures for major restaurant operating functions, including staff at various food booths, wait staff, cashiers, floor managers, chefs, restaurant managers and cleaning staff, which have been compiled and updated based on over 45 years. In the late 2000s, Tsui Wahs stores implemented a modern information technology system that greatly benefited the ordering process and customer satisfaction. In addition, all of the purchases of food ingredients, raw materials and other inventories re quired by our central kitchen and restaurants are made through its centralized purchasing department. This centralized purchasing strengthens the companys bargaining power with suppliers through bulk purchasing and reduces costs .

Central Kitchen Applied to Full Service Dining: Tsui Wah has successfully applied the concept of central kitchens, which is generally associated with fast food restaurants, to operating full -service chain Cha Chaan Teng restaurants. The use of a central kitchen helps Tsui Wah to ensure the consistent quality of food and timeliness of delivery across different locations, to better manage inventory and facilitate greater efficiency through greater economies of scale, such as task specialization among chefs at the central kitchen, de creased reliance on restaurant-level kitchen staff and increased economic use of food ingredients and other supplies. Tsui Wahs processed food and ingredients is directly delivered and handled by central kitchens. In addition, the use of a central kitchen increases the dining area in restaurants which boosts revenue and profits.

Tsui Wah has allocated significant resources to develop and implement a efficient and scalable model which provides the ability to profitably replicate their business model and open new restaurants in new markets

Curious to learn more about Cha Chaan Teng? A few links for additional reading:

CNN Cha Chaan Teng Cheat Sheet: http://travel.cnn.com/hong-kong/eat/cha-chaan-teng-cheat-sheet-how-order-hong-kongs-temples-comfort-food-726567

Wikipedia Cha Chaan Teng 101: http://en.wikipedia.org/wiki/Cha_chaan_teng

Hong Kong Top 10 Things to do: Cha Chaan Teng: http://content.time.com/time/travel/cityguide/article/0,31489,1850110_1850124_1850915,00.html

Top 10 Hong Kong Cha Chaan Teng: http://www.ladyironchef.com/2012/12/top-10-hong-kong-cha-chaan-teng/ NYT: Comfort Food in Hong Kong: http://www.nytimes.com/2008/01/30/travel/30webcomfort.html?_r=0

Communal Seating


Tsui Wah Business Segment Overview18 Historical Restaurant Breakdown As of March 2014, Tsui Wah had 41 stores by year end (not including the landmark renovated Causeway Bay Store in Hong Kong which was completed in April 2014).

Historical # of Stores Mar 2010 Mar 2011 Mar 2012 March 2013 6M Sept 2013 March 201419 Hong Kong 13 16 19 24 25 27 Mainland China 120 221 2 7 9 13 Macau 0 0 122 1 1 1 Total 14 18 22 32 35 41

Source: Annual reports, IPO Prospectus, company website. March 2014 actual based on full year results.

Historical Geographical and Business Segment Revenue Breakdown (US$ in millions, unless otherwise specified)

Revenue in US$mm Mar 2010 Mar 2011 Mar 2012 March 2013 6M Sept 2013 Mar 2014

Hong Kong 51.7 69.0 87.1 112.3 68.3 142.6 Mainland China 4.6 7.4 10.4 26.3 20.5 45.9 Macau 0.5 0.7 0.8 1.3 0.9 1.7 Total 56.8 77.2 98.4 139.9 89.7 190.2

% of Revenue Mar 2010 Mar 2011 Mar 2012 March 2013 6M Sept 2013 Mar 2014 Hong Kong 91.0% 89.5% 88.5% 80.2% 76.2% 75.0% Mainland China 8.0% 9.6% 10.6% 18.8% 22.9% 24.1% Macau 1.0% 0.9% 0.9% 0.9% 1.0% 0.9%

Source: Annual reports, IPO Prospectus, company website. March 2014 actual based on full year results.

Comparable Restaurant Sales and Other Metrics (US$ unless otherwise specified)

Daily average revenue (US$) Mar 2010 Mar 2011 Mar 2012

Hong Kong 12,387 13,936 15,742

Mainland China - 16,903 19,613

Overall daily average revenue 12,387 14,194 16,000 Source: IPO Prospectus. SSSG grew 8% and 5% in March 2013 and March 2014 respectively.

US$ unless specified Mar 2010 Mar 2011 Mar 2012 March 2013 6M Sept 2013 Mar 2014

Approx. Sq. Ft Store 47,500 65,000 81,200 138,700 158,700 198,700

Revenue/Sq. Ft23 $1,195 $1,187 $1,212 $1,009 $1,130 $957

# of Employees 1,222 1,397 1,739 2,181 3,400 3,670

Revenue/Employee $46,461 $55,238 $56,598 $64,156 $52,745 $51,813

Approx. Seats24 2,136 2,802 3,333 5,193 5,730 6,984

Revenue per Seat $26,580 $27,540 $29,530 $26,945 $30,973 $27,227

18 Includes one restaurant in Hong Kong and one restaurant in Macau owned by Jointly-Controlled Entities. 19 As per March 2014 annual results. Causeway Bay s tore was fully renovated by Apri l 2014. Ts ui Wah restaurant network:

http://www.tsuiwah.com/en/business/restaurant/branches/ 20 The fi rst Tsui Wah store in Shanghai opened in April 2009 (March 2010 fi scal year). 21 Opening of second Tsui Wah restaurant in Shanghai, PRC in September 2010. 22 Opening of the Galaxy Casino Macau Tsui Wah restaurant in May 2011, which marked the groups expansion in Macau. 23 Assuming average store size in Hong Kong of 3,000 sq. ft. and 8,500 sq. ft. in China and 7,200 for Macau. For 6M 2013, we have multiplied by 2. 24 Assuming average number of tables in Hong Kong is 49 and 75 in China seating 2 to 4 customers a table.


Business Model with Significant Competitive Advantages: Customer Captivity, Pricing Power, Operational Efficiency and High Quality Food is Key To Understanding Tsui Wah

Tsui Wah benefits from competitive advantages due to customer captivity, pricing power and operational effectiveness that allow breakeven in 1-2 months and investment payback period on average of approx. 18 months.

Customers Love Tsui Wah and are Loyal and Captive (Disclosure: Author is a Captive Customer): Tsui Wah customers are captive and repeat customers. I believe the best and most recognizable brands arent built through advertising, but simply through word of mouth, with Tsui Wah customers telling others. The company does an exceptional job beginning with each customers experience into the store, the look and feel of stores, the design items that carry the companys logo and the signature dishes. Tsui Wah is well positioned to become a highly recognized brand.

Captive Customers Love Tsui Wah (Author Pictured on the Right with Tsui Wahs Famous Milk Tea)

Tsui Wah customers have gone so far as to develop blogs about Tsui Wah, providing free marketing and customer word of mouth. A few interesting links that can illustrate the love that customers have for Tsui Wah:

Everyone should try this Cha Chaan Teng: http://www.tripadvisor.com.gr/ShowUserReviews-g294217-d798374-r160082617-Tsui_Wah_Restaurant-Hong_Kon.html

Hong Kongs own version of McDonalds: http://www.tomeatsjencooks.com/870/hks-best-tsui-wah Captive customers deciding to dress up in Tsui Wah costumes for Hong Kong Halloween (picture above in

the table in the middle): http://www.hongkonghustle.com/local-culture/288/hong-kong-halloween-2007/

Dinner at Tsui Wah: http://www.shootfirsteatlater.com/2012/07/24/dinner-at-tsui-wah-restaurant/ One spoonful at a time: http://onespoonfulatatime.wordpress.com/2011/01/01/tsui -wah

Customer at Tsui Wah on last night in HK: http://myfoodsirens.wordpress.com/2011/10/22/tsui-hua/

USA Today: http://www.usatoday.com/experience/food-and-wine/hong-kong/tsui-wah/2942365/

You Tube customer video on Tsui Wah: https://www.youtube.com/watch?v=qGhVYtW10us Post-mid night snack at Tsui Wah: http://www.lifestyleasia.com/hk/en/scene/people/feature/dj -miss-

yellow-on-lifestyleasias-instagram-me-column/

Discover HK: http://www.discoverhongkong.com/eng/dine-drink/whats-hot/timeout/chinese-bakeries.jsp

HK Style Steak: http://outforalonglunch.com/2014/05/13/building-a-hk100-rump-tsui-wah-hong-kong/

Tsui Wah Has a Consistent History of Raising Prices Every Year: When evaluating Tsui Wahs competitive advantages, I am reminded of a quote from Mr. Buffett25 The single most important decision in evaluating a business is pricing power (even more so than good management). If you have the power to raise prices without losing business to competitors, you have a great business. Tsui Wah has consistently raised the average selling price of menu offerings year-after-year without losing its customers. has indicated that between 2010 and 2013 average prices hiked by c.5%. In April this year, Tsui Wah introduced a new menu and raised prices c. 5% across the board even though its menu is already considerably pricier than other similar Cha Chaan Teng cafes. Importantly, such price hikes or sustained premiums do not bother the mid-high end customers (including us as customers) who are continually willing to wait in long queues at many of Tsui Wahs branches in Hong Kong and China. Data from Frost &

25 http://www.bloomberg.com/news/2011-02-18/buffett-says-pricing-power-more-important-than-good-management.html.


Sullivan indicate that Tsui Wah restaurants have the highest average selling price and customer seat turnover amongst peers. In China, Tsui Wah boasts an average check size which is approx. 35% greater than the peer average according to Frost & Sullivan. Tsui Wahs demonstrated higher average selling prices do not discourage customers as observed with the greater average seat turnover.

Tsui Wah is Incredibly Operationally Efficient with Amongst Highest Revenue/Store, Sales/Sq. Ft, Seat Turnover and Amongst Lowest Payback Periods: Tsui Wah operates with ruthless efficiency: you order, eat, pay and go. The company has exceptional unit store productivity and return metrics. Tsui Wah makes approx. $5mm annual revenue per unit store, approx 1-2 months breakeven and approx 18 months payback. Based on my estimates, the company sells approx US$1,187 per sq ft, US$55,238 per employee and US$27,227 per seat 5 year median with high seat turnover (customer/seat per day of 12). These are exceptional metrics even when compared to legendary global brands, including McDonalds, Subway, Chipotle, Chick-a-Fil, which sell between US$2.5-3.5mm per store annually on a per unit basis. Tsui Wah has implemented a highly efficient and standardized operations which enables the company to maximize profits, achieve economies of scale and establish a scalable business model. This covers every aspect of operating functions, from standardized food preparation and product development, quality control, restaurant site selection and ambience, speed of service, management structure, employee hiring and training, central kitchen and a modern IT system to scrutinize customer spending. At Tsui Wah restaurants, the duties of staff are highly specialized with an efficient organizational structure, allocating chefs and staff with specific duties and stating their relative rank in the restaurants. In addition to improving work efficiency and

ensuring quality consistency of food, this specialization helps to protect proprietary recipes and cooking methods, and shorten training cycles. Table staff use electronic personal data assistants to take orders. The system records each order and forwards the food requests to the restaurant kitchen directly for food preparation. The system reduces errors and enhances time efficiency. The collected data includes date and time of order of meals, location of a customers seat, quantities of each menu item sold, and cash, smart card and credit card receipts. The collected data is transmitted to headquarters automatically every night, enabling management to continually monitor operating results and spending at each restaurant.

Revenue Per Store (US$mm) Mar 2010 Mar 2011 Mar 2012 Mar 2013 6M Sept 2013 Mar 2014 Hong Kong 4.0 4.3 4.6 4.7 5.5 5.3

Mainland China 4.6 3.7 5.2 3.8 4.6 3.5 Revenue per store 4.1 4.3 4.5 4.4 5.1 4.6

Source: IPO prospectus, company filings

Daily Average Revenue Per Comparable Restaurant (US$)

Mar 2010 Mar 2011 Mar 2012

Hong Kong 12,387 13,936 15,742

Mainland China - 16,903 19,613

Daily average revenue 12,387 14,194 16,000 Source: IPO prospectus, company filing. SSSG grew 8% and 5% in March 2013 and March 2014 respectively.

US$ unless specified Mar 2010 Mar 2011 Mar 2012 March 2013 6M Sept 2013 Mar 2014

Approx. Sq. Ft Store 47,500 65,000 81,200 138,700 158,700 198,700

Revenue/Sq. Ft26 $1,195 $1,187 $1,212 $1,009 $1,130 $957

# of Employees 1,222 1,397 1,739 2,181 3,400 3,670

26 Assuming average store size in Hong Kong of 3,000 sq. ft. and 8,500 sq. ft. in China and 7,200 for Macau. For 6M 2013, we have multiplied by 2.

Tsui Wah Waiter with a PDA

which reduces

time and is used to analyze

spending habits


Revenue/Employee $46,461 $55,238 $56,598 $64,156 $52,745 $51,813

Approx. Seats27 2,136 2,802 3,333 5,193 5,730 6,984

Revenue per Seat $26,580 $27,540 $29,530 $26,945 $30,973 $27,227 Source: IPO prospectus, company filings

Frost & Sullivan Cha Chaan Teng Benchmarking (source: IPO prospectus as of Dec 2011) US$ unless specified Customer/Seat/

Day (Turnover) Revenue/Store Average Daily

Revenue Number of Seats

Tsui Wah Restaurant 11.47 5.2 13.6 2950 Tai Hing Roast Restaurant 10.72 2.5 6.4 2,510 Tai Hing New Century 9.67 3.6 9.9 1,630 Ngan Lung Restaurant 9.8 2.6 6.9 1,675 Macau Restaurant 10.44 4.0 11.2 820 Maxims Hong Kong Day 8.39 1.8 3.8 630 Ming Yuen Restaurant 10.8 1.9 5.4 360 Lan Fong Yuen 11.43 1.6 4.1 295 Fu Doo Restaurant 10.32 1.4 5.7 285 Macau Tsui Yuen Restaurant 10.49 1.2 3.3 230

Median 10.5 2.2 6.0 725.0 Source: IPO prospectus. Data compiled by Frost & Sullivan as of December 2011 (calendarized).

Average Spending Per Invoice (US$) Mar 2010 Mar 2011 Mar 2012 Hong Kong 8.5 8.8 9.5

Mainland China - 21.8 24.5

Overall Spending Per Invoice 8.5 9.29 10.3 Source: IPO prospectus, company filings

Invoices at restaurants are primarily settled by way of cash and smart card. The average number of invoices per table per day for restaurants in China is lower but average spending per invoice for restaurants in China is higher than restaurants in Hong Kong. Menu pricing for restaurants in China is generally higher than in Hong Kong and customers in China are also not accustomed to communal seating arrangements, thereby reducing the number of invoices per table per day. On the other hand, customers in China are accustomed to ordering more dishes and more expensive menu items, which increases the average spending per invoice

Tsui Wah Serves Delicious, Safe and Fresh Food: The core philosophy of Tsui Wah is to serve delicious, safe and fresh food of consistent quality to customers. Tsui Wah has implemented a set of standard operating procedures, including a comprehensive set of quality control procedures covering all levels of operations including (i) supply chain, (ii) central kitchen, (iii) logistics and (iv) each restaurant at each stage of the raw materials supply and food preparation process. The company places strict requirements on food safety as well as on the appearance, smell and taste of food ingredients. Since 2009, Tsui Wah has engaged an independent te sting company, SGS Limited, a company with over 50 years of experience and 1,200 professionals to conduct spot checks of food samples, so as to help ensure that food quality. The use of a central kitchen further ensures consistency in food quality across different branches and allows us to benefit from economies of scale. Tsui Wah has a set of restaurant quality control programs, including strict adherence to inventory level, spot-check by secret customers, customer feedback and continuous training programs.

Value Creation Through Combination of Consistently High Returns on Invested Capital and Cash Flow Growth: A combination of high returns on invested capital and profitable growth drives shareholder value. The ability of a

27 Assuming average number of tables in Hong Kong is 49 and 75 in China seating 2 to 4 customers a table.


company to sustain high levels of ROIC depends on the life cycles of its businesses and products, the length of time its competitive advantages can persist, and its potential for renewing businesses and products. I believe Tsui Wah demonstrates these qualities. The below table highlights the return on invested capital financial drivers.

Source: IPO prospectus, company filing.

Return on Invested Capital (EBIT/Invested Capital) Mar-10 Mar-11 Mar-12 Mar-13 Mar-14

ROIC 90.6% 75.3% 91.5% 329.6% 49.7%

Return on Invested Capital - Key Drivers Mar-10 Mar-11 Mar-12 Mar-13 Mar-14

Gross Margin (%) 70.0% 69.7% 69.3% 69.9% 70.1%

SG&A excl D&A/Revenues (%) 51.1% 52.0% 48.8% 51.6% 52.7%

D&A/Revenues (%) 3.4% 3.7% 2.9% 3.8% 4.5%

Operating Margin (%) 15.4% 14.0% 17.6% 14.6% 12.9%

Operating Working Capital/Revenues 10.9% 10.9% 7.8% -9.2% -9.0%

Net PPE/Revenues 6.1% 7.6% 11.4% 13.6% 34.9%

Revenues/Invested Capital (%) 5.9x 5.4x 5.2x 22.6x 3.9x

ROIC x 90.6% 75.3% 91.5% 329.6% 49.7%1 2

1

2


Tsui Wahs Serves Over 170 Delicious, Quality and Signature Dishes Nearly 24 Hours a Day Adopting a Rigorous Customer Centric Approach The birth of Tsui Wah meant customers facing increasingly fast lifestyles could have the choice of over 170 dishes and

drinks for breakfast, lunch, tea, dinner and even late-night snacks The mission of Tsui Wah is to serve delicious, safe and fresh cuisine of high quality to customers. Tsui Wah offers over 170 dishes and drinks in the main menu. I attach the full menu from multiple visits to Tsui Wah Hong Kong and Shanghai restaurants, particularly for those who outside Asia and who have not yet visited. Hong Kong Menu: https://www.dropbox.com/s/o0x4thkvstuxj68/Tsui%20Wah%20Hong%20Kong%20Full%20Menu.pdf Shanghai Menu: https://www.dropbox.com/s/8enb0bml92tn7mg/Tsui%20Wah%20Shanghai%20Menu.pdf The menu at Tsui Wah are priced to cater the mid- to high-end segment of the market in Asia. The menu can be classified into categories including: (i) top ten signature dishes, (ii) top 8 fusion dishes, iii) soups and appetizers, iv) vegetarian food, v) sizzling platter, vi) organic series, vii) tomato series, viii) continental delights, (ix) signature Malaysian-style curries, (x) new Zealand deep sea fish, (xi) traditional Asian fried noodles and rice, (xii) Hong Kong style dishes, (xiii) noodles, (xiv) south east Asia dishes, (xv) sandwich series and (xvi) drinks. Tsui Wahs menu is highlighted by its top 10 signature dishes that are the best sel ling items and representative of the Cha Chaan Teng culinary style.

Tsui Wah Top 10 Dishes by Sales in Hong Kong (#5 recommended for Tsui Wah First Timers)

Swiss Sauce Chicken Wings (HK$53 / US$6.8) Tsui Wah takes this Cantonese favorite to the next level by marinating the wings with aromatic sweet soy sauce

Fish Balls & Fish Cakes w/ Flat Rice Noodles in Fish Soup (HK$32 / US$4.2)

Made daily with handpicked yellow eels and over 10 types of fresh fish

Hainanese Chicken Rice (HK$ 61 / US$7.9)

Juicy, boneless and tender, the dish is served with a bowl of flavored oil rice made with chicken stock, basil

and lemon grass

Crispy Bun Served w/ Sweet Condensed Milk (HK$17/US$2.2)

Each freshly baked bun is richly coated with thick butter and condensed milk

Milk Tea (HK$18 / US$2.3)

Combines premium Ceylon tea leaves and with many years of teas-training know-how to bring the perfect

cup of milk tea

Jumbo Frankfurter Hot Dog (HK$30 / US$3.9) The 11 inch juicy sausage and sesame seed bun is filled

with fresh lettuce, tomato and cucumber, with traditional sauce

1 2

4 3

5 6


Kagoshima Style Pork Cartilage w/ Tossed Instant Noodles (HK$46 / US$5.9)

The soft and tender stewed pork cartilage is marinated with special sauce to bring out its mouth watering

flavor

Malaysian Beef Brisket Curry w/ Rice (HK$61 / US$7.9) Natural and fresh ingredients are blended with

imported curry powder and over 30 types of herbs and spices

Shredded Pork Mushroom w/ Fried Noodles

(HK$58 / US$7.5) Crispy and golden pan-fried premium whole egg

noodles covered with lean pork, fresh sprout, leek and mushrooms

Sizzling King Prawn w/ Fried Noodles (HK$77 / US$9.94)

The noodles are pan-fried to a crispy and crunchy state, then mixed with succulent sweet and sour king prawns

on top Source: Tsui Wah Hong Kong Menu.

Tsui Wah reviews its main menu on a semi-annual basis and tracks feedback from customers. Tsui Wah has tremendous pricing power and has raised prices every year for the last 5 years (Tsui Wah raised prices recently in April 2014 approx. 5%). Tsui Wah actively seeks to incorporate customer feedback by refining existing dishes and new ones to meet consumer tastes and regional preferences, and shifting food and nutrition trends. The company leverages technology to collect and analyze customer orders, and respond rapidly to customers. For example, Tsui Wah has developed healthy dishes that use organic food ingredients in response to the modern health-conscious dining trend. In order to accommodate local tastes, restaurants outside of Hong Kong feature a menu that comprises most of the items at Tsui Wah restaurants in Hong Kong, with the rest of the dishes developed locally to meet local demands and tastes. For example, restaurants outside of Hong Kong due to popular local demand in China and Macau serve rice congee and Cantonese-style barbecue meat, which are not available in restaurants in Hong Kong. In addition to the main menu, Tsui Wah offer customers a seasonal menu. For example, egg white almond tea in the winter and specialty icy drinks in the summer. Before launching a new dish in all restaurants, Tsui Wah conducts a test launch in certain selected restaurants. Tsui Wah continues to track the sales volume and collect feedback from customers after the test launch, which helps to assess the level of market acceptance to the newly introduced menu item. Finally, Tsui Wah has implemented standard operating procedures, including a quality control proce dures at each stage of the raw materials supply and food preparation process. The company places strict requirements on food safety as well as on the appearance, smell and taste of food ingredients. Since 2009, Tsui Wah has engaged an independent inspection company to conduct random spot checks of the physicochemical, microbial and other indices of food samples, so as to help ensure that quality conforms with standards.

Tsui Wahs ability to refine and develop menu offerings through a rigorous, systematic and customer centric approach while serving classics that never change, such as the milk tea are not easy to replicate easily

100

9

7

8


Tsui Wah Stores Are Strategically Located in Hong Kong and China and on Average Are Open a Median of 18 Hours a Day, with Eight Locations in High Traffic Areas Open 24 Hours a Day Tsui Wah owned and operated 14, 18, 22, 25, 32 and 41 restaurants as of March 31, 2010, 2011, 2012, 2013 and 2014 respectively. The 2014 number does not include the landmark Cause Way bay store that was renovated and completed in April 2014. Most of Tsui Wahs restaurants are located in high-traffic locations.

Store Count Mar 2010 Mar 2011 Mar 2012 March 2013 6M Sept 2013 March 201428 Hong Kong 13 16 19 24 25 27 Mainland China 129 230 2 7 9 13 Macau 0 0 131 1 1 1 Total 14 18 22 32 35 41

Source: Annual reports, IPO Prospectus, company website.

Pictures of Selected Tsui Wah Restaurants in Hong Kong and China (Stores Are Packed Nearly 24 Hours a Day)

Tsui Wah at Hong Kong International Airport Tsui Wah at Fu Min Rd(Shanghai)

Tsui Wah at Central (Hong Kong) Tsui Wah at Chuanchang Rd. (Shanghai)

Tsui Wah at Xu Jia Hui Rd. (Shanghai) Tsui Wah at Yangpu Wanda (Shanghai)

28 As per March 2014 annual results. Causeway Bay s tore was fully renovated by Apri l 2014. Tsui Wah restaurant network: http://www.tsuiwah.com/en/business/restaurant/branches/ 29 The fi rst Tsui Wah store in Shanghai opened in April 2009 (March 2010 fi scal year). 30 Opening of second Tsui Wah restaurant in Shanghai, PRC in September 2010. 31 Opening of the Galaxy Casino Macau Tsui Wah restaurant in May 2011, which marked the groups expansion in Macau.


Tsui Wahs stores boast full occupancy and long lines. My multiple visits to Tsui Wah stores in Hong Kong and China have been positive based on exceptional customer service, the variety of delicacies and quality and freshness of the meal. 8 out of 41 stores are open 24 hours with the median of Hong Kong stores is 19 hours and China is 14 hours. However, Tsui Wah restaurants in China occupy more space than restaurants in Hong Kong, covering over 7,000 10,000 sq. ft. to per restaurant and having between approximately 65 to 84 tables seating approx. 2-4 customers each. In Hong Kong, restaurants are on average, 3,000 sq. ft. and generally have approx. 30 to 67 tables seating approx. 2-4 customers each. We list the hours of opening in stores in Hong Kong and China.

Hong Kong & Macau Restaurants32 Mainland China Restaurants32

Central Hours Open Shenzhen Hours Open

Des Voeux Road 19 Jianshe Road 12 Wellington 24 Wanghai Road TBO

Jaffe Road 24 Guangzhou

Cannon Street 24 Tianhe Road 12

Lockhart Road, Causeway Bay 19 Shanghai

Wan Chai 20 Fumin Road 19

Aberdeen 20 Tian Yao Qiao Road 14

The Peak 14 Chuanchang Road 14 Kowloon South Xizang Road 13

Ngau Tau Kok 17 Xu Jia Hui Road 17

San Po Kong 20 Changshou Road 14

To Kwa Wan 19 Yangpu 14

Mong Kok 24 Century Avenue 14

Pak Hoi Street 20 Sichuan North Road TBO

Pitt Street 19 Hangzhou

Parkes Street 24 Hangzhou 14 Tsui Wah Concept 19 Wuhan

Tsim Sha Tsui 19 Han Street 13

Tsim Sha Tsui East 19 Luoyu Road 14

New Territories Yuncai Road TBO

Metro City Plaza 18 China Median 14

Sheung Tak 17

Chung On Street 24 Shiu Wo Street 24

Tuen Mun Tai Hing 18

Tuen Mun Ocean Walk TBO

Sha Tin 17

Tai Po 17

Tsui Wah Eatery 18

HKG Intl. Airport 17

Fu Tung Branch 18 Macau

Macau 24

Hong Kong & Macau Median 19.0 Source: Company Filings, Prospectus and Website.

Source: Company Menu and website. 32 Includes restaurants coming soon or to be opened.


Tsui Wah Has Incentivized, Value Oriented Management Who Bought Shares Two Months Ago and The Company Has A Culture of Hiring People with Passion For Food and Efficiency

Tsui Wah is run by value oriented, incentivized management with an intense focus on: return on capital, profitability and customers. Multiple visits to stores affirm that Tsui Wah employees are people with passion and efficiency

The origin of Tsui Wah dates back to 1967 when the first Tsui Wah was opened in Mongkok by a third party. The operations of the group began in 1989, when Chairman, Lee Yuen Hong acquired the San Po Kong Tsui Wah Restaurant together with the founding partners listed below. As of April 2014, Tsui Wah has significant insider ownership with approx. 62.6% owned by the founding partners. Together, they have successfully grown the business from one humble tea shop to a iconic brand leading Cha Chaan Teng in Asia over 25 years since 1989. The founders cumulatively bring over 190 years of experience in the restaurant industry. Tsui Wah has 3 independent non-executive directors out of a total 8 on the board, exceeding the requirements under the Hong Kong listing rules. Notably, insiders have been recent buyers of the stock in April at prices above current prices, acquiring 3.664mm shares and 3.336mm shares on the secondary market at average prices of HK$4.1097 and HK$4.1935 on 22 & 23 April respectively33. I am reminded by a quote by Mr. Munger Pay close attention to incentives

Name Title Industry Experience Approx. Ownership34 Lee Yuen Hong, 59 Chairman and Co-Founder 42 years 26.4% Ho Ting Chi, 51 Executive Director 34 years 20.5% Cheung Yu To, 57 Executive Director 35 years 7.9% Cheung Wai Keung, 63 Executive Director 45 years 4.7% Cheung Yue Pui, 52 Executive Director 36 years 3.1% Total 192 years 62.6%

Source: Company Filings, IPO Prospectus.

My multiple visits to Tsui Wah stores have reinforced that employees are people with passion and amongst the most efficient in the quick service industry, while maintain attentive service. Tsui Wah has a relentless focus on hiring, motivating and retaining employees (restaurant staff, table staff, cooks, store management, kitchen assistants, etc.) who based on my multiple conversations with them, see Tsui Wah as a career, not just a job. The company makes an effort to hire employees who share a passion for food, and who will operate stores in a way that is consistent with high standards but that allows each of their unique personalities and strengths to contribute to the companys success. In an effort to maintain employee loyalty and retention, Tsui Wah has an employee incentive scheme where restaurant personnel receive bonuses, i) if the restaurant at which he or she works achieves certain performance targets, and (ii) office personnel will receive bonuses depending on the number of restaurants that achieve performance targets. Thi s employee incentive scheme, amongst several other factors, has been successful in motivating employees. To ensure the experience of customers, Tsui Wah has developed a set of standardized and formal programs for employees, including waiting staff, cashiers, floor managers, chefs and restaurant managers. Such training programs are accredited and critically recognized by multiple Hong Kong vocational education councils.

33 Cui Fa , a company incorporated in the BVI and controlling shareholder, owned approx. 48.19% by Chairman, Lee Yuen Hong, 37.35% by Executive Director, Ho Ting Chi and 14.46% by Executive Director, Cheung Yu To. Post the purchase, Cui Fa shareholding as of April 2014 increased to 54.83%. 34 Ownership % as of April 2014 as per ownership in Cui Fa, Ample Favour and Victor Leap.

Tsui Wah has built a culture hiring motivated

people with passion who stay at the company for a long-time and build careers at Tsui Wah


Tsui Wah offers numerous opportunities for employees, including benefits, training and activities

Source: Company filings and website.

In addition, Tsui Wahs culture helps to promote internal upward mobility, which not only increases employee retention rates, but also produces the type and quality of management personnel needed for the groups rapidly expanding restaurant network. For example, restaurant waiting staff have risen through the ranks to become restaurant managers through hard work and that the culture of Tsui Wah is one where you can build a career at Tsui Wah and not just a job.

Tsui Wahs culture of hiring people with passion helps to promote internal upward mobility


Tsui Wah Has Tangible Catalysts Ahead for Investors, With Revenue and EBIT Potentially Doubling in 2-3 Years With High Return on Capital and Efficiency Metrics

Tsui Wah has numerous tangible growth opportunities ahead, to replicate its profitable, highly efficient and standardized restaurant network, offering meaningful upside for long-term oriented investors

Tangible Catalysts as Tsui Wah Rolls Out Stores in China, a Market Where It is Critically Profitable with High Return Metrics and Where It Enjoys Higher Average Pricing Than Core Market: I estimate Tsui Wah will have 80 stores by March 2017 in Hogn Kong, China and Macau, doubling current store count and revenue and EBITDA. For each new store, the company spends approx. $1.15mm capex with an average 18 month payback earning high returns on capital and generate significant cash flow. The company is at a key inflection point in China, a market where it had only 7 stores out of 32 as of year ending March 2013 (Sept 2013: 9 China stores out of a total of 35 stores). In China, Tsui Wah opened 5 and 6 stores in March 2013 and 2014 respectively. It is expected to open between 9-11 stores by March 2015, leading to a total of approx. 22-24 stores in China by March 2015, i.e. which is 3x the number of stores it had year ending March 2013. I model an additional 8 stores in China in 2016 and 2017 respectively. I believe this is rational as Tsui Wah has demonstrated the ability to profitably double its store count in China to 13 from 7 last year and have a very long track record in chain Cha Chaan Teng. Long-term, management are investing from IPO proceeds approx. $7.1 and $7.7mm for 2 new central kitchens in Shanghai (completed in March 2014) and Southern China (will finish in March 2015), which together can serve nearly approx. 90 restaurants.

I expect revenue % contribution of Tsui Wah in China to rise to nearly 40% by March 2015 and approx. 45% by March 2017. In terms of store count, Tsui Wah has grown from just 11.1% of stores in China to 31.7% by March 2014. Diligence suggests that Tsui Wah enjoys significant brand recognition and Chinese customers love the food. Although Tsui Wah restaurants in China are open at an average, 14 hours vs. 19 hours in Hong Kong, Tsui Wah restaurants in China occupy more space than restaurants in Hong Kong, covering over 7,000 10,000 sq. ft. per restaurant and have between approximately 65 to 84 tables seating approx. 2-4 customers each. In Hong Kong, restaurants are on average, 3,000 sq. ft. and generally have approx. 30 to 67 tables seating approx. 2-4 customers each. Furthermore, rent and personnel costs in China are much less than compared to Hong Kong.

Store Count Mar 2011 Mar 2012 Mar 2013 Mar 2014

Total Tsui Wah Stores 18 22 32 41

Hong Kong Stores 16 19 24 27

Mainland China 2 2 7 13

% of TW stores in China 11.1% 9.1% 21.9% 31.7% Source: Company filings. Macau has 1 restaurant in the Galaxy Casino (http://dining.macau.com/dining/restaurants/tsui-wah-161)

Historical Store Opening in China Mar 2011 Mar 2012 Mar 2013 Mar 2014

Yangtze River Delta (primarily Shanghai) 135 0 4 3

Southern China (Shenzhen/Guangzhou) 0 0 0 2

Central China (Wuhan) 0 0 136 1

Total New Store Opening in China 1 0 5 6 Source: Company filings, IPO prospectus.

China Revenue Breakdown Mar 2011 Mar 2012 Mar 2013 Mar 2014

China Revenue (US$ mm) $7.4 $10.4 $26.1 $45.9

Total Tsui Wah Revenue (US$ mm) $76.7 $97.8 $139.0 $190.2

China % of Total Revenue 9.6% 10.6% 18.8% 24.1%

China Revenue Per Store (US$ mm) $3.7 $5.2 $3.7 $3.5

35 Opening of second Tsui Wah restaurant in Shanghai, PRC. The first Tsui Wah s tore in Shanghai opened in April 2009 (March 2010 fi scal yea r). 36 Opening of the first Tsui Wah restaurant in Wuhan, PRC.


In addition, please see below pricing comparision of the top 10 selling items in Hong Kong and China. Tsui Wah charges an average 12.4% higher on its top 10 selling items in China.

Below are some customer reviews of Chinese customers on Tsui Wah stores and food. I was thrilled when I realized that Tsui Wah Restaurant is from the same establishment as the one at the Hong Kong Airport. I had fallen in love with the Fish ball Rice Noodles when ate at the HK Airport. A friend of mine took me to the one at Xujiahui and that dish proved to be what I had remembered it to be. The taste was exactly the same. I took two of my friends there again and the chicken wings and fried wonton were also very good. I will try the other dishes the next time I visit Julie from China on Tsui Wah Shanghai37 I'm a regular visitor to Shanghai... eating out almost every evening... This is a great restaurant amongst the many in Shanghai. Great food, great service and atmosphere. Exactly what I expected from the Tsui Wah Group. One needs reservation either for lunch or dinner. Can't decide which dish to suggest as they are all great!! Value for money! Visitor from Germany to Shanghai on Tsui Wah Fuming Lu Restaurant in Shanghai38 This is loud, greasy, open all night, and oh so delicious. You will not lose weight at this joint. But you will be satisfied. Especially after a hard night of partying! ThunderSpider on Tsui Wah Shanghai39

Potential to Increase Hong Kong Market Share and Deepen Customer Penetration Through New and Diversified Sales Channels Requiring Minimal Capital: While the largest Cha Chaan Teng operator in Hong Kong, Tsui Wah has significant room to grow revenue and deepen its customer footprint in Hong Kong with relatively small incremental investments through store count, and expanding delivery and catering services. In 2013, new restaurants were opened at the terminal of Hong Kong International Airport, Hung To Road in Ngau Tau Kok, Shatin Plaza, Pitt Street in Yau Ma Tei and Habour Crystal Centre in Tsim Sha Tsui East. Tsui Wah is opening a second central kitchen in Hong Kong for the year ending March 2014 funded from IPO proceeds. It expected to be between 30,000 to 40,000 sq. ft., and will support nearly 50 new Tsui Wah restaurants within a radius of approx. 200km or 2 hour radius. Each such new Tsui Wah restaurant in Hong Kong, will require, on average, capital expenditures of approx. HK$9.0 million and have payback periods of approx. 12-18 months. In addition to store growth, Tsui Wah identified the delivery of Cha Chaan Teng cuisine in Hong Kong to be underserved. The company launched the business of Tsui Wah delivery serving Hong Kong where customers may conveniently enjoy delicacies without leaving their homes. Tsui Wah plans to open 3 and 3 new centers for years ending March 31, 2014 and 2015, respectively. Tsui Wah delivery centers will be no greater than 1,000 sq. ft. With

37 http://www.tripadvisor.com/ShowUserReviews-g308272-d3928132-r157673032-Tsui_Wah_Restaurant-Shanghai.html 38 http://www.tripadvisor.com/ShowUserReviews-g308272-d5010560-r199978659-Tsui_Wah_Restaurant_Fuming_Lu_Shanghai-Shanghai.html 39 http://www.tripadvisor.com/ShowUserReviews-g308272-d3928132-r193854573-Tsui_Wah_Restaurant-Shanghai.html

Top 10 Items in Tsui Wah China Menu Tsui Wah China Menu Price Tsui Wah Hong Kong Menu Price

Name RMB HK$ equivalent HK$ % Premium

Hainanese Chicken Rice 52 64.8 61 6.3%

Swiss Style Chicken Wings 46 57.3 53 8.2%

Signature Homemade Fish Balls w/ Rice 33 41.1 32 28.6%

Kagoshima Pork Cartilage 49 61.1 46 32.8%

Milk Tea 17 21.2 18 17.7%

12-inch French Hotdog 26 32.4 30 8.0%

Special crispy bun served w/ condensed milk 15 18.7 17 10.0%

Malaysian Beef Briskey Curry 53 66.1 61 8.3%

Shredded Pork & Mushroom w/ Fried Noodles 43 53.6 58 -7.6%

Sizzling King Prawns w/ Fried Noodles 69 86.0 77 11.7%

Average 40.3 50.2 45.3 12.4%


the smaller footprint, capital expenditure should be minimal, and much lower than for new restaurants, which will enable Tsui Wah to replicate this model and achieve penetration very quickly. This represents a long-term profit and growth potential for Tsui Wah and growing at double digit growth. Tsui Wah can broaden its already strong existing customer base and increase sales by strengthening delivery services from existing restaurants and a network of delivery centers to reach customers in areas where existing restaurants are not located. As captive customers, I was obviously thrilled to hear about the launch (delivery hotline 40: +852 2776 8833 for those interested!). The author can be seen pictured trying out a delivery scooter on the right.

Long-Term Investments of 3 New Central Kitchens (vs. Just 1 at Time of IPO in November 2012) Provide Significant Economies of Scale and Lay Groundwork To Support Over 110 New Restaurants for Tsui Wah: At the time of the IPO in November 2012, Tsui Wah had just one central kitchen (approx. 9,000 sq. ft. in Tsuen Wan, New Territories) in Hong Kong, which was set up in 2008. Tsui Wah is laying the long-term foundation by adding 1 central kitchen in China by year ending March 2014 and 1 central kitchen in Southern China by year ending March 2015. The new central kitchen opening in Hong Kong, is expected to be able to support 50 new Tsui Wah restaurants. The central kitchen in Shanghai is expected to be able to support up to 40 new restaurants. The central kitchen in Southern China in 2015 is expected to feed another 20 Tsui Wah restaurants. Cumulatively, these three central kitchens will be able to support over 110 Tsui Wah restaurants alone. The capital expenditure is funded from IPO proceeds, and are long-term investments, that will support new restaurants beyond the coming 10 years. Margins which are temporarily lower than average, will likely benefit as the companies reaps economies of scale and full utilization.

China Central Kitchen Mar 2013 Mar 2014 Mar 2015 New central kitchen openings 0 1 (Shanghai) 1 (Southern China) Projected capital expenditure (US$mm) 0 7.1 7.7 Hong Kong Central Kitchen Mar 2013 Mar 2014 Mar 2015 New central kitchen openings 0 1 0 Projected capital expenditure (US$mm) 0 7.1 0.6

Total central kitchen openings 0 2 1 Total central kitchen capex (US$ mm) 0 14.2 8.3 Source: Company filings, IPO prospectus.

The companys central kitchen centralizes, for restaurant operations, the production and distribution of semi -processed food and processed food, including fish balls, meats, soups and sauces, and prepares the proprietary seasonings and spices used in dishes. Tsui Wah also benefits from economies of scale by centralizing storage function and training chefs to prepare specialized dishes. In addition, the risk of leakage o f secret recipes is significantly reduced by centralizing most of the preparatory work to chefs working in the central kitchen. Tsui Wah minimizes the inventory needed to store (with very low inventory turns) and orders raw materials and supplies, to the extent possible, on an as needed basis.

Continue to Enhance Comparable Restaurant Sales Growth and Profitability: Tsui Wah has grown comparable restaurant sales in Hong Kong and China by 12.5% and 16.2%, as disclosed last in the year ended March 2012. In March 2013 and 2014, SSSG grew 85 and 5% respectively. The company has implemented a number of initiatives to grow SSSG, including: menu price increases (Tsui Wah has increased prices every year for the last 5 years), new menu offerings with focus on high margin products (new menu introduced this year introduced several new food categories based on customer feedback), increase average daily revenue per restaurant and guest traffic by improving dcor and creating a welcoming atmosphere with relentless focus on high quality, safe and fresh cuisine.

40 http://www.tsuiwahdelivery.com/tc/index.php

The author pictured on a Tsui Wah scooter


What is Tsui Wah Worth? (Key Statistics as of June 21, 2014) At a share price of HK$3.97 as of June 21, Tsui Wah is a great business at a fair price whose transformation has not been fully recognized by the market. Since the IPO in Nov 2012, the companys share price appreciated to nearly a high of HK$5.75 in Nov 2013, just under 9 months ago. Since then, Mr. Market have offered the opportunity to purchase shares nearly 30% lower at HK$3.97 (at prices higher than where insiders have bought just two months ago). At HK$3.97, Tsui Wah has a market capitalization of $719mm. As of Sept 2013 balance sheet, to calculate enterprise value (TEV), I add $0mm in short term debt and current portion of finance leases, $0.01mm for non-current finance lease payables, $0mm in minority interest and subtract $120.4 in excess cash and deposits, leading to a TEV of $598.8mm (note: company is consistently FCF positive with negative operating working capital and minimal capital intensity to grow). To estimate the normalized earnings potential of Tsui Wah, lets do some back of the envelope math. As of March 2014, Tsui Wahs store count was 41 (27 HK, 13 China and 1 in Macau), excluding the landmark Causeway Bay store that was renovated by April 2014. Over the last five years, stores in Hong Kong and China earned at an average, $5.0mm and $4.0mm per unit respectively. Based on total store estimate of 55 and 68 stores by March 2015 and 2016 respectively (management have a goal of 80 stores by March 2017), this gets us to approx. $250mm and $307mm in revenue by March 2015 and 2016 respectively including Macau. This attributes no value to new sales channels, which Tsui Wah has had significant success in Hong Kong and growth outside these markets as well. To triangulate at this another way, management have previously disclosed in the IPO prospectus, that average daily revenue per comparable restaurant is approx. HK$124,000 or US$16,000. This gets us to approx. $340mm and $428mm in revenue for 2015 and 2016 respectively. One can also derive revenue through the average number of tables, number of invoices per table per day and average spending per invoice. Stores in Hong Kong are approx. 3000 sq. ft. with an average of 30-67 tables seating 2-4 customers each with average 25 invoices per table with average check price of $9.5. China stores are approx. 7000-10,000 sq. ft. with an average of 65 to 84 tables seating 2-4 customers each with an average of 8 invoices per table and an average spending price of $20. The Macau restaurant is 7,200 sq. ft. seating an average of 2 customers. This gets us to revenue of approx. $260mm and $320mm respectively. Based on the above, to be conservative, I will assume the lower end of the range and assume Tsui Wah has total revenue of $250mm and $307mm for March 2015 and 2016 respectively, i.e. 31.5% and 22.8% higher. The company has grown revenue at 35.9%, 27.5%, 42.2% and 35.9% for the four years ending March 2014. Tsui Wah has grown revenue the last 5 years at a CAGR of 27.3%. Assuming 5 year median historical EBITDA margins of 19%, Tsui Wah will generate EBITDA of approx. $47.5mm and $58.3mm for March 2015 and 2016 respectively. This translates to an EV/EBITDA multiple of 12.6x for March 2015, 9 months from now and 10.3x March 2016 EBITDA. The company spends US$1.15mm per store and has minimal maintenance capex requirements (at most $3-4mm annually) which gets us to 13.5x and 10.8x EBITDA maintenance capex multiples for March 2015 and 2016 respectively. The way I look at it, Im buying a high quality business that is amongst the most efficient quick service restaurants selling nearly $5mm per store and that has grown at a CAGR of 27.3% with high returns on capital at 10.8x EBITDA less capex. Tsui Wah deserves a high multiple and indeed Ackmans Burger King presentation (page 48) on April 2012 advocates a 13x to 16x EBITDA minus capex multiple based on a variety of factors, including unit growth, margin, SSSG growth and return on capital . Tsui Wah ranks favorably on these factors to comparables. I estimateTsui Wah will have 80 stores by March 2017, which will double March 2014 stores, revenue and EBITDA in 3 years, alone implying a nearly 80-100% upside in 2-3 years. Tsui Wahs efficiency is competitive compared to even global QSR restaurants (see Appendix B of Global QSR 50 ranking by QSR magazine), with revenue per store of US$5mm, with approx. breakeven of 1-2 months and investment payback of 18 months. Regional Asian comparables, like Caf De Coral, Ajisen China, Fairwood, Jubilant have lower revenue and EBIT per store as well as a lower growth profile. At current multiples, Tsui Wah offers an opportunity to buy a quality company at a compelling price with insider ownership and recent buying meaning alignment with shareholders. Given the 30% stock decline, Tsui Wah offers a compelling entry point for long-term investors with a 2-3 year horizon.


Risks to Investment Thesis

Future Growth Depends on Ability to Open and Profitability Operate New Restaurants in Existing and New Markets: Tsui Wah has a target of reaching 80 restaurants in Hong Kong and China by March 2017. The company has significant experience in the Cha Chaan Teng space and allocated significant resources and time to develop, implement and perfect their model. Future growth depends on Tsui Wahs ability to successfully replicate their winning formula in new markets, including the ability to find quality locations, secure approvals and permits, hire and train skilled management and successfully management investment payback of new stores. Furthermore, opening new restaurants may negatively affect sales at existing restaurants. Tsui Wah is well positioned to capitalize on its iconic brand given management have had a long track record of excellent capital allocation and eat their own cooking. The company has successfully doubled its China store count in the last year, and completed long -term investments by opening a large central kitchen while revenue has doubled in two years. SSSG has been postive, investment payback on average 18 months and per store revenue competitive than global QSRs. Tsui Wah is consistently FCF positive and generates cash flow that far exceeds its capital outlay for opening new stores.

Brand and Intellectual Property: Tsui Wahs competitive position depends on maintaining the strength of its iconic brand, loyalty of its captive customers and reputation for consistent, high quality products. As Tsui Wah continues to grow in size, expand menu offerings and extend geographic size, maintaining quality and consistency is paramount. In addition, the ability to implement its business plan successfully depends on the companys ability to protect its trademarks, proprietary know-how, recipes, trade secrets and other intellectual property, including names and logos. Tsui Wah is well positioned to capitalize on its 45 year old brand having invested significant time, effort and resources to establish brand recognition, being the only pure play listed Cha Chaan Teng. The company is the recipient of several awards in Hong Kong and China, and a simple search on the internet reveals hundreds of blogs from captive customers raving about Tsui Wah. The company uses confidentiality and non-compete agreements with key management and operating personnel and other precautionary procedures to protect proprietary know-how, recipes and trade secrets. In addition, the risk of leakage of secret recipes is also significantly reduced by centralizing most of the preparatory work to chefs working in the central kitchen. Tsui Wah has implemented a detailed organization structure, with specific duties for employees, which additionally helps protect proprietary recipes and cooking methods.

Capital Allocation: Tsui Wah management may pursue deploying free cash flow into reinvestment opportunities that earn lower returns on capital. While this is a risk that one cannot rule out, the probability of such an event is low, given historical track record of management who have stuck to a simple idea and taken it seriously without losing focus on their core business. This is a quality that I look for in businesses as lack of focus on the core business is something that is value destroying. Management have been conservative capital allocators in the past with a religious focus on return on capital and profitability. Operating and net margins are higher than peers, and while net margins in the recent year have declined, this is largely due to the growth ramp up in a new market, that is typical.

Risks Related to Real Estate Rental Market: Tsui Wah primarily leases properties on which its restaurants operate. The companys inability to obtain leases for desirable restaurant locations or renew existig leases could have a material impact on the core business. Tsui Wah has successfully navigated this throughout its history under its founding group with long-term lease terms of 2-10 years,with renewable options exercisable at the companys discretion upon expiration of lease periods ranging from 2-6 years. This is evident from the companys ability to successfully open and operate stores in landmark locations in Hong Kong, including its Lan Kwai Fong location, the Peak, Causeway Bay, Airport, etc. Tsui Wahs efficiency metrics, including payback periods of approx 18 months on average, provide the business with prodigious cash flow generative abliity to navigate through economic cycles.

Increase Raw Material and Wage Cost Pressures: Tsui Wah profitability depends significantly on the companys ability to anticipate and react to changes in cost of food ingredients and wage cost pressures. The ability to source quality food ingredients at competitive prices in a timely manner is crucial to Tsui Wah. For the four years ended


March 31, 2010, 2011, 2012 and 2013, the total purchases from its five largest suppliers in aggregate accounted for 30.2%, 27.0%, 23.9% and 21.8% respectively. Tsui Wah has not experienced any material delays or interruptions in securing supply of food ingredients from key suppliers, and is consistently looking to imp rove its supply chain. While expanding its restaurant network, Tsui Wah has dedicated significant resources to raising the quality standard of its cuisine and standardisation of its food processing procedures, enhancing operating efficiency, unifying qual ity testing and consolidating supply chain management through the establishment of central kitchens.

Food Safety and Quality Control: A multi-location restaurant business such as Tsui Wah is exposed to negative publicity or news reports,whether accurate or not, regarding food quality, safety, etc. Any negative publicity, whether warranted or not, could harm Tsui Wahs business and brand. The company has implemented a set of standard operating procedures, including a comprehensive set of quality control procedures covering all levels of operations including (i) supply chain, (ii) central kitchen, (iii) logistics and (iv) each restaurant at each stage of the raw materials supply and food preparation process. The company places strict requirements on food safe ty as well as on the appearance, smell and taste of food ingredients. Since 2009, Tsui Wah has engaged an independent testing company, SGS Limited, a company with over 50 years of experience and 1,200 professionals to conduct spot checks of food samples, so as to help ensure that food quality. The use of

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