Dough Rising!

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BUY

Initiating Coverage

Price $0.575

Target $1.05

ST Index 3,651.38

Hiorial Chrt

Market Cap (US$m) 89.35

52-week high ($) 0.69

52-week low ($) 0.20

Shares issued (m) 234.9

6m avg. daily vol (US$) 0.26

Free float (%) 47.6

♦ Food In Any Language

Within a short span of six years, BreadTalk Group (BTG) is one of the few local

companies that have created a handful of distinctive brands, which has been

successfully exported globally. Its multi-product offering ? BreadTalk (bakery), Food

Republic (Food Courts), Din Tai Fung (Restaurant) and Toast Box (Café) ? has

effectively positioned the group to tap the various income and lifestyle segments that

have arisen as a result of the increasing consumerism in Asia. Coupled with its ?secret

recipe? to scale up its presence in China through franchising and brand extension,

BTG is poised for accelerating its earnings growth momentum from FY07 onwards.

♦ Oriental Express

After sowing the seeds of growth for several years in the competitive China F&B

market, BTG is finally ready to enjoy some gourmet moments due to its strong brand

recognition and ahead-of-the-curve strategy, which will start to transform its earnings

profile into that of a global F&B conglomerate. The rapid expansion in the number of

owned bakeries, food courts and franchised outlets in China will move its contribution

to BTG?s bottomline from the current 40% to 60% by FY08.

♦ Incubator of Future Winning Brands

Founder George Quek is essentially a ?Brand Wizard? with his proven track

record of creating new winning brands. Following the success of BreadTalk in

2000, he went on to create the award-winning branded Food Courts - Food

Republic (known as Megabite in PRC), as well as Toast Box. The ingenuity of

BTG?s creations is best reflected by the fact that they are able to command a

price premium over its closest peers.

♦ Competitors could drool over this tasty feast

Our investment case for BTG is further strengthened when we value the company

from a replacement cost perspective. To replicate BTG?s geographical footprint at

today?s costs that we have conservatively assumed as an aggregate of store fit-out

costs, its rental deposits and net cash already amounted to $190m ($0.81/share) or

40% above its current market capitalisation. Hence, for any serious contender, it

would make more sense to buy over the group than to re-invent the wheel.

♦ Time to enjoy some gourmet moments

We believe years of trial and error have resulted in the group discovering its very own

?success formula?. Earnings growth momentum is expected to be boosted by

operating leverage, as well as the turnaround of some unprofitable outlets. Moreover,

the stock is due for a massive re-rating as its earnings contribution from China is

expected to exceed 60% from FY08. Hence, we are initiating coverage on BreadTalk

with a 12-month price target of $1.05 based on the SOTP valuation. Our fair value

implied the stock to trade up to 14x FY08 PER for its local operations and 26x for its

earnings from China.