Snack Empire

My 2021 Top Pick

Snack Empire is a management- & founder owned food and beverage group operating under a single Shihlin Taiwan Street Snacks® brand with over 250 outlets in Singapore, Indonesia, Malaysia, Cambodia, Egypt, and the United States. Last year Snack Empire was one of only six Singaporean companies to make it to Forbes Asia’s Best Under A Billion. According to Forbes, companies on this list have consistent top- and bottom-line growth and a track record of stellar corporate performance. More precisely, companies featured on this list have ranked above peers in terms of sales and profit growth, low debt levels and robust corporate governance.

Investment Proposition

Trading at an adjusted (non-IFRS) FY2020 EV/EBIT below 3 and EV/Sales at 0.6 I consider this highly profitable and management owned company my Top Pick for 2021.

1) Shihlin Taiwan Street Snacks

Aged in their mid twenties and serving their National Service the current CEO Wong C. Tat and Chairman Tay K. Siong embarked on a overseas exercise to Taiwan. After encountering many of the signature Taiwanese dishes at the famous Shilin Night Market in Taipei, with origins from 1899, the duo decided to set up their own Food & Beverage business. Their favorite dishes from the many different vendors were recreated and incorporated under the brand Shihlin Taiwan Street Snacks:

They figured it was an opportunity to bring authentic Taiwanese food cuisine to Singaporeans who were unable to travel to Taiwan. Today, 16 years later, one outlet have turned to +250 and the presence in one market have turned to 6 (7): Indonesia, Egypt, Cambodia, USA, Singapore, and Malaysia (and Brunei, as of writing).

Perhaps most known for their XXL Crispy Chicken served in their signature red paper boxes (McDonald’s playbook…).

In 2006 Shihlin Taiwan had sold its first million of XXL Crispy Chicken, last year that number passed 63 million sold. Fresh chicken breasts are used instead of frozen meat and with the use of local seasoning and spices it creates a clear distinction to American Fried Chicken, catering to the Asian consumer.

Other popular dishes are Handmade Oyster Mee Sua, Ricebox and Sweet Plum Potato Fries. The Mee Sua is hand cut and their Egg Crepes are custom made and imported from Taiwan.

Once talking restaurant economics with a McDonalds franchisee, being the operator of four restaurants, he disclosed beverages were the profit-center of the restaurants and the burgers are what made them come inside. While the gross profit of the BigMac was decent, accounting for labor, cooking equipment, cold supply chain and several different food inputs the operating margin of the burger was meager. The $3 Milkshake, on the other hand, had almost 0 input costs and could be sold after the simple press of a button on a machine.

With that small anecdote in mind, it’s encouraging to see Shihlin have been able to raise the average selling price of Beverage Products in Singapore from $1.4 SGD in 2017 up to $2.0 SGD in 2019. Shihlin have continuously been launching new beverages such as the 1983 Boba Milk bubble tea series and fresh drinks such as the Winter Melon Tea and Smoked Plum.

Judging by Instagram, the creative bottle packaging seems to be somewhat instagrammable.

Reviews from Grubhub (4.8/5), Yelp (4/5), Klook (4.7/5), Sirved (4.3/5), FoodPanda (4.5/5) and GrabFood (4.4/5). While there are the occasional bad reviews the unison picture seems to be that the food is above average (link).

As the saying goes, if the restaurant is packed with Grab-drivers…

2) Snack Empire: Geographic Expansion

Per latest annual report there were 248 Shihlin Taiwan Street Snacks® restaurants established in four countries: Singapore, Indonesia, Malaysia and the United States. Cambodia, Egypt and Brunei (as of writing…) are new markets that was just recently entered, but not listed in their latest annual report, making the total number of restaurants at +250 and countries at 6 (7).

Snack Empire owns 16 self-operated restaurants in Singapore and 14 in Malaysia. All of the rest are Single Unit- & Master Franchisees/Licencees.

The Emerging - & Frontier Market exposure of the restaurant network is enticing and it’s somewhat rare to find a clean exposure to the Emerging Asian Consumer. Sure, Starbucks $SBUX is available in Indonesia too, but if you buy that stock the main part of your exposure is still the American Consumer.

Indonesia with a population of +270 million ranks 4th in the world in terms of population and had a yearly GDP growth in the high single digit %, before C19. I envision Snack Empire having a long runway of restaurant expansion in markets such as Egypt (100m), Cambodia (17m), Malaysia (32m) and Indonesia (270m) - especially considering the franchisees taking the OPEX and CAPEX on theirs P&L.

2.1) Expansion of Self-Operated Restaurants

Snack Empire identified 25 locations such as train stations, institutions of higher learning, transport hubs, shopping malls and other prime locations in Singapore as potential premises for new self-operated restaurants. Among these 25, SE have expressed their interest to the landlords of 18 locations. Management’s target is to open more than 12 new restaurants accumulative 2022, 2023 and 2024.

Likewise in Malaysia, management have identified 30 locations of which 19 they have formalized an interest to the landlords. Management’s target is to open more than 15 new restaurants accumulative 2022, 2023 and 2024.

Snack Empire have doubled their self-operated footprint since 2017. If the aforementioned targets are met it would mean another doubling of the self-operated chain of restaurants within 4-5 years.

2.2) Expansion of Non-Self-Operated Restaurants

Snack Empire have received enquires from prospective franchisees in a number of different countries including New Zealand, Vietnam, the United Kingdom, Sri Lanka, Thailand and Hong Kong. They target to enter at least one Master-Franchise in a new country every two years.

A net 59 franchisees opened between 2018-2020, not counting the recently opened Cambodia, Egypt (and Brunei).

Cambodia was opened 2 months ago but is not yet featured in any semi/annual report:

Although maintaining a decent pace of franchisee expansion, reading the prospectus there’s a healthy dose of self-criticism in regards to not acting on enquiries from prospective international franchisees:

…” which our Directors believe was due to (i) our Group’s slow reaction time to respond to enquiries from prospective franchisees/licensees, leading to their gradual loss of interest and momentum; and (ii) insufficient manpower of our Group to allocate and spend sufficient time on each and every prospective franchisees/licensees, therefore failing to give an impression to prospective franchisees/licensees that our Group was willing to invest time and money to understand and collaborate with them

The group, however, seems to realize its failings and intends to start participate in international trade missions and international franchise exhibitions in a systemic and organized way.

A trade mission team of 10 people are to be set up and they plan to attend on average 12 trade missions per year and on average 18 franchise exhibitions per year. This crusade was set to commence in april 2020 but unfortunately C19 happened and global trade exhibitions could re-start at the earliest in late 2021 or more likely next year. Although historically not participating in trade fairs and franchise exhibitions in a systemic way, and yet manage to establish +200 restaurants in 6 (7) countries, there’s perhaps an upside optionality to that franchise expansion.

Although delayed, I believe this will be a great opportunity in the future. It’s not farfetched to envisage a corporate group in Japan, with a 10-year yield of 0.11%, that want to cater to the largest tourist group in the world, the Chinese, with a chain of authentic Taiwan cuisine. Evidentially so, as they previously received formal enquires.

American Fried Chicken or Shihlin Night Market Fried Chicken….

3) Snack Empire: Business Model

Snack Empire have three main sources of revenue:

1) Sales via Self-Operated Restaurants

2) Sales of Goods to Franchisees (beverages, food ingredients, packaging material etc)

3) Franchise Fees & Royalties

1) Sales via Self-Operated Restaurants

One year ago (2020-03-31) Snack Empire had 16 Self-Operated restaurants in Singapore and 14 in Malaysia. Unit economics are surprisingly transparent and detailed, but most importantly: very good. In Singapore, the break-even period for new restaurants opened between 2017-2019 was a min. 1 month(s) and a max. 2 month(s). The investment payback period was a min. 1 month(s) and a max. 16 month(s). Malaysia shared the same stats with the only difference that the investment payback period was a min. 3 month(s). The average operating margin in 2019 per self-operated restaurant in Singapore was 25.6% and 23.4% in Malaysia. Sales grew +17.4% last year with good profitability.

As mentioned earlier SE look to add +15 new restaurants in Malaysia and +12 in Singapore the coming 4 years, almost doubling their footprint. Snack Empire should be able to do a yearly +20m $SGD of sales in 3-4 years time and continue to uphold +23-25% operating margins. Considering current EV is 13.1m….

2) Sales of Goods to Franchisees

All food, beverages and packaging must be purchased from Snack Empire or an approved supplier, unless agreed upon otherwise. A franchisee is not allowed to mix its own products and packaging materials, which would constitute a breach of franchisee agreement and could cause termination of the franchise.

Snack Empire sell food packaging, beverages and unique food ingredients to all its franchisees. There are, however, variations when it comes to sales of general food inputs. In Malaysia where Snack Empire carry their own footprint of restaurants along side a sizable franchise-operation, SE procure fresh chicken to the franchisees at a market price gross margin. The Indonesian business which is 100% non-self-operated, however, they let the master-licensee procure its own fresh food inputs.

3) Franchise Fees & Royalties

Royalty is the crème de la crème of franchising. The franchisee is obliged to pay a % of the restaurant’s gross revenue. Payment is due the subsequent month and thus a highly cash flow accretive setup for Snack Empire. Below are the details of the agreements which are public (Cambodia commenced operations in January this year, hence no information yet).

Franchising is the very essence of a asset light business model once you’ve created scale and gained traction. The franchisee has to pay not only a fixed and sizeable royalty on its turnover but is also obliged to procure its input goods such as food packaging, food ingredients, beverages etc. from the franchisor. Furthermore, the franchisee is solely responsible for all the capital expenditures in connection with opening a restaurant, including renovation and equipment upkeep, as well as all ongoing operating expenditures such as staff and rent.

Orange = Snack Empire costs
Green = Franchisee costs

To illustrate the earnings-power of Snack Empire I’ll disregard income from Franchise Fees ($684k, 2020) and income from Promotion Fees ($311k, 2020) as these are, in my humble opinion, “project-based fees” to cover new franchise openings and keeping the brand relevant. The Royalty, however, is as close to software-margins as you get in the restaurant business. This annuity stream is what makes investors pay up +25-35x FCF for franchisors such as McDonalds $MCD and Domino’s $DPZ.

If we would completely disregard Business 1 (self-operated stores) and Business 2 (sales to non-operated stores) and value only this asset light cash flow stream - that grew 22% last year - at 7 times, it would alone equal todays enterprise value of Snack Empire. Accounting managements ambitious targets with attending global trade missions and franchising exhibitions, and adding the newly opened markets Cambodia, Egypt (and Brunei), it’s not difficult to contemplate a yearly royalty stream of 3-4m SGD in a couple of years. Considering current EV is 13,1m…

There are no signs of a failing business in decline, to the contrary, all three main sources of revenue are clearly showing a thriving business. Adding 16 years of constant restaurant expansion and above average food reviews we can somewhat conclude Shihlin Taiwan Street Snacks® have a legitimate place in the Food & Beverage sector.

Gross margins for the main sources of revenue:

Gross margins per country:

4) Snack Empire: The Opportunity

Snack Empire have managed to grow revenues at a double digit % pace all while increasing gross profit margin.

Listed in financial year 2020 general administrative costs, professional fees, listing fee, remuneration to the board and management increased due to running a public company. I wouldn’t be too concerned about the cost increase as operating leverage will kick in tandem with further restaurant- and country expansion, sending down OPEX % closer to previous levels.

Adjusted operating profit equals ~5,7m SGD FY2020 putting the valuation at below EV/EBIT 3 (FY2020). Actually, the free cash flow earned the last 4 years outstrip the current EV. If historic cash conversion were to be repeated (I see no reason to as why not), current EV will be earned again until 2025.

Important Disclosure: Adjusted Operating Profit = excluding the non-recurring listing expenses detailed at p. 285 in the prospectus. In short, 50% of the listing fee was taken immediately against the equity and the rest recognized as expenses on the P&L for 2018, 2019 and 2020. This is a non-IFRS measure and you can find the statutory profit statement in the Annual Report/Prospectus.

Snack Empire was listed one and a half year ago trading at an EV of 70m SGD and EV/S 3.3.The valuation-dislocation is stunning.

Now, 2021 will undoubtedly be a lost year because of Covid-19. Malaysia and Indonesia issued a hard lock down, tourism is dead and the F&B sector suffered a forced closing. However, looking in the rear view mirror and investing have rarely been a winning strategy. What’s not priced in at EV 13.1m SGD? This is perhaps the best Risk/Return-ratio I’ve ever encountered.

Let’s recap the actual business evolution up to C19 (2020 results include 2 months of C19…).

Base Case

I envisage 2021 being a lost year and in late 2022 early 2023 we’re getting back to pre-C19 levels:

- No more non-recurring listing expenses

- I forecast 1 new large Master-Franchise agreement either in Thailand or Japan

- Cambodia, Egypt (and Brunei) stores added to the results for the first time

- The whole world is craving a re-opening and tourism will be rampart in 2022/2023

- At mid 2022, at the latest, we should se opening of new self-operated stores as planned

- At mid 2022, at the latest, we should see continued expansion by the franchisees in some or all of the 6 (7) countries

- Start to participate in 18 Trade Missions and 12 Franchise Exhibitions per year

- Actual franchise enquires from New Zealand, Vietnam, the United Kingdom, Sri Lanka, Thailand and Hong Kong.

My forecast is on the assumptions of a recovery in 2022 and returning to previous growth rates in 2023 and 2024. This forecast could be wrong. There’s a downside risk if COVID-19 shutdowns continue next year and if the brand falls out of fashion.

The CEO and the Chairman owns 75% of the shares outstanding. Starting Shihlin Taiwan Street Snacks® and making it to a +250 restaurant chain have been a lifelong project, meaning majority of their net worth is vested in the share price. Shihilin Taiwan is incorporated in Singapore, the management is located in Singapore and the cash on the balance sheet is in Singapore Dollar.

Corruption Perceptions Index (CPI) 2020 has ranked Singapore the 3rd least corrupt country in the world out of 180 countries with a high score of 85, which we have successfully achieved since 2018. Singapore is again the only Asian country ranked in the top 10.


I’m long shares @ 0.25 and I consider Snack Empire 1843:HK my 2021 Top Pick.

Thank you for reading,

Alexander Eliasson

“Successful investing is having everyone agree with you… later”

- Jim Grant

A final note

I support Arden Hah and Kent Wong, investors based in Singapore and Malaysia, in their efforts of increasing awareness of the company. You can find their letter here (link).

“…we have done a lot of due diligence by visiting the Shihlin stores in our home markets (Malaysia & Singapore), checking on the traffic, their expansion plans tallying, and everything is in line. The company stores are well managed, and enjoy one of the highest four wall profitability in the F&B kiosks concept. ” 

- Arden Hah

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Disclaimer

- This post was written on the 18th of march 2021 and all the calculations are based on share price @ 0.25$

- Please advice your bank and/or financial advisor before making any investment of any kind

- This is not investment advice and this blog may contain factual errors which you can not base your investment decisions upon

- I own shares (I’m obviously biased and this article is most certainly biased

I’m using a non-IFRS ‘operating profit’ adjustment in my remarks, you can find the statutory numbers here:

Prospectus: https://www1.hkexnews.hk/listedco/listconews/sehk/2019/0930/2019093000101.pdf

2020 Annual Report: https://www.snackemp.com/wp-content/uploads/2020/07/e_01843ar-20200727.pdf

- Do your own due-diligence before investing