Tenfu (6868.HK / 6868 HK) A leading Chinese tea brand

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1 Asia Pacific/China Equity Research Food Producers (Small Cap Companies) Rating OUTPERFORM* [V] Price (03 Nov 11, HK$) 5.59 Target price (HK$) 6.60¹ Chg to TP (%) 18.1 Market cap. (HK$ mn) 6,860 Enterprise value (Rmb mn) 4,638 Number of shares (mn) 1, Free float (%) week price range *Stock ratings are relative to the relevant country benchmark. ¹Target price is for 12 months. [V] = Stock considered volatile (see Disclosure Appendix). Share price performance Sep-11 Price (LHS) Research Analysts Eva Wang eva.wang@credit-suisse.com Kenny Lau, CFA kenny.lau@credit-suisse.com Rebased Rel (RHS) The price relative chart measures performance against the MSCI CHINA F IDX which closed at on 03/11/11 On 03/11/11 the spot exchange rate was HK$7.77/US$ Performance over 1M 3M 12M Absolute (%) 11.4 Relative (%) (6868.HK / 6868 HK) INITIATION A leading Chinese tea brand We initiate coverage on with an OUTPERFORM rating and a target price of HK$6.6., a leading tea-product enterprise in China, sells and markets tea leaves, tea snacks and tea ware, and develops product concepts, tastes and packaging designs. We like its high brand value, experienced management team and focus on retail development. A leading brand in China s tea market. is a well-known tea brand in China and its key management team has over 20 years of experience in the tea business. ranked No. 1 in Mainland China in all its main product categories in 2010 according to Euromonitor. We believe the company will benefit from industry growth driven by rising demand for health foods as well as from its key brand values of consistent quality and value for money. Solid development strategies and retail focus. leverages on its tea expertise and professionalism, and emphasises tea culture, retail services and personalised customer experience. As of June 2011, had a nationwide coverage of 1,107 retail stores in China. It plans to add around 150 retail stores every year in the next five years, which we believe will help it consistently improve brand value and maintain its competitiveness. Our target price of HK$6.6 is based on 18x CY12E P/E with reference to comps average. We expect s net earnings to grow 31% in 2011E to Rmb291 mn and 25% in 2012E to Rmb365 mn. We expect to achieve a 27.3% revenue CAGR and 26.5% earnings CAGR for E. We believe the Chinese beverages and snacks companies are close comparisons with. Our target price of HK$6.6, based on 18x target CY12E P/E, the average valuation of its comparable companies, implies a target PEG ratio of 0.68x and 18% potential upside. We initiate coverage with an OUTPERFORM rating. Key risks include: macroeconomic risks, industry and competition risks and company expansion and execution-related risks. Financial and valuation metrics Year 12/10A 12/11E 12/12E 12/13E Revenue (Rmb mn) 1, , , ,574.3 EBITDA (Rmb mn) EBIT (Rmb mn) Net income (Rmb mn) EPS (CS adj.) (Rmb) Change from previous EPS (%) n.a. n.a. n.a. n.a. Consensus EPS (Rmb) n.a. n.a. n.a. n.a. EPS growth (%) P/E (x) Dividend yield (%) EV/EBITDA (x) P/B (x) ROE (%) Net debt/equity (%) Net cash Net cash Net cash Net cash, Thomson Reuters, Credit Suisse estimates. DISCLOSURE APPENDIX CONTAINS ANALYST CERTIFICATIONS AND THE STATUS OF NON-US ANALYSTS. U.S. Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

2 Focus charts and table Figure 1: Revenue breakdown by products (2010) Figure 2: Revenue breakdown by sales channel (2010) Others Tea snacks 16.1% Wholesale (hy permarkets) 1.9% 2.8% Retail 61.8% Tea leav es 70.3% Tea ware 10.8% Others 2.8% Total w holesale 35.4% Wholesale (3rdparty stores) 33.5% Figure 3: ranked #1 in branded tea leaves market Figure 4: s retail store expansion Top Fiv e: 13.3% DaYi Tea Group Group 3.7% 3.6% Hunan Tea Co., Ltd. 2.4% Beijing Wuy utai Tea 1.6% Others 86.7% 1,600 1,400 1,200 1, Av erage 135 new stores per y ear Av erage ~66 new stores per y ear Target 150 new stores per y ear Zhuy eqing Tea 1.9% E Third-party ow ned Self-ow ned Source: Euromonitor, as of 2010, Credit Suisse estimates Figure 5: s brands by product and distribution categories Revenue Product categories Distribution channels share Third party- (%) Tea Tea Tea Self-owned owned Hyper- Brand 2010 Ownership/distributorship leaves snacks ware stores stores markets 83.6 Self-owned brand Ten Xin 3.6 Self-owned brand Uncle Lee 0.1 Self-owned brand Danfeng 0.2 Self-owned brand Lu Yu Ten Ren 1.7 Connected party-owned brand, exclusive distribution in Mainland China 2.6 Third party-owned brand, exclusive distribution in Mainland China (6868.HK / 6868 HK) 2

3 A leading Chinese tea brand is a leading tea-product enterprise in China engaged in the sales and marketing of a comprehensive range of tea products, including tea leaves, tea snacks and tea ware, and it also engages in the development of product concepts, tastes and packaging designs. Its products are distributed through a nationwide network of self-owned as well as third partyowned retail outlets and sales points. A strong brand in China s tea products market is a well-known tea brand in China and its key management team has over 20 years experience in the tea business. The company has created synergy by expanding into complementary segments of tea ware and tea snacks. s focus market is Mainland China, where it derives 100% of its revenue and profits. According to Euromonitor, ranked No. 1 in all of its main product categories with a 3.7% market share in branded tea leaves, 46.3% market share in tea snacks and 30.8% in tea ware in We believe it will benefit from the industry growth for branded tea leaves, tea snacks and tea ware, at a 15%, 28% and 14% three-year CAGR, respectively, as forecast by Euromonitor, in the next three years. currently has four self-owned brands and also sells one connected party brand and another third party brand with exclusive distribution in Mainland China. The company carefully differentiates its brand portfolio to meet various levels of market demand. We believe the key value that delivers is its established brand value as a representative of consistent quality and value for money. Solid development strategies has developed a solid strategy since its establishment in 1993 and it leverages its advantages of tea expertise and professionalism. We believe its core competence lies in the sourcing, classification, sales and marketing of its tea leaves products. Quality control is of key importance to its long-term development. We believe the company s current longterm vision includes retail network expansion and brand reputation improvement. The company emphasises tea culture, retail services and personalised customer experience. had a national coverage of 1,107 retail stores in China, including 469 self-owned and 638 third party-owned stores, as of June plans to achieve a net increase of approximately 150 retail stores every year over the next five years, to expand its network in a stable manner. We believe its retail strategy would help to consistently improve its brand value and maintain its competitiveness. Earnings forecasts and valuation We expect s net earnings to grow 31% in 2011E to Rmb291 mn and 25% in 2012E to Rmb365 mn. We expect to achieve a 27.3% revenue CAGR and 26.5% earnings CAGR for the three years from 2011E to 2013E. We believe the Chinese beverage and snack companies Tingyi, Want Want China, Uni-President, China Foods, China Mengniu, Tsingtao Brewery, China Huiyuan and Besunyen are close comparisons with, with an average valuation of 17.9x CY12E P/E or 0.76x PEG ratio. is currently trading at 15.4x CY12E P/E or 0.58x PEG ratio. Our target price of HK$6.6 is derived from 18x target CY12E P/E, the average valuation of its comparable companies, implying a target PEG ratio of 0.68x and 18% potential upside. We initiate coverage with an OUTPERFORM rating. Investment risks We highlight the major risk factors for the company, including: (1) macroeconomic risks overall economic growth, inflation pressure and consumption habit changes; (2) industry and competition risks entry barrier and brand awareness, source and supply control for tea leaves, requirement of professionalism and expertise, as well as food quality and safety issues; (3) company expansion and execution risks retail expansion execution, control over third party retailers, working capital management, outsourcing risks of tea ware production and risks of geographic concentration. sells tea leaves, tea snacks and tea ware in China. is No 1 in China s branded tea leaves market with 3.7% market share in 2010 according to Euromonitor and will benefit from health industry growth of tea leaves, tea snacks and tea ware in China stands out from competitors on its expertise, retail sales network and prudent retail expansion strategy Initiate with OUTPERFORM. Target price of HK$6.6 is based on 18x target CY12E P/E, implying 18% potential upside. Macroeconomic risks, industry and competition risks, and company expansion and execution risks (6868.HK / 6868 HK) 3

4 Financial summary Figure 6: s income statement Rmb mn E 2012E 2013E 1H10 1H11 Revenue , , , , YoY (%) Cost of sales Gross profit , , , Gross margin (%) Distribution costs Admin costs Other income Operating profit Operating margin (%) D&A EBITDA EBITDA margin (%) Finance income Finance cost Net finance cost Other (losses)/ gains Share of profit - JV Profit before tax Income tax expenses Effective tax rate (%) Profit for the year Profit to equity shareholders YoY (%) Net margin (%) EPS YoY (%) , Credit Suisse estimates Figure 7: Core valuation comps Company Ticker Price Market cap P/E (x) EPS growth (%) Growth (%) PEG (x) local (US$ mn) CY11E CY12E CY11E CY12E CY10-13E CY12E 6868.HK China beverages & snacks Tingyi 0322.HK , Want Want China 0151.HK , Uni-President* 0220.HK , China Foods* 0506.HK , China Mengniu 2319.HK , Tsingtao* 0168.HK , China Huiyuan* 1886.HK Besunyen 0926.HK Average Note: All market prices as of 3 November 2011; * from Bloomberg consensus., Bloomberg, Credit Suisse estimates (6868.HK / 6868 HK) 4

5 A strong brand in China s tea products market, a leading tea-product enterprise in China, engages in the sales and marketing of a comprehensive range of tea products, including tea leaves, tea snacks and tea ware, through a nationwide network of self-owned as well as third party-owned retail outlets and sales points. It also engages in the development of product concepts, tastes and packaging designs. The key management team has at least 20 years of experience in the tea leaves business and has created synergy by expanding into the complementary segments of tea ware and tea snacks. s focus market is China where it derives 100% of its revenue and profits. According to Euromonitor. ranked No. 1 in all its main product categories in 2010 with 3.7% market share in branded tea leaves, 46.3% market share in tea snacks and 30.8% in tea ware. As forecast by Euromonitor, industry growth for branded tea leaves, tea snacks and tea ware is expected to remain high at 15%, 28% and 14% three-year CAGR, respectively, over the next three years. We believe will be a major beneficiary of the total market size growth with consumers increasing demand for health foods. currently has four self-owned brands and also sells one connected-party brand and another third party brand with exclusive distribution in Mainland China. The company has carefully differentiated its brand portfolio to meet various levels of market demand. Its main brand, ( 天福 ), has a good reputation in the industry. We believe s leverage on the concept of health tea and its emphasis on tea culture will help strengthen its brand value and long-term development. We believe the key value that delivers is that it represents consistent quality and value for money. Unlike many other consumer goods, for which quality could be quantitatively measured or readily referenced against a benchmark or industry standard, professionalism and expertise play a very important role in the tea leaves market while assessing quality and value. Though highly subjective, we believe this is the key value for its customers, which is very difficult to replicate in the industry. A leading brand in the retail sales of tea leaves, tea snacks and tea ware is No 1 in China s branded tea leaves market with a 3.7% market share in Strong industry CAGR growth of 15%, 28% and 18% for branded tea leaves, tea snacks and tea ware The ( 天福 ) brand is well-known in the tea industry with consistent quality and good value-formoney products Figure 8: Revenue breakdown by product (2010) Figure 9: Revenue breakdown by sales channel (2010) Others 2.8% Tea snacks 16.1% Wholesale (hy permarkets) 1.9% Retail 61.8% Tea leav es 70.3% Tea ware 10.8% Others 2.8% Total w holesale 35.4% Wholesale (3rdparty stores) 33.5% (6868.HK / 6868 HK) 5

6 Company introduction, a leading tea-product enterprise in China, mainly engages in the sales and marketing of tea leaves, tea snacks and tea ware, with each accounting for around 70%, 16% and 11% of the company s total revenue, respectively, in The company sells products through a variety of retail channels, including self-owned retail stores, third party retail stores as well as through hypermarkets. Tea leaves: The foundation of its business with a comprehensive product portfolio Tea leaves are s major revenue contributor (70% of revenue in 2010). The company sources tea leaves using its specialist team and has built up an extensive network of tea farmers and manufacturers of renowned tea-growing regions in Mainland China, including the Fujian province, the Yunan province, the Taihu lake area and Hangzhou. It also sources some tea leaves from Taiwan. Given the fragmented China tea farming industry, its expertise and professionalism are s key to success. purchases tea leaves in their finished form and then processes them according to different specifications and sells the final tea leaves products in small packages. The company has the expertise to store tea leaves at a low temperature to ensure they retain their freshness. A diversified product mix: tea leaves 70% of revenue, tea snacks 16% and tea ware 11% has an extensive network for procurement and sales of tea leaves with a focus on expertise and professionalism Figure 10: s tea leaves products Figure 11: s tea leaves products has spent a lot of effort in promoting tea culture in China, and its tea leaves product packaging designs thoroughly reflect its customer-oriented focus such as suitable weight of tea leaves in each pack and packaging varieties from different tea products. sells products from all five major tea categories (Figure 12), and over 1,110 varieties of tea leaves products in China. Partially-fermented Oolong tea and non-fermented green tea are its major revenue sources, which together accounted for 70.6% of its tea leaves revenue as of Promoting tea culture and customer experience to enhance sales with over 1,110 varieties of tea leaves products. Figure 12: has a tea leaves portfolio covering all major categories Average % of % of Price retail Tea leaf Nature Revenue* tea total tags price* types (Rmb mn) revenue revenue Source/ note (Rmb/kg) (Rmb/kg) Green tea Non-fermented tea Taihu Lake and Hangzhou 40-30, Oolong tea Partially-fermented tea Mainly from Fujian and imports from Taiwan , Black tea Fully-fermented tea Fujian Wu Yi Mountain and Yunnan province , Pu'er tea Post-fermented tea Yunnan province , Other tea Incl. scented teas and flower teas Mainly made with green tea as tea base 10-3, Total * As of 2010., Credit Suisse estimates (6868.HK / 6868 HK) 6

7 Figure 13: s tea leaves revenue breakdown by major categories Figure 14: Compared to overall branded tea leaves market breakdown Other tea 11.1% Pu'er tea 12.2% Black tea 6.2% Green tea 22.8% Oolong tea 13.4% Black tea 5.9% Pu'er tea 7.6% Oolong tea 47.8% Green tea 66.5% Other tea 6.6%, as of 2010 Source: Euromonitor, as of 2010 Tea snacks: Supplementary food derivatives of tea Tea snacks contributed to 16% of s revenue in 2010, including candied fruits, roasted snacks and tea powder, as well as pastries and candies. These products derive from the complementary foods served with tea, but also incorporate standalone sales growth because they belong to the pure snacks category as well. s key strengths in the tea snacks market include its brand image originating from tea leaves, synergy in marketing and promotions, as well as good quality and food safety controls. Currently, has two production facilities for tea snacks in the Fujian and Sichuan provinces, respectively. Tea snacks are natural complementary foods served with tea produces its own tea snacks with good quality control Figure 15: s tea snacks product Figure 16: s snacks products Tea ware: Complementary equipment Tea ware accounted for 11% of the company s revenue in 2010 and is a natural complementary utility whose sales grow with tea consumption. Demand is closely related to the populace s income growth and increasing awareness of and interest in tea culture. currently outsources most of the production for its tea ware products. The company has a complete tea ware product portfolio targeting various customers, covering the mass market ( brand tea ware), mid-end market (Lu Yu) and it also provides over 2,400 varieties of tea ware under the high-end Master Crafters series. The Master Crafters series is designed and produced by well-recognised master tea crafters and bears their signature in both Taiwan and Mainland China. Tea ware is a natural complementary utility that grows with tea consumption (6868.HK / 6868 HK) 7

8 Figure 17: offers a variety of tea ware products with coverage from mass market to high-end collection pieces % of tea % of Average Revenue* ware total Brand ownership/ source retail price* Tea ware collections (Rmb mn) revenue revenue (Rmb/set) collection Self-owned brand, designed and manufactured by external parties, 76 packaged by the company Lu Yu collection Connected party-owned brands, supplied to the company in finished form 475 Master Crafters series Designed and made by master tea crafters, packaged by the company 4,155 Other brands Products include Yu Ru Yi tea pot, Jing Ding electric pot and Jia 99 Ming personal cup, etc. Total tea ware * As of 2010., Credit Suisse estimates Figure 18: s tea ware products Figure 19: s tea ware products Healthy industry growth outlook s focus market is China, from which it derives all of its revenue and profits. We believe industry growth for tea and its related products is mainly driven by rising household income and the growing awareness of, and demand for, health foods, especially as people start to revert to natural food products to ensure their safety and good health. 100% focused on the China market Figure 20: China per capita annual disposable income (Rmb) 20,000 Figure 21: China per capita tea consumption (Rmb) 80 (Kilograms) , , , Urban per capita % 10-y ear CAGR Per capita tea consumptionn v alue (Rmb) Rural household % 10-y ear CAGR Per capita tea consumptionn v olume (Kg) Source: National Bureau of Statistics of China Source: Euromonitor (6868.HK / 6868 HK) 8

9 According to Euromonitor, ranked No. 1 in all its main product categories with 3.7% market share in branded tea leaves, 46.3% market share in tea snacks and 30.8% in tea ware in As forecast by Euromonitor, the industry growth for branded tea leaves, tea snacks and tea ware is expected to remain high at 15%, 28% and 14% of their three-year CAGR, respectively, in the next three years. We believe will be a major beneficiary of the total market size growth with consumers increasing demand for health foods. ranked No.1 with market share of 3.7%, 46.3% and 30.8% in branded tea leaves, tea snacks and tea ware in 2010 Figure 22: Total value of s target markets Rmb mn 60,000 50,000 40,000 30,000 20,000 Figure 23: China beverage retail sales +39% YTD (%) , E 2012E 2013E Branded tea leav es Tea snacks Tea ware 1Q01 4Q01 3Q02 2Q03 1Q04 4Q04 3Q05 2Q06 1Q07 4Q07 3Q08 2Q09 Retail sales Food, bev erage, tobacco and liquor Bev erage 1Q10 4Q10 3Q11 Source: Euromonitor Tea leaves: Benefiting from income growth and consumption habit change According to Euromonitor, China was the largest tea producer in the world with 1.45 mt production in 2010, 33% of the world s total production, and it also consumed 1.1 mt of tea in China has a well-promoted tea-drinking tradition and culture. focuses on the branded tea leaves market and the company had a 3.7% market share as of 2010, ranking No. 1 according to Euromonitor. We believe demand for tea in China is mainly driven by the following factors: Source: CEIC retail sales of consumer goods of Above Designated Size Enterprise Tea consumption in China is driven by rising per capita disposable income, the current low consumption per capita and growing awareness about health food Figure 24: China tea production +8.6% to 1.5 mt in 2010 Figure 25: China s tea output by provinces ('000 tons) 1,600 1,400 1,200 1, China tea farming output YoY% (%) Jiangs u 1.2% Shandong 0.8% Others 0.1% Shaanx i 1.5% Chongqing 1.7% Jiangx i 1.9% Henan 2. 6% Guangx i 2.7% Guizhou 3.1% Guangdong Anhui Hunan 3.8% 6.0% 7.3% Hubei 10.6% Fujian 19.6% Yunnan 13.5% Zhejiang 12.3% Sichuan 11.4% Source: CEIC Source: CEIC (6868.HK / 6868 HK) 9

10 Rising per capita disposable income. We believe this helps enhance the overall market demand for quality tea leaves products. According to Figure 20, China s per capita disposal income in urban areas is high, at 3.2x that in rural areas. We believe the urban areas will remain s main retail expansion target in the next few years. Current low tea consumption per capita. China s per capita consumption of tea is low, at 0.85 kg or only Rmb70 per year in 2010, well below that of major developed countries according to Euromonitor. We believe the rate of tea consumption in China may increase with income growth and will be reflected in two ways: (1) rising tea consumption volume per capita; and (2) growing demand for high-quality teas (such as those well-packaged as gifts and presents). Growing awareness of health food in China and demand for food safety. In recent years, there has been growing media disclosure about food quality problems in China. In addition, people have started focusing more on health food given rising pressures from work and life. As Chinese tea is considered to be a health food, we believe a change towards health foods in social and cultural trends would help boost demand for quality tea. China s tea leaves market can be divided into unbranded and branded, according to Euromonitor. While unbranded tea leaves are affordable for a wide range of customers due to their low price, branded tea leaves target mid- to high-end consumers in the tea market given their perception of higher quality and better taste. China s rising middle class is the largest client base for branded tea leaves. According to Euromonitor, the total market share of the branded tea market has grown from 25.1% in 2000 to 35.0% in 2010, and it is expected to continue to grow faster than unbranded tea products at 15% CAGR in the next three years, accounting for 37.1% of the total tea leaves market in 2013E. We believe is well positioned to benefit from the faster growth of branded tea. Urban areas with high disposable income will be s key target market. China s per capita tea consumption is low at Rmb70 per year in Health food and food safety are hot topics in China. Branded tea leaves market targets mid- to high-end consumers; unbranded tea is more affordable. Branded tea is expected to grow faster at a 15% threeyear CAGR to a 37% share of the total tea leaves market by 2013E. Figure 26: Branded tea market growing faster; accounted for 35% of total market in 2010 (Rmb mn) 140,000 Forecast CAGR: 15.0% branded v s. 11.5% unbranded 37.1% 120, ,000 80, Year CAGR: 16.5% branded v s. 11.1% unbranded 35.0% 60,000 40, % 20, E 2012E 2013E Unbranded tea leav es Branded tea leav es Market size in terms of retail sales price (RSP). Source: Euromonitor Tea leaves include a variety of products. Based on different production processes, they are classified into five major categories as shown in Figure 27. Non-fermented green tea and partially fermented Oolong tea are the most widely consumed products in China with 66.5% and 13.4% market share in the branded tea leaves segment, according to Euromonitor. These are also s main products, accounting for 23% and 48% of its tea leaves revenue in According to Euromonitor, is ranked No. 1 in China s derives around 50% of total revenue from Oolong tea and green tea, which are the most consumed tea categories in China (6868.HK / 6868 HK) 10

11 Oolong tea market with 13.3% market share and it is ranked No. 3 in the green tea market with a 1.3% market share. Overall, has 3.7% market share in the branded tea leaves market, ranking No. 1 in Mainland China. Figure 27: Branded tea leaves, by categories Figure 28: ranked No. 1 in branded tea leaves market (Rmb mn) 50,000 40,000 30,000 20,000 10, E 2012E 2013E Top Fiv e: 13.3% DaY i T ea Group Group 3.7% 3.6% Hunan Tea Co., Ltd. 2.4% Beijing Wuyutai Tea 1.6% Others 86.7% Non-fermented green tea Fully -fermented black tea Flower tea Partially -fermented Oolong tea Post-fermented Pu er tea Others Zhuy eqing Tea 1.9% Market size in terms of retail sales price (RSP). Source: Euromonitor Source: Euromonitor, as of 2010 We believe s wide coverage of all major tea leaves categories would enable it to benefit from the anticipated branded tea market growth of 15.0% CAGR in the next few years. This would also help defend against any potential negative impact (e.g. shortage of supply caused by adverse weather conditions) in a single tea category. has a wide coverage of all major tea categories a well-diversified portfolio. Figure 29: The growth of different branded tea categories and s market share Market size in 2010 CAGR (%) Market share in 2010 Branded tea categories Rmb mn % of total Top 5 (%) (%) Rank Non-fermented green tea 21, #3 Partially-fermented Oolong tea 4, #1 Fully-fermented black tea 1, n.a. Post-fermented Pu er tea 2, n.a. Flower tea 1, n.a. Others n.a. n.a. n.a. Total branded tea 32, #1 Market size in terms of retail sales price (RSP). Source: Euromonitor, Credit Suisse estimates Based on the retail sales value of branded tea, is ranked No. 3 in the green tea market with a 1.3% market share in green tea and it ranks No. 1 in the Oolong tea market with 13.3% market share in 2010, according to Euromonitor. Although it is not among the top five for black tea, Pu er tea and flower tea products, our rough estimates show that had around 3.4%, 5.0% and 4.1% market share in the black tea, Pu er tea and flower tea segments in 2010, respectively. ranked No.1 in Oolong tea with a 13% market share and ranked No.3 in green tea. (6868.HK / 6868 HK) 11

12 Figure 30: Non-fermented green tea market share Xiaoshi 1.8% Figure 31: Partially-fermented Oolong tea market share 13.3% Others 93.7% Lundao 1.7% 1.2% LVJIAN 1.1% Gengx iang 0.4% Others 53.0% Eight Horse 8.9% Fengshan 8.6% Lix iang 8.5% Huax iangy uan 7.7% For branded tea leaves only, as of Source: Euromonitor For branded tea leaves only, as of Source: Euromonitor Figure 32: Fully-fermented black tea market share Minghong 8.8% Taiyunchun 6.7% Feng brand 6.4% Figure 33: Post-fermented Pu er tea market share DaYi Others 37.9% 32.2% Newtanyang Others 68.3% 5.6% East Lake 4.1% Zhongcha 5.2% Xiaguan Tuocha 5.8% Mengku 7.4% Colourful Yunnan 11.4% For branded tea leaves only, as of Source: Euromonitor For branded tea leaves only, as of Source: Euromonitor Figure 34: Flower tea market share Others 12.1% Pinpinx iang 9.3% Zhangy iy uan 26.2% Figure 35: s tea leaves market share summary (%) Yinlu 11.8% Monkey King 15.0% Wuy utai 25.7% Green tea Oolong tea Black tea Pu'er tea Flow er tea Ov erall For branded tea leaves only, as of Source: Euromonitor For branded tea leaves only, as of Source: Euromonitor (6868.HK / 6868 HK) 12

13 Figure 36: Major competitor tea companies in MainlandChina Full name in Company Chinese Website Tea brands Introduction DaYi Tea Group 大益茶业集团 Dayi ( 大益 ), Royal Tea House ( 皇茶会 ), Tea for Happiness ( 快乐品茗 ) Hunan Tea Co., Ltd. 湖南省茶业有限公司 Junshan ( 君山 ), Xiangyi ( 湘益 ), Baixisha ( 白沙溪 ), Jietan ( 碣滩 ), Guzhang Maojian ( 古丈毛尖 ), Xiaoxiang ( 潇湘 ) Beijing Wuyutai Tea 北京吴裕泰茶业股份有限公司 Zhuyeqing Tea 竹叶青茶业 yq/index.htm Yichang Xiaoshi Tea Group Green Arrow Tea Industry Geng Xiang Tea DaYi Tea Group owns Menghai Tea Factory ( 勐海茶厂 ) in the Yunnan province and has the largest market share in post-fermented Pu'er tea in MainlandChina according to Euromonitor. It was among the sponsors for the 2010 Asian Games in Guangzhou. It had over 450 authorised retail stores as of March Hunan Tea Co., Ltd. has 66 tea farm bases in Hunan province with an area of 32,400 hectares. It is the largest tea company in Hunan province and accounts for 70% of sales volume of tea commodities in the province. Its website discloses it has set up 71 image stores and 377 authorised retail stores. Wuyutai ( 吴裕泰 ) Beijing Wuyutai Tea has a history of over 120 years and is well-known in Beijing. It focuses on flower tea products and has the second-largest market share in flower tea inmainland China according to Euromonitor. It has also developed other tea-related products such as tea ware. It has set up 238 retail stores and one tea culture exhibition centre. Zhuyeqing ( 竹叶青 ), Lundao ( 论道 ), Piaoxue ( 飘雪 ), Exin ( 峨蕊 ), Mount Emei Maofeng ( 峨眉山毛峰 ) 宜昌萧氏茶叶集团 Xiaoshi ( 萧氏 ), Dengcun ( 邓村 ) 浙江诸暨绿剑茶业有限公司 北京更香茶叶有限公司 Zhuyeqing Tea is based in Sichuan province and mainly sources its tea leaves from Mount Emei. Its main product is non-fermented green tea and it focuses on high-end products with differentiation from tea leaves sources to marketing. It owns tea farms and tea production factories. Yichang Xiaoshi Tea Group is based in the Hubei province. It has the largest market share in green tea in Mainland China according to Euromonitor. Its tea revenue was Rmb420 mn in LVJIAN ( 绿剑 ) Green Arrow Tea Industry is based in the Zhejiang province and focuses on green tea. It has tea farms of over 3,500 hectares and also owns tea production factories. Gengxiang ( 更香 ) Geng Xiang Tea owns four tea farm bases with a total area of over 5,300 hectares in several tea production provinces in China including Zhejiang, Guangxi and Fujian, of which around 4,000 hectares are organic tea farms. It has over 200 self-managed retail stores. (6868.HK / 6868 HK) 13

14 Figure 36: Major competitor tea companies in MainlandChina (continued) Full name in Company Chinese Website Tea brands Introduction Eight Horse Tea Group 八马茶业 Eight Horse ( 八马 ) Anxi Tiekuanyin Group is based in the Fujian province and focuses on partially-fermented Oolong tea. It has the second-largest market share in Oolong tea in Mainland China according to Euromonitor. It owns two tea processing factories with a total planted area of 60,000 sq.m. It has set up over 600 authorised retail stores. Anxi Tiekuanyin Group 安溪铁观音集团 p.com Lixiang Tea Hua Xiang Yuan Group 泉州市理想茶叶有限公司 厦门华祥苑实业有限公司 Fengshan ( 凤山 ) Anxi Tiekuanyin Group is based in Fujian province and focuses on partially-fermented Oolong tea. It has the third largest market share in Oolong tea in Mainland China according to Euromonitor. It has set up over 300 authorised retail stores. Lixiang ( 理想 ) Lixiang Tea is based in the Fujian province and focuses on partiallyfermented Oolong tea. It has set up over 200 authorised retail stores. Huaxiangyuan ( 华祥苑 ) Hua Xiang Yuan Group is based in the Fujian province and has its own organic tea farms (400 hectares), tea production factory and tea snacks factory. It has set up over 200 authorised retail stores. Minghong Tea 福建坦洋工夫集团 Minghong ( 茗红 ) Fujian Tanyanggongfu Group focuses on fully-fermented black tea. It was the first company authorised by the Chinese government to produce Tanyanggongfu tea (over 120 years' history). It has developed three major series of tea products under the Minghong brand and has the largest market share in black tea in Mainland China according to Euromonitor. It owns Minghong Tea Factory ( 茗红茶厂 ) and tea farm bases of over 660 hectares. It has set up over 200 authorised retail stores. Beijing Zhangyiyuan Tea 北京张一元茶叶有限责任公司 Source: Euromonitor, abovementioned company websites, Credit Suisse Research. Tea snacks: Expected to grow fast at a 28% three-year CAGR Zhangyiyuan ( 张一元 ) Zhangyiyuan Tea has a long history of over 100 years and is a well-known brand in Beijing. It has the largest market share in flower tea in Mainland China according to Euromonitor. It has set up over 120 authorised retail stores China s tea snacks market is a relatively new, emerging segment in China with total retail sales having accelerated in recent years, at a 21.6% CAGR in the past three years, to Rmb567 mn in 2010, as per Euromonitor. The market is expected to grow faster, at a three-year 28.0% CAGR in E based on Euromonitor estimates. As this is a relatively consolidated market, the top five players have 74.5% market share and is ranked No. 1 with a 46.3% market share. We believe the growth of the tea snacks market can be separated into two sources due to the consumption of tea snacks as: (1) a complementary food consumed while people are drinking tea; or (2) an independent food, as a snack-food preparation. While the demand for (1) may be related with tea consumption, the demand for (2) is unrelated to tea. We Tea snacks market is expected to grow fast at a 28% CAGR in E as per Euromonitor. sells tea snacks in both retail stores and its hypermarket network to meet different demand. (6868.HK / 6868 HK) 14

15 believe has a good differentiation strategy to target these two sources of market demand at both its retail stores and at hypermarkets. Figure 37: Tea snacks market expected growth 28% CAGR in E Figure 38: ranked No. 1 in tea snacks market (Rmb mn) 1,400 1,200 1, Year CAGR: 16.6% Forecast CAGR: 28.0% Anx i Tiekuany in Group 6.8% Others 25.5% Group 46.3% Tea snacks market E 2012E 2013E Lix iang Tea Group 6.8% Eight Horse Tea Group 7.1% Hua Xiang Yuan Group 7.5% Market size in terms of retail sales price (RSP). Source: Euromonitor Source: Euromonitor, as of 2010 Tea ware: Potential from culture change and the gradual move to high-end market Tea ware is a natural requirement for tea. China s tea ware market has been growing steadily at a 11.4% CAGR in the past few years to Rmb622 mn in 2010, as per Euromonitor. The market is expected to grow faster, at a three-year 14.4% CAGR in E based on Euromonitor estimates. As this is a relatively consolidated market, the top five players have 61.3% market share and ranked No. 1 with 30.8% market share. We believe tea ware market growth stems from (1) steady growth with the increasing demand for tea in China; (2) changing consumption habits which may imply that consumers may switch to professional tea ware with rising brand awareness; and (3) the popularity of tea culture, which stimulates mid- to high-end demand for delicate tea ware, such as Master Crafters. Tea snacks market is expected to grow at a fast 14.4% CAGR in E as per Euromonitor. Growing demand for tea and tea culture will help drive tea ware market growth. Figure 39: Tea ware market expected growth 14% CAGR in E (Rmb mn) 1,000 Forecast CAGR: 14.4% 800 Six -Year CAGR: 11.4% E 2012E 2013E Tea w are market Market size in terms of retail sales price (RSP). Source: Euromonitor Figure 40: ranked No.1 in the tea ware market Others 38.7% Lix iang Tea Group Group 5.4% ` 30.8% Beijing Wuy utai Tea 6.1% Anx i Tiekuany in Eight Horse Group Tea Group 9.3% 9.7% Source: Euromonitor, as of 2010 (6868.HK / 6868 HK) 15

16 Brand value: Quality assurance currently has a portfolio of retail brands in Mainland China. The company carefully differentiates the brands under management to meet different levels of market demand. Its main brand, ( 天福 ), has a good reputation in the industry and has a high brand awareness according to a consumer survey by Euromonitor. The company has consistenly tried to promote tea culture in China with high management commitment, which has helped to improve its brand value. We believe the key value that delivers is that it is a representative of consistent quality and value for money, which is not an easy proposition to replicate. Well-diversified brand portfolio with market differentiation currently has four self-owned brands and also sells one connected-party brand and another third party brand with exclusive distribution in Mainland China. Its brand portfolio was carefully designed and enriched to target different market segments and various distribution channels, thereby achieving a wide exposure to tea-related products from the mass market to the premium market. Its main brand, ( 天福 ), is still the main revenue contributor, accounting for 85% of tea product revenue in 1Q11. It commands a good reputation in the industry. Given the high professionalism and expertise required in the tea business, we believe the strong brand reputation that has gained is a key asset for the company since it is seen to represent consistent high quality and value for money. We believe s leverage on the health tea concept and emphasis on tea culture will help strengthen its brand value and long-term development in the future. has a portfolio of retail brands. Its main brand, ( 天福 ), is well-known in China and has a good reputation in the industry. owns or distributes six brands, with coverage from mass market to high-end segments. Its main brand, ( 天福 ), accounted for 85% of 1Q11 revenue. Figure 41: s brands by product and distribution categories Revenue Product categories Distribution channels share Third party- (%) Tea Tea Tea Self-owned owned Hyper- Brand 2010 Ownership/ distributorship leaves snacks ware stores stores markets 83.6 Self-owned brand Ten Xin 3.6 Self-owned brand Uncle Lee 0.1 Self-owned brand Danfeng 0.2 Self-owned brand Lu Yu Ten Ren 1.7 Connected-party owned brand, exclusive distribution in Mainland China 2.6 Third-party owned brand, exclusive distribution in Mainland China acquired Xiamen Apex for Rmb16.3 mn (0.94x historical P/B) in January 2011, which focuses on the sales and marketing of tea leaves and tea snacks through hypermarkets, and therefore controlled three other self-owned brands, Ten Xin, Uncle Lee and Danfeng. All these three brands are targeted at the hypermarkets, which could help increase consumers exposure to the company. Prior to the acquisition, Xiamen Apex was 50% owned by Mr. Lee Chia Ling ( s CEO) and 50% by Mr. Tsai Shan Jen ( s Non-Executive Director). In the distribution brands that manages, Lu Yu specialises in tea ware and is whollyowned by Tensin Investment, which was incorporated in Taiwan in 1980 and is held approximately 31.25%, 10% and 6.25% by Mr. Lee Shih-Wei ( s Vice Chairperson), Mr. Lee Chia Ling ( s CEO) and Mr. Lee Rie-Ho ( s Chairperson), respectively. Ten Ren is an unrelated Taiwan-listed company (stock code: 1233), which has a similar products portfolio as, but is active mainly in Taiwan and a few overseas markets. Both brands have granted exclusive distributorships to in the Mainland. Brand differentiation: Ten Xin, Uncle Lee and Danfeng are targeted at hypermarkets, the mass market Lu Yu, a connected party brand, specialises in tea ware with over 30 years history. Exclusive distribution in Mainland China for Ten Ren of Taiwan (6868.HK / 6868 HK) 16

17 Figure 42: Tea products revenue breakdown by brand (1Q11) Figure 43: s brand awareness is high 85.3% Ten Xin * 3.7% Danfeng * 0.2% Uncle Lee * 0.1% Lu Yu 1.8% Ten Ren 2.6% Non-fermented green tea Partially -fermented Oolong tea Others 6.2% Post-fermented Pu'er tea 65 % of selection as preferred brands Note: * Ten Xin, Danfeng and Uncle Lee brands were acquired in January 2011 via the acquisition of Xiamen Apex. Management commitment to promote tea culture helps improve brand value Given s leading position in the traditional Chinese tea market, has proactively established two tea museums in 2002 in the Fujian province and the Sichuan province, through Zhangpu Tianfu and Jiajiang, respectively. The two tea museums have a total gross floor area of approximately 7,917 sq m (self-owned parcels of land) which showcase the history and development of tea and tea culture in China and several other countries. We believe they reflect the management s commitment to respect and promote tea culture in China, and is a unique branding and marketing strategy for. Source: A market survey of tea industry done by Euromonitor in 2011 in ten cities in China with 3,000 respondents established two tea museums in Fujian and Sichuan to promote tea culture in China. Figure 44: s tea museum Figure 45: s tea museum s key brand value: It represents quality We believe the key value that delivers is that it is representative of consistent quality and value for money. Unlike many other consumer goods, for which quality could be quantitatively measured or readily referenced against a benchmark or industry standard, in s brand value: consistent quality and value for money. (6868.HK / 6868 HK) 17

18 the tea leaves market, professionalism and expertise play a very important role in assessing quality and value. We believe the characteristics of the tea leaves market are similar to the wine market. The traditional Chinese tea leaves industry features special requirements regarding planting, processing and blending. In terms of product quality, the taste of teas in different categories or planting areas is unique, and the assessment of quality relies heavily on expertise and experience. procures tea leaves in finished form and focuses on sourcing, appraising and categorising tea leaves through its tea experts, who are key contributors to quality control from its consumers perspective. has a highly professional and experienced tea experts team that has specialised in tea tasting and quality assessment. The Chairperson himself works from the tea factory and is directly involved in the tasting process to ensure consistent high quality. We believe the expertise that has in tea leaves assessment is also key for its cost control. Though highly subjective, in our view, quality assurance is the key brand value offers its customers, which is not easy to replicate in the industry. Like wine, tea leaves have special characteristics and rely on expertise and experience in appraising and categorising. The Chairperson directly monitors the tea tasting process to ensure consistent good quality. Figure 46: s tea tasting and quality control office (6868.HK / 6868 HK) 18

19 Solid development strategies has developed a solid strategy since its establishment in 1993 and it leverages its advantages in tea expertise and professionalism. We believe its core competence lies in the sourcing, classification, sales and marketing of its tea leaves-based products. Therefore, employs different production models for different product lines, with different combination of self-production and outsourcing based on the company s strengths and weakness as well as the technical barriers presented by different processing procedures. We believe this quality focus is of key importance to its long-term development. We believe s current long-term vision includes retail network expansion and brand reputation improvement for its sustainable development. The company emphasises tea culture, retail services and personalised customer experience. We believe this will help consistently improve its brand value and maintain its competitiveness. had 1,107 retail outlets and retail points in China, including 469 self-owned stores and 638 third party-owned stores, as of June In addition, it also sells tea snacks and tea leaves products through 164 hypermarkets directly following the acquisition of Xiamen Apex in January plans to achieve a net increase of approximately 150 retail stores annually over the next five years, to expand its network in a stable way. Meanwhile, it will continue to transform its third party-owned retail stores to self-owned stores in order to better control the distribution system, while it improves efficiency and profitability. Quality focus employs different production models for its different product lines, with diverse combinations of self-production and outsourcing based on the company s strengths and weaknesses as well as the technical barriers presented by different processing procedures. The company focuses on what it is best at: quality control. stands out from competitors on its expertise, retail sales network and prudent retail expansion strategy Tea culture and client service are s retail focus Extensive network in China: 469 self-owned stores and 638 third party-owned stores as of 2Q11 Production: focus on key quality control procedures Figure 47: s business model tea leaves production (6868.HK / 6868 HK) 19

20 Figure 48: s business model ea snacks Focus on expertise and quality s procurement and production are differentiated based on its different product lines, respectively: Tea leaves: procures tea leaves in their finished form, while it participates in their categorising, quality control and packaging as shown in Figure 47. We believe categorising and quality control is of high importance given the tea leaves complexity and the necessity for expert tasters. The key value that delivers in its tea leaves products is consistent quality and good value at a reasonable price, in our view. Tea snacks: controls the whole production process as shown in Figure 48. Given the food safety problems that have surfaced in China during recent years, we believe the company s focus on the quality of its tea snacks segment is essential. obtained the HACCP (Hazard Analysis and Critical Control Points) certification in respect to tea snacks in 2009, which is a systematic preventative approach to food safety that addresses physical, chemical and biological hazards. Tea ware: currently outsources most of the production of its tea ware to third parties as this business requires completely different techniques, human resources and facilities. The company is only involved in the packaging of tea ware with a packaging factory in Zhangpu, in Fujian province. Although the profit margin in tea ware is lower than that in tea leaves and tea snacks due to the outsourcing model, it helps the company centralise its resources, expertise and management efforts in areas where it can achieve the best efficiency and effectiveness. Tea leaves categorising and quality control require a high degree of expertise Tea snacks, food safety produces all. Tea ware: outsourced production. Figure 49: Tea leaves factory Figure 50: Tea snacks factory (6868.HK / 6868 HK) 20

21 Strong professional and expert team We believe s strong professional and expert team is its core asset. It has built up its talent pool in tea procurement, quality control and sales and marketing. For procurement and production, as of March 2011, it has 36 employees in the key procurement department, of which 19 are highly experienced specialist tea tasters. Among them, five senior tea specialists have over ten years experience in categorising and appraising tea leaves, two of whom are certified tea specialists in China. also has 45 quality control personnel to monitor and control each stage of the production process, from raw material procurement to production and delivery, to ensure the consistency and high quality of its tea products. Management s commitment to quality also shows through in its efforts to promote its brand image with superior quality. For example, Mr. Lee Rie-Ho, the Chairperson, himself works from the tea factory and directly supervises the tasting process to ensure consistent high quality. The company s tea specialists are also involved in the packaging design, in order to better reflect product features and attract customers. owns 22 registered patents, of which the majority are design patents for its tea leaves, tea snacks and tea ware products. Accurate perception of market trends by its professionals and experts is of great importance for enhancing the popularity and awareness of its products among consumers. Retail focus We believe s long-term vision has a retail focus, which implies retail network expansion and brand reputation improvement for sustainable development. The company emphasises tea culture, retail services and personalised customer experience. We believe these will help to continue to improve its brand value and maintain its competitiveness. National network and stable expansion plan had 1,107 retail outlets and retail points in China, including 469 self-owned stores and 638 third party-owned stores, as of June 2011 ( had 1,062 in total as of March 2011, including 453 self-owned and 609 third party-owned stores). In addition, it also sells tea snacks and tea leaves products through 164 hypermarkets directly after the acquisition of Xiamen Apex in January plans to achieve a net increase of approximately 150 retail stores annually over the next five years, to consistently expand its network. We believe the company s expansion plan is cautious and prudent, which matches management s long-term vision (over ten years) for business development. A talented pool for tea tasting, quality control and sales and marketing High management commitment to quality control 22 patents including packaging design Focus on improving retail network and customer service Extensive retail network improves brand visibility; solid expansion plan of approximately 150 net new stores per year (6868.HK / 6868 HK) 21

22 Figure 51: s retail network as of 1Q11 (1,062 retail outlets and retail points) Heilongjiang 4 18 Jilin Xinjiang 5 13 Tibet Qinghai 2 Beijing Liaoning Inner Mongolia Hebei Tianjin Ningxia Shanxi Shandong Gansu Shaanxi Henan Jiangsu Anhui Hubei Chongqing Shanghai Sichuan Zhejiang 6 9 Guizhou Hunan 8 38 Jiangxi Fujian Yunnan Guangxi Guangdong Self-operated retail outlets and retail points Third-party operated retail outlets and retail points 2 4 Hainan Figure 52: s retail expansion plan appears quite achievable 1,600 1,400 Target 150 new stores per y ear 1,200 1,000 Av erage 135 new stores per y ear Av erage ~66 new stores per y ear H E 2012E 2013E Third-party ow ned Self-ow ned, Credit Suisse estimates (6868.HK / 6868 HK) 22

23 Currently, in terms of geographical retail exposure, still has some concentrated allocation. For example, Fujian, Shandong and Beijing are its three biggest markets, accounting for 29.6%, 9.9% and 8.5% of its revenue in 2010, respectively. We believe further expansion into other regions may help the company diversify geographically and improve its customer exposure. Geographical sales concentration is in Fujian, Shandong and Beijing Figure 53: s retail stores geographical exposure No of No. of Third party- % self-owned owned of Location stores stores Total total Note Eastern region Shanghai, Jiangsu, Zhejiang, Anhui, Shandong, Jiangxi, Fujian Southern region Hubei, Hunan, Henan, Guangdong, Guangxi, Hainan South-western region Sichuan, Guizhou, Tibet, Yunnan, Chongqing North-eastern region Heilongjiang, Jilin and Liaoning Northern region Beijing, Tianjin, Hebei, Shanxi, Inner Mongolia North-western region Shaanxi, Gansu, Ningxia, Qinghai, Xinjiang Total , , Credit Suisse estimates, as of March Focus on self-owned stores and flagship stores established its first self-owned retail store in October During the recent two to three years, expended a lot of effort in ramping up its owned stores through both opening new stores and converting third party-owned stores. For example, in 2010 alone, opened 138 self-owned stores and converted 196 stores from third party-owned to self-owned. Meanwhile, 117 underperforming third party-owned stores had their contracts terminated or were otherwise closed during the year. By this conversion and focus on self-owned stores, targets increasing its control over the retail sales system and improving store management and efficiency to better promote brand image and enhance financial profitability. We believe the company will continue to open larger-sized new stores in the future. The average area of self-owned retail stores opened in 2009 was approximately 66 sq m while the average store area for those established in 2010 was approximately 116 sq m. We believe this increasing new-store size is partly due to the enriched product portfolio, which results in more product variety to display, and also reflects management s commitment to improving the customers shopping experience. s other retail focus is on its flagship stores, which represent its brand image, marketing strategy and client interaction. As of March 2011, ran 16 cultural flagship stores in 16 cities, of which 13 stores are self-owned. The flagship stores are all located around high streets and have designated areas for the promotion of tea culture and aim to enrich the customers shopping experience. Though there is not a specific growth target, we believe there is great potential for to open at least one self-owned store in each capital city in China in the first stage, gradually increasing this to two to three flagship stores per city for a few large capital cities in the long term. This should help improve the company s brand awareness nationwide. Closure of underperforming retail stores helped improve overall efficiency Conversion of third partyowned stores to self-owned stores New store sizes getting larger 16 flagship stores in 16 cities Big potential to develop flagship stores in higher-tier cities (6868.HK / 6868 HK) 23

24 Figure 54: Retail stores changes gross openings and close downs Retail stores E 2012E 2013E Number of stores Self-owned Third party Total retail ,042 1,192 1,342 1,492 Change in number of stores Self-owned Third party Total retail Change in self-owned stores From third party Close down Fresh new Subtotal Change in third party-owned stores Transfer to self-owned Close down Fresh new Subtotal , Credit Suisse estimates Land purchase plan for long term development plans to acquire store premises to operate its self-owned retail outlets, especially stores located in affluent commercial areas. Management believes that the costs of lease payment or concessionaire fees in China will trend up in the next few years with shortening contract terms. Therefore, we believe this land purchase plan to secure some store locations particularly flagship culture stores would be beneficial for the company s long-term development and also help save rental costs. Retail strategy: cross-selling and personalised service s retail strategy features a multiple brand strategy with differentiation in market segments and product portfolio which has helped target a wide range of customers. For example, besides the popular brand, there is a separate line of products under the Ten Xin (tea leaves), Danfeng (tea leaves) and Uncle Lee (tea snacks) brands, which are mainly sold at hypermarkets. Currently, provides a wide range of products, including over 1,110 varieties of tea leaves products, over 160 varieties of tea snacks and over 200 varieties of tea ware products. We believe its rich product portfolio can help gain popularity among various customers. The company hopes to enhance the customers shopping experience and loyalty by providing personalised services and promoting tea culture. For example, it provides complimentary tea tasting, tea making and tea selection guidance to customers at its retail stores. The sales staff undergoes a specially designed training on tea knowledge and customer service. We believe such a retail and service-oriented development strategy can help in its network expansion and brand building. Land purchase plan to secure key retail locations Multiple brands to target different market segments with a rich product portfolio Promotes personalised service and tea culture to enhance customer loyalty (6868.HK / 6868 HK) 24

25 Figure 55: s culture flagship store Figure 56: s store outside hypermarket Figure 57: in department stores Figure 58: in hypermarkets (Ten Xin) (6868.HK / 6868 HK) 25