Key Takeaways:

• TH International will take over operation of the Popeyes fried chicken chain in China from the brand’s owner, Restaurant Brands International
• TH International is likely to announce a major expansion plan for Popeyes in the months ahead, after the chain failed to gain traction in its first three years in China

By Doug Young

What’s the Popeyes fried chicken chain worth in China?

That took TH International’s market value to $790 million, up from $620 million before the announcement, which is how we got our $170 million figure.

But this story is more complex than a single deal, and we’ll admit we follow it a bit more closely than most due to our personal affection for Popeyes fried chicken, as well as the donuts and coffee that are Tim Hortons specialty. The deal looks relatively shrewd, building on a foundation already established by a fast-growing Tim Hortons chain in China over the last few years.

Since launching Tim Hortons in China, TH International has rapidly built up the chain and last month announced the opening of its 600th store. The company has big plans for the market, with a target of opening 1,000 stores by the end of this year and 3,000 by the end of 2026. It also boosted its cash last August when it listed in the U.S. through a back-door merger using a special purpose acquisition company (SPAC).

A check of Dianping, the Chinese equivalent of Yelp, shows that, indeed, only two Popeyes outlets were operating in Shanghai at the time of this writing.

Tim Hortons to the rescue?

The latest announcement is also very thin on details, saying only that TH International will pay for rights to the Popeyes brand in China using its shares, with no cash changing hands. That’s probably a good thing, since TH International had a relatively modest 760 million yuan ($112 million) in cash at the end of September, which it will likely need for its aggressive expansion of Tim Hortons, and now the Popeyes chain as well.

As we’ve noted already, investors seem quite pumped about the latest combination, at least based on the big one-day share gain. But the reality is slightly more complex, since TH International’s stock has hardly been a stellar performer since it completed its SPAC listing last August. Following that, its shares moved steadily downward and at one point lost about two-thirds of their value.

Since then they have bounced back a bit, and following the latest rally they are about double an all-time low from late December. But at their latest close of $5.29, the shares are still down by about a third from where they were at the time of the SPAC listing’s completion last August.

That seems to indicate investors are still undecided about whether the company can succeed with its current aggressive expansion plan. We expect that following this latest announcement we may see some new aggressive targets rolled out for Popeyes, similar to what TH International has announced for Tim Hortons.

Despite the investor indecision, TH International’s shares still trade at a relatively high price-to-sales (P/S) ratio of 4.5, similar to the 4.6 for fast-growing local coffee chain Luckin (OTC:LKNCY), but nearly twice the 2.6 times for much larger and also profitable Yum China.

At the end of the day, this deal really does look like a good one for both RBI, which was clearly struggling with its self-owned Popeyes China operation, and for TH International, by giving it another major brand that should appeal to Chinese diners. Now the two partners just need to cook up a new roadmap for Popeyes in China, and also provide investors with another clear picture showing when TH International might become profitable in the not-too-distant future.