What is new? Sales of shares by the 2nd largest shareholder of DPC Dash (1405 HK). Domino's Pizza (DPZ US), the 2nd largest shareholder of DPC Dash (1405 HK), has sold 10mn shares (about 7.66% of total shares issued), at the price of HK$ 65.0 per share, with a 12.8% discount to last closing price of HK$ 74.55. After this trade, Domino's Pizza's ownership in DPC Dash will be reduced from around 18.1mn shares (13.87% of the total) to about 8.1mn shares (6.21% of the total). Noted that it will have a 90 days' lock-up period afterward.
Our view: While the long-term interest is still here, it is reasonable for Domino's Pizza to take profit, but we believe fundamentals are intact and the liquidity boost is more important.
1) Investors might be worried, but we do think it is totally reasonable for Domino's Pizza to take profit. According to our estimates, the cost of investment for them was at around US$ 90mn (back in May 2020, Jan 2021 and Dec 2021), and based on the price of HK$ 65.0, the value of those shares will now be at around US$ 151mn; hence it has already recorded a 68% gain over the past 3 to 4 years, which is about US$ 16.5mn per year.
2) In fact, Domino's Pizza is still profiting a lot from the partnership. Based on DPC's annual report and our estimates, DPC paid RMB 103.7mn (around US$ 14.6mn) in FY23 as aggregate fees under the master franchise agreement to Domino's Pizza, which consists of (i) store opening fees (US$ 10k per new store), (ii) continual royalty fees (3% of fees per year) and (iii) fees for the POS and payment system (US$ 3k per existing store). Such payments may grow to about US$ 21mn/ 28mn in FY25E/ 26E (CMBI est.), still higher than the average capital gains per year mentioned above.
3) The liquidity was quite an issue and now is likely resolved. If we assume the pre-IPO investors, directors and other connected persons did not sold many shares after the IPO, the remaining mix of the free-float shares is just at about 10%, which is rather low, in our view, and so does its average daily trading value in the past 6 months (at about HK$ 16.4mn). Therefore, after this placement, the free float could potentially be boosted by 77%, and this is a profound step for enrolling more professional investors.
4) The fundamentals of DPC Dash remain very solid. SSSG in 3Q24 continued to be positive. This is astonishing in our view given the high base last year (SSSG was likely 10%+) and has outpaced many of its peers. Also, as at 3Q24, 210 new stores were added in 9M24 and store number reached 978. Total net new stores (including stores under construction and contract signed) is now very close to 100% of the FY24E target of 240, and we are still confident for the Company to achieve their target of 300-350 new stores per year in FY25E-26E. However, more importantly, the total number of loyalty program members reached 21.7mn by 3Q24, increased by over 100% YoY, which is highly encouraging for the future business, in our view.
