Executive Summary / Key Takeaways

• TH International Limited (THCH) is undergoing a significant transformation, shifting from a coffee-centric model to a "Coffee Plus Freshly Prepared Food" strategy, which is proving to be a key differentiator in China's competitive beverage market. The company's made-to-order food preparation model, featuring open kitchens and an expanding "Light & Fit Lunch Box" platform, is driving food revenue growth and enhancing store unit economics.
• The company's strategic pivot to a capital-efficient sub-franchising model is accelerating store network expansion, with over 400 stores converted by Q2 2025 and a target of 200-300 new openings annually in the coming years. This approach is generating steady cash flows and profitability, contributing to THCH's return to positive adjusted corporate EBITDA.
• Despite macroeconomic headwinds and intense price competition, THCH achieved positive adjusted corporate EBITDA in Q2 2025 and reduced adjusted net losses by 16.2%. Management anticipates positive same-store sales in Q3 and the second half of 2025, signaling a turning point for profitability and top-line growth.
• Digital engagement is a significant strength, with loyalty club members reaching 26.2 million by Q2 2025 and digital orders comprising an all-time high of 90.4% of total orders, indicating a robust platform for customer acquisition and retention.
• Key risks include ongoing market competition and potential supply chain disruptions, but THCH's diversified menu and strategic sourcing are designed to mitigate these challenges, with management expecting minimal impact from coffee bean price volatility.

A Differentiated Recipe for Growth in China's Dynamic Market

TH International Limited (NASDAQ:THCH) operates Tim Hortons coffee shops across mainland China, Hong Kong, and Macau, establishing itself with a distinctive "Coffee Plus Freshly Prepared Food" business model. The company's journey began in Shanghai, navigating a challenging landscape marked by a two-year COVID period and fierce price competition within the Chinese coffee market. In response, THCH strategically honed its focus on product differentiation, emphasizing freshly prepared, healthy, and high-quality food offerings at accessible price points. This approach has become fundamental to its competitive positioning, allowing THCH to sidestep direct price wars that have characterized much of the industry.

The Chinese coffee market, while offering significant long-term growth potential due to expanding consumer penetration and rising consumption frequencies, remains intensely competitive. THCH positions itself as a mid-tier player, distinguishing its brand from premium global giants like Starbucks (SBUX) and rapid-expansion, tech-driven local competitors such as Luckin Coffee (LKNCY). While Starbucks emphasizes a premium experience and broader product range, and Luckin Coffee prioritizes digital convenience and affordability, THCH carves out its niche by offering a value-oriented, Canadian-style cafe experience rooted in fresh food.

Technological Edge: The Made-to-Order Fresh Food Model

A cornerstone of THCH's differentiation is its "made-to-order" (MTO) fresh and healthy food preparation model, which includes open kitchens. This operational technology is not about advanced AI or complex algorithms, but rather a process innovation that delivers tangible benefits and a unique customer experience. The open kitchens allow guests to observe staff preparing fresh meals from start to finish, fostering transparency and trust in the quality and freshness of the food.

This MTO model underpins THCH's strategic expansion into various dayparts beyond its traditional strength in breakfast. The "Light & Fit Lunch Box" platform, a key strategic focus for 2025, exemplifies this. It features new combo products such as hot baked bagel sandwiches, energizing lunch wraps, and loaded power bowls. These offerings are designed to reshape consumer perceptions of Tims as a lunch destination, creating a second high-demand meal daypart. Early data indicates a positive spillover effect, with increased lunchtime business contributing to higher engagement during breakfast and other dayparts. The "Light & Fit Lunch Box" series has notably contributed an average of 20-plus incremental daily transactions per store.

The impact of this food-focused strategy is evident in THCH's financial performance. Food revenue increased by 8.6% year-over-year in Q2 2025, reaching a historical high of 35.2% of total sales, up from 32.5% in Q2 2024. This demonstrates the model's effectiveness in driving top-line growth and enhancing store unit economics. The company's continuous product innovation, including 92 new products in 2024 (47 beverages, 45 food items) contributing approximately 25% of total net revenue, further supports this strategy. In Q2 2025 alone, 43 new items were introduced, diversifying the beverage portfolio with sparkling cold brews, a reintroduced water buffalo milk series, and non-coffee options, all leveraging existing infrastructure for efficient innovation.

Capital-Efficient Expansion Through Franchising

A pivotal shift in THCH's growth strategy is its robust sub-franchising model, launched in December 2023. This capital-efficient approach is crucial for accelerating market penetration, increasing store density in existing cities, and broadening outreach into new cities. The program has garnered significant market confidence, evidenced by over 8,100 applications received and more than 400 stores successfully converted by the end of Q2 2025.

The attractive unit economics for sub-franchisees, with an average payback period of two to three years, makes this model highly desirable. This strategy allows THCH to expand its footprint rapidly without significant capital outlay, a notable advantage compared to more capital-intensive, company-owned expansion models. The company aims to open around 200 new made-to-order stores in 2025 on a gross basis, with the majority being sub-franchisee locations. Management anticipates over 100 net openings in 2025 and projects 200 to 300 new openings annually in the next few years. By Q2 2025, THCH had expanded its store footprint into 98 cities, including new entries like Zibo, Lishei, Luan, and Jincheng. Revenues from the franchised and retail businesses surged by 50.7% year-over-year in Q2 2025, underscoring the success of this expansion strategy.

Financial Performance and Operational Efficiency

THCH's financial performance in Q2 2025 reflects continuous improvements and the resilience of its business model. The company returned to positive adjusted corporate EBITDA of RMB 2.2 million and reduced adjusted net losses by 16.2% during the quarter. This achievement follows a similar positive adjusted corporate EBITDA in Q2 2024, demonstrating a consistent trend towards profitability.

While company-owned and operated store revenues saw a 12.5% year-over-year decrease in Q2 2025, primarily due to the planned closure of underperforming stores and a 3.6% decrease in same-store sales growth, there are encouraging signs. Same-store transaction growth was positive at 3.4% in Q2 2025, with a positive trend observed since April. This suggests that strategic pruning of unprofitable locations and the focus on the MTO model are yielding results.

Operational efficiencies are a key driver of improved margins. In Q2 2025, food and packaging costs as a percentage of revenues from company-owned stores decreased by 0.8 percentage points year-over-year to 30.1%. Labor costs and other store operating expenses as a percentage of revenues also saw reductions of 1.0 and 0.4 percentage points, respectively. These cost optimization measures, coupled with supply chain refinements, have contributed to a 2.7 percentage point improvement in company-owned and operated store contribution margin and a 2.8 percentage point improvement in adjusted corporate EBITDA margin year-over-year in the first half of 2025.

However, certain costs have increased. Rental and property management fees as a percentage of revenues from company-owned stores rose by 0.9 percentage points to 20.2% in Q2 2025, mainly due to the decrease in same-store sales volume. Delivery costs as a percentage of revenues also increased by 1.8 percentage points to 11.8% due to a higher delivery revenue mix, although the number of delivery orders for company-owned stores increased by 10.2% year-over-year. Marketing expenses increased by 0.5 percentage points to approximately 4% of total revenues to support the crucial lunch box campaign.

Digital capabilities are a significant strength for THCH. Overall monthly average transacting customers reached 3.59 million in Q2 2025, a 14.3% increase from 3.14 million in Q2 2023. Digital orders accounted for an all-time high of 90.4% of total orders in Q2 2025, up from 86.5% in Q2 2024. The loyalty club membership has also seen remarkable growth, reaching 26.2 million by June 30, 2025, a 22.4% year-over-year increase. These figures highlight the company's successful digital engagement and its potential to drive future growth and customer retention.

Outlook and Risks

THCH's management is optimistic about the second half of 2025, viewing it as a "turning point" for both same-store sales and corporate EBITDA. They expect to achieve positive same-store sales in Q3 and the second half of the year. The company is committed to achieving full-year corporate EBITDA breakeven, driven by continued operational efficiencies, supply chain optimizations, and rigorous cost controls.

Liquidity remains a key focus. As of June 30, 2025, THCH held RMB 178.8 million (USD 24.9 million) in total cash and cash equivalents, time deposits, and restricted cash. The company is approaching operating cash flow self-sufficiency and does not expect to burn cash at the operating level. Management is actively working to secure additional bank loans onshore and other financing to potentially open more profitable company-owned stores, balancing expansion with financial prudence.

Key risks include the ongoing macroeconomic volatility in China and intense market competition. While the coffee market has seen aggressive price wars, THCH's differentiated "Coffee Plus Freshly Prepared Food" strategy aims to mitigate direct competition on price. Supply chain disruptions, such as geopolitical tensions or natural disasters, are also a concern, but THCH has diversified its sourcing, including from Yunnan provinces in China, to mitigate these risks. Management estimates that even if coffee bean costs remain at current levels, the overall impact on margins for the full year 2025 would be less than 90 basis points, due to the diverse menu and the relatively small proportion of coffee bean costs within total food and packaging expenses.

Conclusion

TH International Limited is executing a compelling transformation, leveraging its "Coffee Plus Freshly Prepared Food" model and a capital-efficient sub-franchising strategy to drive sustainable growth in China's dynamic market. The company's commitment to product innovation, particularly the successful "Light & Fit Lunch Box" platform, and its made-to-order operational technology, provides a distinct competitive advantage against rivals focused solely on price or traditional coffee offerings. This differentiation, coupled with robust digital engagement and a clear path to profitability through disciplined cost management and strategic expansion, positions THCH at an inflection point.

While macroeconomic uncertainties and intense competition persist, THCH's return to positive adjusted corporate EBITDA and its projected positive same-store sales in the latter half of 2025 underscore the resilience and strategic effectiveness of its approach. The rapid expansion through franchising, with attractive unit economics, provides a scalable and financially prudent pathway for future growth. For discerning investors, THCH presents an opportunity to participate in a company that is not merely growing its footprint but is strategically redefining its market position through a unique blend of fresh food innovation, operational efficiency, and a capital-light expansion model.