1H20 results inline. We believe store expansion plan may either speed up or at least maintain, as it should be positive on mid-long term growth. However, since the outlook in 2H20E remains doubtful, we suggest investors to stay aside in the meantime. Maintain HOLD and trimmed TP to HK$ 18.26, based on same 21x FY21E P/E, in-line with 5 years avg.
- 1H20 NP att. fell by 37%, dragged by greater promotion and operating deleverage. 1H20 sales increased by 2% YoY to HK$ 4,264mn while net profit fell by 37% to HK$150mn, which is 7% below our est. but inline with the previous profit warnings. Such weakness, in our view, was due to: 1) lower other income, 2) 0.6 ppt decrease in GP margin as more promotions were carried out to draw traffic and 3) operating deleverage implied by 0%/ -1% SSSG for CDC/ Super congee in HK, 4% decrease in fast casual dining revenue and 32% jump in admin costs (overall labour costs up 4%). On the other hand, SSSG for CDC China was healthy at 6% but segment EBIT also dropped by 6% because of RMB depreciation, reduced operating days by more stores renovation and rising raw material costs.
- Outlook for HK could be cloudy. While the social unrest in HK sustained into Oct-Nov 2019, operating deleverage will continue as we estimate SSSG for CDC/ Super congee/ Fast causal brands to be negative and only moderate cost control measures was imposed (no large scale rental benefits and staff layouts happened). We remain pessimistic for 2H20E and forecast 0% sales growth plus 19% drop in EBIT.
- Outlook for China is much brighter. Going forward in 2H20E, we believe SSSG could still be resilient at 4% (vs 6% in 1H20) and overall sales growth will improve to 8% (vs 4% in 1H20), thanks to: 1) less CNY depreciation, 2) accelerated store expansion since 2H19, and 3) increase in attractiveness as more stores are upgraded to the 6G format.
- Store expansion plan in FY20E-22E is likely to maintain. For China, CDC will continue to expand fast into the Greater Bay Area. We expect 11/ 12/ 13 net new stores in FY20E/ 21E/ 22E. For HK, adjustments in rental costs could be an opportunity for the Company and speed up in openings may even be a mid-long term positive. We expect 12/ 9/ 10 net new stores (including CDC and other fast casual brand like Mixian Sense, etc.) in FY20E/ 21E/ 22E.
- Maintain HOLD and cut TP to HK$ 18.26. We cut our EPS by 9%/ 4%/ 0% in FY20E/ 21E/ 22E, to factor in: 1) greater discounts and promotions, and 2) significant operating deleverage. We maintain HOLD and cut TP to HK$ 18.26 based on 21x FY3/21E, due to uncertain business outlook. The counter is trading at 23x FY3/21E with only 4% yield, which is not too attractive.
