Maintain BUY and raised TP to HK$ 39.83, based on 45x FY21E P/E, (rolled over from 47x FY20E P/E). We believe HDL’s fundamental remains intact and one-off impact by coronavirus (22% FY20E NP cut) had been fairly digested by 16% share price correction (from peak in Jan to trough in Feb 2020).
- Still a BUY and why? 1) Short-lived impact and 2) long term positives driven by consolidation. HDL was certainty impacted by the outbreak of coronavirus in China, and sizable losses was generated since its suspension of restaurant operation on 26 Jan 2020. However, we believe the Company’s competitiveness should not be affected and growth shall resume soon once the situation is settled. On the positive side, HDL should benefit from industry consolidation, as: 1) consumers’ awareness of hygiene increases, 2) smaller players exit or slow down expansion due to tightening cash flow.
- According to our scenario analysis, 15/ 30/ 60/ 90 days of restaurant closures would result in 11%/ 22%/ 41%/ 57% cut in FY20E net profit. Temporarily closing all stores in mainland China to guarantee the safety of all its staffs and customers, is a responsible decision in our view. However, revenue impact and increased associated fixed costs would lead to severe operating deleverage. Based on our analysis, daily sales could be ~RMB 97mn a day in 1Q20E, and 15/ 30/ 60/ 90 days of suspension would imply 4%/ 8%/ 12%/ 15% cut in FY20E sales. On the cost side, we estimate the fixed/ variable costs to account for 48%/ 52% of FY20E opex, with reference that 55%/ 60%/ 90% of staff/ rental/ D&A costs are fixed and 95%/ 80% of utilities/ travelling & other expenses are variable. Hence, 15/ 30/ 60/ 90 days of store suspension could translate to 11%/ 22%/ 41%/ 57% cut in FY20E net profit. We have factored in a 30-day case in our model.
- Potential CNY inventory write-off may partly be offset by cost savings from store opening delay. On one hand, there could be some raw materials prepared for CNY season in HDL restaurants, implying 2-3 inventory days (CMBI est. ~RMB 100mn) to be written off, but this loss may be partially offset by delay of store openings in FY20E (CMBI est. ~RMB 10-15mn may be saved if opening of 50 stores are delayed by 2-3 months in FY20E).
- Maintain BUY and raised TP to HK$ 39.83. We maintain BUY and raised TP to HK$ 39.83, based on 45x FY21E P/E (rolled over from 47x FY20E P/E), implying a 2.4x 3 years PEG. Current valuation is not demanding, at 37x FY21E P/E or 1.7x PEG (vs int’l catering/ consumer staple peers median of 3.0x/ 2.6x). We revised down our FY19E/ 20E/ 21E EPS by 6.1%/ 26.8%/ 17.3%, to factor in 1) lower table turnover as density of stores increases and 2) losses due to store closures during this virus season.
