We believe 1) traffic limitation imposed by HK government, 2) significant operating deleverage and 3) potential cut in dividends remain the major overhangs. However, potential staff cost subsidies and strong recovery in China will be major catalysts. All in all, we maintain HOLD and trimmed TP to HK$ 15.98, based on 19x FY3/21E P/E (down from 21x), vs its 5 years avg. of 21x.
- We forecast a 16%/ 5% YoY drop in HK sales in 2H20E/ 1H21E due to: 1) HK social event in 2019, 2) traffic curbing measures to counter COVID-19 and 3) drop in institutional catering sales because of school and university suspensions. We expect sales growth to resume at 23% in 2H21E due to: 1) end of epidemic and 2) HK government stimulus to take effect.
- Significant margin pressure in 2H20E and 1H21E. As more promotion were introduced in 2H20E/ 1H21E, GP margin will be under pressure. Also, operating deleverage will be huge since most of the rental costs are fixed and staffing policies are rather prudent (we expect no major layoffs but only reduction of average working hours). There also exists potential downside risk like further extension of traffic limitation by government.
- But there is also a significant upside risk in 2H21E. If the labour cost subsidies can be finalized, it would be significant due to CDC’s labour intensive nature (~7,500/ ~6,500 full-time/ part time staff in Hong Kong). The subsidies can be as high as ~HK$ 400mn if 50% of the staffs are entitled to the policy, but we only factored ~HK$100mn in FY21E due to uncertainty.
- We forecast 20% YoY sales decline in China sales in 2H20E due to virus outbreak and growth to resume at 12%/ 27% in 1H21E/ 2H21E, thanks to: 1) consumption boost by vast amount of vouchers given by Chinese local governments and 2) strong ramp up of delivery business enabled by Meituan.
- Dividend policy should likely be changed. We believe it is less likely for CDC to maintain its FY20E dividend policy, because: 1) less operating cash flow can be expected (net profit to be revised down by 48%) and 2) limited cash balance (~HK$ 552mn reported in 1H20 report), noted that HK$ 492mn was paid as dividend in FY19. We only expect a 30% payout ratio and 1% FY20E yield now.
- Maintain HOLD and cut TP to HK$ 15.98. We cut our EPS by 48%/ 3%/ 3% in FY20E/ 21E/ 22E, to factor in the impacts by virus outbreak and meaningful operating deleverage (high fixed staffs and rental costs). We maintain HOLD and cut TP to HK$ 15.98 based on 19x FY3/21E (down from 21x). The counter is trading at 17x FY3/21E and 1% FY20E yield, not too attractive.
