More details of Anti-epidemic Fund was released by HK government on 12 May 2020, which includes a massive subsidy for the catering sector. Together with the projected traffic recovery, we have now turned more positive. We adjusted our EPS by -63%/ +15%/ -1% in FY20E/ 21E/ 22E and upgrade to BUY and lifted TP to HK$ 15.98, based on 19x FY3/21E P/E (unchanged), vs its 5 years avg. of 21x.
- Announced further details about Anti-epidemic Fund. HK government issued 3 rounds of measures totaling HK$ 287.5bn and we believe CDC is eligible to two of them (but can only pick one): 1) Employment Support Scheme (funding commitments up to HK$ 81bn) and 2) Catering Business (Social Distancing) Subsidy Scheme (funding commitments up to HK$ 9.5bn). To err on the side of caution, we only factored in HK$ 200mn in our model for FY21E.
1) Employment Support Scheme. All employers who have been making MPF contributions to employees are eligible and wage subsidy is based on 50% of monthly salary (capped at HK$ 18,000) for 6 months, as long as 1) there are no redundancy of staff and 2) not less than 50% of subsides are used for salaries. According to our estimates, 6,000/ 1,400 full/ part-time staff in HK, with avg. salary of HK$ 15,620/ 5,250 are entitled to the subsidies, totaling RMB 300mn in FY3/21E.
2) Catering Business (Social Distancing) Subsidy Scheme. Each premise can receive subsidies up to HK$ 250k-2,200k, depending on its licensed area per premise, as long as: 1) there are no layoffs and 2) not less than 80% of subsidies are used for salaries. Based on 351 stores in Hong Kong for FY3/21E, we estimate potential subsidies of HK$ 350mn (assumed avg. area per premise at ~350 sq m).
- HK catering sales dropped by 33% YoY in 1Q20, but we expect bottom out and gradual recovery. Catering sales in HK were hit hard by COVID-19, down by 33% YoY in 1Q20 (-11%/ -47%/ -42% in Jan/ Feb/ Mar 2020), even worse than -14% YoY in 4Q19 but slightly better than CMBIS est. of -43% YoY. By type, sales for Chinese/ Non-Chinese/ Fast food restaurants were down by 40%/ 36%/ 17% YoY. After a slightly better Mar vs Feb, we now expect a gradual improvement, boosted by relaxation of the social distancing order on 21 May 2020 and zero local infections for over 2 weeks.
- Upgrade to BUY and lifted TP to HK$ 18.31. We adjusted our EPS by -63%/ +15%/ -1% in FY20E/ 21E/ 22E, to factor in profit warning and potential subsidies. We upgrade to BUY and lifted TP to HK$ 18.31 based on 19x FY3/21E (unchanged). Since the worst will be over in Apr-Jun 2020, in our view, its current valuation of 17x FY3/21E is attractive, vs 5 years avg. of 21x.
