Maintain BUY and raised SOTP-based TP to HK$ 16.10, based on 15x FY21E P/E for Jiu Mao Jiu and 50x FY21E P/E for Tai Er (up from 10x and 35x FY21E P/E respectively, we believe better than peers traffic could justify its ability to gain market shares and a higher leader multiple). 1) Smaller burden from Jiu Mao Jiu, 2) robust momentum for Tai Er and 3) better rental terms, in our view, could all fuel better growth onwards. We think its current valuation of 41x FY21E P/E (vs industry average at 31x) is still attractive, given a 62% FY20-22E EPS CAGR.
- We expect 23% sales reduction and RMB 116mn losses in 1H20E. Referencing to the profit warning, we estimate net losses of RMB 116mn and 23% YoY sales decline (Tai Er +25%/ Jiu Mao Jiu -61%) in 1H20E. Such result included: 1) operating deleverage from store suspension in 1Q20, 2) Jiu Mao Jiu’s weak recovery, 3) one-off expenses from Jiu Mao Jiu’s store closures and 4) margin dilution from greater Tai Er’s delivery sales.
- Tai Er’s recovery remained industry leading, with the help of delivery sales. Tai Er’s 25% sales growth in 1H20E is far better than industry (China catering sales fell by 37% in 5M20, by NBS). Its recovery rate in 2Q, in our view, was impressive, where table turn already reached ~5x in Jun 2020 (~107% of FY19 level) and dine-in and delivery accounted for ~88%/ 19%. Recovery rate for YUMC/ HDL/ XBXB were ~95%/ 80%/ 70% in Jun 2020.
- Expect Tai Er opened ~36 stores in 1H20E, on track to fulfill its FY20E target. Despite disruptions caused by COVID-19, JMJ still managed to open 36 new Tai Er stores (CMBI est.) in 1H20E, registered a 78% YoY growth. We believe FY20E target of 80 is achievable, even with a second outbreak in Beijing, where planned openings in Beijing could be shifted to other regions. Also, we think JMJ is a major beneficiary from industry consolidation, by signing more new store contracts with better rental terms and locations.
- Expect Jiu Mao Jiu to close ~39 stores in 1H20E. Jiu Mao Jiu is under pressure in 1H20E, because of: 1) ASP drop as it had removed tea charge per person and 2) its weak traffic, where table turn only recovered to 1.6x (~70% recovery rate) in Jun 2020. We estimate closure of 39 Jiu Mao Jiu stores in 1H20E (21 were in Beijing, Tianjin and Wuhan), with a one-off expense of ~RMB 20mn. Whether to re-open more stores would subject to performance of the new format stores, which is likely to be delayed to FY21E.
- Maintain BUY and adjusted TP to HK$ 16.10. We cut FY20E/ 21E/ 22E EPS estimates by 88%/ 26%/ 17%, to factor in the disruptions by COVID-19. We maintain BUY and lifted TP to HK$ 16.10, based on 15x/ 50x FY21E P/E for Jiu Mao Jiu/ Tai Er (up from 10x/ 35x). Valuation is still undemanding at 41x FY21E P/E given a turnaround from now on with a 62% FY20-22E EPS CAGR.
