Maintain BUY and raised SOTP-based TP to HK$ 20.88, based on 15x FY21E P/E for Jiu Mao Jiu (“JMJ”) and 60x FY21E P/E for Tai Er (“TE”) (up from 15x and 50x). The losses were short lived as TE and JMJ have already returned to profit since Apr and May 2020. We are now more confident on the growth onwards. The current valuation of 43x FY21E P/E (vs industry average at 30x) in our view, is still attractive, given a 62% FY20-22E EPS CAGR.
- 1H20 results slight beat. Jiumaojiu reported net losses of RMB 89mn, beating the “no more than RMB 120mn losses” from its profit warning, thanks to better-than-expected tax credit of RMB 40mn. Noted the RMB 28mn impairment losses was roughly offset by the other income of RMB 27mn.
- Tai Er’s impressive run of recovery. Tai Er’s superior popularity was evidenced by its better-than-industry recovery. According to mgmt., seat turnover had recovered to 91% in Apr 2020 to 108% in Jul 2020 (vs ~4.8x in Dec 2019), helped by the delivery orders, ~26% and 14% of total sales in Apr and Jul 2020. Also, the fading out of delivery would be a positive for its overall GP margin in 2H20E.Traffic further improved in Aug 2020 vs Jul 2020.
- Store expansion plan on track. Even with the COVID-19 disruption, Tai Er still added 35 new stores in 1H20, at a similar pace vs 1H19. Although the Beijing expansion plan is likely to be delayed, we are still confident for Tai Er to achieve its 80 new stores target in FY20E, as it has a very short ramp up time (1-1.5 months from contract signing to opening) and receives various shopping mall invitations (can pick only those with better rent terms and locations).
- Jiu Mao Jiu is also recovering healthily. Jiu Mao Jiu is obviously lagging behind the industry, but it is still recovering. Its seat turnover improved from 41% in Apr 2020 to 86% in Jul 2020. Thanks to the terminations of many non-performing stores, JMJ has already returned to profit since May 2020.
- Under tight cost control, margins can shoot up when demand returns. The Company has turned on its cost conscious mode, where falling number of staff vs end of FY19 is an example. We believe when the demand normalizes, profits can resume in a robust manner and hence OP margin should trend up from -5.9% in 1H20 to 9.9% in 2H20E and 19.3% in FY21E.
- Maintain BUY and adjusted TP to HK$ 20.88. We adjust FY20E/ 21E/ 22E EPS estimates by -226%/ +29%/ +2%, to factor in: 1) strong SSSG in Aug 2020 and 2) equity raising back in Jul 2020. We maintain BUY and lifted TP to HK$ 20.88, based on 15x/ 60x FY21E P/E for Jiu Mao Jiu/ Tai Er (up from15x/ 50x). Valuation is not demanding at 43x FY21E P/E given a turnaround from now on with a 62% FY20-22E EPS CAGR.
