We expect China catering sector to have a more thorough recovery and leaders will benefit even more thanks to faster expansion in 2021E. In the long run, China market is still highly fragmented vs US, and hence we reiterate our BUY call on leaders like Jiumaojiu, Haidilao, Yum China and Cafe de Coral. We also initiate BUY on Yihai, thanks to its efficient management and product innovations. Our top pick is Jiumaojiu due to its growth potential and attractive valuation.
- Cautiously optimistic on FY21E. We expect catering sales growth to rebound to 18.2% YoY in 2021E vs retail sales of 13%, after a 16.6% drop in 2020 (the worst sub-segment in the entire consumer space, vs retail sales decline of 3.9%), thanks to: 1) less traffic restrictions amid fewer COVID-19 cases, 2) catching up to retail sales growth as catering sales used to outperform during 2015-2019, 3) reasonably strong growth momentum in CNY (29% YoY vs 2020 for key enterprises, according to MOC), 4) normalization of consumer behavior with recovery of family, business and travelling demand, and 5) positive guidance by leading brands (e.g. Starbucks, McDonald’s).
- Industry consolidation speeded up and there are still plenty of room. We expect catering sales for top-10 listed leaders to drop by only 4.8% YoY in 2020E, far better than industry sales decline of 16.6%, indicating a significant consolidation. We expect this trend to stay in 2021E, due to faster expansion from these leaders (many quality rental contracts were signed in 2020). In the long run, room for growth is still huge, as combined market shares of these leaders was only 2.1% in 2019, way lower than the 12%/ 45% for top-10 full services/ limited services restaurant groups in US, according to Euromonitor. For a single brand in each sub-segment, we estimate that HDL/ KFC/ Tai Er currently account for 5%/ 5%/ 7% market shares in hotpot/ QSR/ sauerkraut fish industry in China, which are much lower than 5-15%/ 16-47% for full services/ limited services restaurant brands in US in 2019.
- Which brands do we prefer? We prefer brands with 1) faster recovery rate, 2) faster expansion plan, and 3) greater sales mix from tier 1-2 cities and from delivery. All in all, we maintain Outperform rating on China catering sector and prefer Jiumaojiu (9922 HK) > Haidilao (6862 HK) > Yum China (9987 HK) > CDC (341 HK). We also initiated BUY on Yihai (1579 HK). We researched on the potential market size for each brand and estimate a long run restaurant numbers to be ~2,500/ 4,500/ 15,000/ 7,300/ 7,000/ 2,600 for Tai Er/ HDL/ KFC/ Pizza Hut/ XBXB/ Cou Cou by FY25E, where they had only ~9%/ 27%/ 48%/ 32%/ 15%/ 6% of that in FY20E, based on population density.
- Southbound investment is a double-edged sword, but should be a positive catalyst in the long run. Southbound investors tend to have a higher risk appetite and valuation (evidenced by A/H shares premium). Hence if these catering leaders continue to outperform, southbound stock connect ownership should keep rising in long run despite potential short-term reversal.
