Yum Cha 飲茶. September 11, 2013 CHART OF THE DAY CYCLICAL REBOUND FUELLED BY CREDIT TALKING POINTS. INDICES Closing DoD% Hang Seng Index 22,

Transcription

1 Yum Cha 飲茶 September 11, 2013 CHART OF THE DAY CYCLICAL REBOUND FUELLED BY CREDIT INDICES Closing DoD% M % M % Hang Seng Index HSCEI Shanghai COMP Shenzhen COMP Gold BDIY 22, , , , ,363.3 (1.7) 1, FAI % YoY VAI % YoY RETAIL SALES +13.4% Crude Oil, WTI(US$/BBL) (2.2) Source: WIND Crude Oil, BRENT(US$/BBL) HIBOR, 3-M SHIBOR, 3-M RMB/USD DIARY NOTES FOR THIS WEEK September 8 September 9 September 10 Source: Bloomberg (2.3) China trade balance (August) China CPI and PPI (August) 4.7 (0.0) 6.1 (0.0) China industrial output and fixed asset investment (August) Good news and bad news, as usual with data from China. It seems the only thing worse than confirmation of growth is evidence that credit is also growing to support the improving economic output. New RMB bank lending in August was slightly up on July, at RMB711.3bn (RMB699.9bn in July) but total social financing almost doubled (+94.1%) to RMB1.57trn in August from July s RMB808bn, and up 25% year-on-year (YoY). The financing growth fuelled a range of improved industry metrics, with fixed asset investment (FAI) up 20.3% YoY for the first eight months of 2013, industrial output (VAI, or value added of industry) rose by 10.4% YoY, the fastest growth since March At the consumption level retail sales accelerated by 13.4% YoY in August, from growth of 9.7%, reversing a trend of slowing consumer demand. Overall, the data for August are pointing to a rebound in overall growth for the economy in Q3, and also providing a base for continued improvement into The rebound is cyclical in nature, in that the policymakers have turned up the gas to avoid growth slipping below their target, and also to put a floor under increasingly negative expectations and falling consumer confidence seen up to June. Policy remains critical in China s economic and industry drivers, and Premier Li Keqiang said this week that the old model of high consumption and high investment needed to be replaced by a reform-based model for growth. For the time being, though, it is still FAI, VAI, retail sales and real estate providing the growth, fuelled by credit. TALKING POINTS Analyst: John Mulcahy, Managing Director SECURITIES INDUSTRY - According to press reports Shanghai and Shenzhen Stock Exchanges have sought opinions from securities companies to extend the maximum lending period (currently six months) for margin financing. If the maximum lending period is extended, it will enable securities companies to serve some investors better. It also confirms the direction of deregulation. FUTURE BRIGHT (0703.HK, HK$2.47, BUY) - With most of its restaurants located in Macau, we believe Future Bright is a derivative Macau play that will benefit from emerging mass market gaming. We expect its core EPS to record a CAGR of 16.4% during E. We initiate coverage with BUY rating and a target price of HK$3.00. This is equivalent to 0.9x PEG for 2014E/ core EPS E CAGR, translating to 15x 2014E PER. 1

2 COMPANY / INDUSTRY NEWS SECURITIES INDUSTRY POTENTIAL RELAXATION ON MARGIN FINANCING RESTRICTION Analyst: Wong Chi Man, CFA Maximum lending period may be extended. Following the expansion of eligible stocks for margin financing and securities lending (MFSL) on Monday, the authorities may consider relaxation on other restrictions. According to press reports, Shanghai and Shenzhen Stock Exchanges have sought opinions from securities companies to revise some of the rules. One of the possible revisions is to extend the maximum lending period for MFSL. More flexibility to meet investors needs. Currently investors using MFSL services are required to settle their positions within six months. It is not convenient for investors who would like to hold stocks for a longer period of time. If the maximum lending period is extended, it will enable securities companies to serve some investors better. Meanwhile, we believe the maximum lending period will not be removed due to risk management. The direction of deregulation remains unchanged. After Everbright Securities trading error scandal last month, investors have concerns about a slower progress of deregulation due to tighter regulatory control. However, the expanded stock list for MFSL and potential relaxation on maximum lending period show that the direction of deregulation is still unaltered, which should be good news to the securities industry. 2

3 September 11, 2013 Future Bright [0703.HK] A Derivative Play: Emerging with Macau Mass Gaming Leading F&B catering operator in Macau. Future Bright operated 37 restaurants (36 in Macau, one in Guangzhou) by the end of 1H13, and will add seven more in Macau in 2H13. Its restaurants are located in prime tourist spots in Macau such as casinos, and Future Bright s business model primarily focuses on non-repetitive demand from tourists (>60% from mainland China). Target customers are 1) time-conscious and 2) price-insensitive, which ensures better margins than its non-macau peers. Initiate coverage with BUY rating, with target price (TP) of HK$3.00. Equivalent to 0.9x PEG for 2014E/core EPS E CAGR, translating to 15x 2014E PER is undemanding, in our view, and well below the industry average. Macau F&B Sector Price Performance BUY Close: HK$2.47 (Sep 10, 2013) Target Price: HK$3.00 (+21%) Key drivers Near term: industrial catering. Future Bright will add two new canteens to its portfolio in 2H13E, adding to the first canteen opened in The focus on this segment is to build a track record to offer hotel staff catering services, which is more stable and profitable. Long term: restaurants inside new resorts. Macau casino operators will be opening new projects from mid Future Bright will gradually open new restaurants near casinos, and we expect its network to expand from 44 in 2013E to 67 by the end of 2016E. Core EPS CAGR of 16.4% during E. Our projections are based on the assumption that Future Bright will open 4 new restaurants in pipeline casinos. We see more upside revision in due course, if 1) it successfully signs contract with hotel operators for staff catering, and/or 2) more restaurants opening in each new casino E 2014E 2015E Turnover (HK$m) Net profit (HK$m) Core net profit (HK$m) Net margin (%) Core net margin (%) Basic/Diluted EPS (HK$) Core Basic/Diluted EPS (HK$) Core PER (x) Market Cap Shares Outstanding Auditor US$200m 629m BDO Free Float 55% 52W range 3M average daily T/O Major Shareholding Source: Company, Bloomberg Angela Han Lee (852) angelahanlee@chinastock.com.hk John Mulcahy (852) johnmul@chinastock.com.hk HK$ US$0.8m Mr. Chan Chak Mo (45%) Yield (%) PBR (x) Source: Company, CGIHK Research 3

4 Key Financials Profit & loss (HK$m) E 2014E 2015E Cash flow (HK$m) E 2014E 2015E Revenue Net Income COGS (162.1) (185.5) (208.3) (212.4) (234.2) Depreciation and Amort Gross Profit Change in Working Capital 4.6 (7.8) Direct Operating Expenses (185.5) (223.5) (256.5) (299.7) (350.6) Other Operating Cashflow 31.1 (45.9) Gross Operating Profit Operating Cashflow Other Revenue CAPEX (299.1) (16.5) (55.0) (50.0) (15.3) Other Gains and Losses Proceeds from Disposals Administrative Expenses (82.1) (89.0) (96.1) (99.0) (102.0) Other Investing Cashflow 68.8 (203.4) Operating Profit Investing Cashflow (223.5) (215.1) (51.0) (44.8) (10.6) Financial Costs (8.6) (9.2) (13.0) (13.9) (13.6) Net Proceeds from Borrow ings (12.1) Other Non-Operating Expenses (4.9) Share Issue Profit before Tax Dividend Paid (8.3) (24.9) (41.3) (26.3) (40.9) Tax Expenses (16.5) (36.3) (22.9) (21.3) (26.6) Other Financing Cashflow (27.2) (49.1) Profit after Tax Financing Cashflow (53.0) Minority interests (23.6) (25.5) (26.6) (29.8) (34.8) Foreign Exchange Rate Adj Net Profit Core Net Profit Net change in Cash Free Cashflow (145.8) Basic EPS (HK$) Diluted EPS (HK$) Core Basic EPS (HK$) Total DPS (HK$) Key ratios E 2014E 2015E Revenue Grow th 45.4% 18.2% 10.2% 10.7% 15.1% Balance sheet (HK$m) E 2014E 2015E Operating Profit Grow th 92.3% 118.8% -35.0% -6.1% 23.0% Cash and Cash Equivalents Net Profit Grow th 119.8% 170.4% -41.8% -10.5% 26.9% Inventories Core Net Profit Grow th 102.7% 18.2% 12.9% 23.3% 26.9% Trade and Other Receivables Gross Margin 70.3% 71.3% 70.8% 73.1% 74.2% Other Current Assets Operating Margin 26.2% 48.5% 28.6% 24.2% 25.9% Total Current Assets Net Margin 16.4% 37.5% 19.8% 16.0% 17.6% Property, Plant and Equipment Core Net Margin 14.0% 14.0% 14.4% 16.0% 17.6% Investment Properties Return on Asset 12.9% 20.8% 10.5% 8.5% 10.0% Goodw ill Return on Equity 30.2% 40.3% 20.1% 15.8% 17.4% Other Non-Current Assets Net Debt to Equity 31% 12% Net Cash Net Cash Net Cash Total Assets , , , ,603.3 Quick Ratio 1.1x 2.x 2.4x 2.9x 3.4x ST Borrow ings Current Ratio 1.4x 2.3x 2.6x 3.2x 3.7x Trade and Other Payables Interest Coverage Ratio 16.6x 33.9x 15.6x 13.7x 17.3x Other Current Liabilities Total Current Liabilities LT Borrow ings Non-interest Bearing Borrow ings Revenue Breakdown (HK$m) E 2014E 2015E Other Non-Current Liabilities Japanese Restaurants Total Liabilities Chinese Restaurants Common Stock - Par Value Western Restaurants Reserves Food Court Counters Shareholders Equity Industrial Catering Minority Interest Food Wholesale Total Equity & Liabilities , , , ,603.3 Other F&B Sales Rental Income Basic BPS (HK$) Total Source: Company, CGIHK Research 4

5 5-Forces Model: Catering Play in Unique Market-Macau Competitive risk should not be under-estimated, but Future Bright s deep Macau roots are a defence. Unique market offers strong bargaining power. As seen in the figure below, the existing competitive landscape does not provide significant selling point for Future Bright, which we will elaborate on later. However, the differentiator lies in the market: Macau is driven by the tourist industry. As a catering industry leader in Macau, Future Bright enjoys more bargaining power with suppliers and customers, ensuring its margin. This is also an advantage over peers operating in other markets, including China. Figure 4: 5-forces model New entrants Low capital requirement Strong reputation in Macau catering to open in casinos Economies of scale Suppliers Low supplier concentration High switching cost (raw materials from Japan) Volume business Existing rivalry Rely heavily on organic growth in near term Low product differentiation High concentration Customers Low price sensitivity (tourists) High concentration (crowded casinos) Substitutes Cha Chaan Teng and restaurants outside casinos No price competitiveness Source: CGIHK Research Supply chain risk is low, as suppliers and customers have lower bargaining power. Customer mix is favourable. 90% of its revenue is generated from tourists to Macau, most of whom are mainland Chinese. They are more time-conscious than price-sensitive, which means Future Bright has limited need for advertising, especially when restaurants in nearby casinos are full. Its diversified cuisine at different price levels meets different catering habits of tourists from various locations in China. As long as mainland Chinese travel to Macau for gaming and entertainment purposes, we believe Future Bright is a beneficiary, after casino operators. Market leader position provides bargaining power over suppliers. With a strong position in Japanese cuisine, Future Bright is Macau s largest consumer of raw food materials imported from Japan, and also a wholesaler with a c.20% gross operating margin. Future Bright buys other fresh raw materials in local wholesale markets, which have low supplier concentration. Future Bright s bulk purchasing gives it bargaining power over suppliers. 5

6 Rooms % % Nights Restaurants: Good Penetration into Casinos Occupancy rate is high at >80%. Relatively high room rate due to limited supply. Insufficient accommodation capacity implies long-term upside. Although visitor arrivals from China are strong, we believe growth is capped because of insufficient room supply. Hotel room capacity in Macau more than doubled over the past five years, but the occupancy rate is still running at over 80% and fully booked in peak seasons. Insufficient supply leads to relatively high room rate, partially discouraging long stays in Macau. Therefore, we see pent-up demand in Macau tourism. Figure 9: No. of hotel rooms and occupancy rate in Macau Figure 10: Length of stay of visitors vs. hotel occupancy rate in Macau 30, ,000 26, , ,000 20,000 18, ,000 14,000 12, ,000 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 No of rooms Hotel occupancy rate Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Length of stay of visitors (night) Hotel occupancy rate 30 Source: DSEC, CGIHK Research Source: DSEC, CGIHK Research Hotel room capacity in Macau is expected to double in the coming 5 years. More casinos translate into more restaurants for Future Bright. More upside from Cotai pipeline casinos. All six casino operators are building new resorts in Cotai, and the total new hotel rooms by 2018 will be 16,050, a 57% increase from now. Future Bright expects 30,000 new hotel rooms by then, including non-gaming resorts. We believe this enlarged capacity will drive more visitors to Macau and encourage longer stays, with visitors spending more on gaming and also on F&B services. We expect 3-4 Future Bright restaurants in each new resort. With its leading position we believe Future Bright has an edge to enter new pipeline casinos with the following mix: 1 Japanese restaurant, 1 Chinese/Western restaurant, 1 food-court counter and 1 coffee shop. This suggests big upside in its network expansion, and we assume this will increase from 44 in 2013E to 67 by the end of 2016E. Figure 11: Pipeline projects of casino operators in Cotai Opening time Project Rooms Budget Gaming capacity GFA (sqm) Land area (sqm) Mid 2015 GEG - Galaxy Macau Phase 2 1,350 HK$20bn 500 tables, 1,000 slots 450,000 n.a. Mid 2015 Melco Crown - Macau Studio City 1,600 US$2.9bn 500 tables, 1,500 slots 707, ,789 Late 2015 MGM China - Cotai project 1,600 US$2.6bn 500 tables, 2,500 slots 391,750 71, Wynn Macau - Cotai project 2,000 US$4.0bn 500 tables, 1,000 slots 636, , Sands China - Parcel 3 3,300 US$2.7bn To be confirmed n.a. 60, SJM - Cotai project 2,000 HK$25bn 700 tables, 1,000 slots 521,435 70, GEG - Galaxy Macau Phase 3 & 4 4,200 HK$48-60bn 1,000 tables, 3,000 slots 1,280,000 n.a. Source: Company, CGIHK Research 6

7 Industrial Catering: Green Field with Low Competition First student/staff canteen in Two more in 2H13. One more in Q1 2014E. Hotels will outsource staff catering if standards met; Future Bright has track record among Macau caterers. Hotel staff catering offers better margin, but...still lower than restaurant business. Improvement in its margin from...integration of upstream supply chain by central kitchen. No new casinos in near term, and Future Bright seeks opportunity in canteens. Business in casinos is ideal, with stable tourist flow and good margins. However, with no casino openings until 2015E, we believe the main expansion driver is the industrial catering business. As a F&B catering leader in Macau, Future Bright began operating a student/staff canteen at the Macau University of Science and Technology. With its successful execution experience, the company is opening two new canteens in 2H13E: at the University of Macau s new Hengqin campus and at the International School of Macau respectively. The company is seeking other opportunities, and it will open two student canteens in the Hengqin campus dormitory. More opportunities in hotel staff canteens. Apart from student/staff canteens, we believe there are opportunities from casinos contracts to prepare staff meals. Casinos are providing their own employee catering, but are willing to outsource to third parties as long as they meet standards. It is still a green market, in our view, and Future Bright will be the first to get the business based on 1) its existing long-term relationship with casino operators and 2) market leadership with good meal standards in Macau. Advantages of hotel staff catering over student canteens: 1) meal standard is higher with a budget of HK$30-35 per meal, and higher margins; 2) more earnings visibility: casinos pay fixed amounts for staff meals, while students can choose not to eat at canteens; and 3) no seasonality: hotel employees do not have summer/winter vacation. Assuming it provides staff meals to a casino with 6,000 employees at 3xHK$30 per day, Future Bright would generate HK$197.1m annual turnover and HK$39.4m profit at an assumed gross operating margin of 20%. (Sands China paid HK$329.6m for staff meals in 2012). Volume business; but lower margin. Industrial catering has lower margins than the restaurant businesses. Gross operating margin for its canteen operation in 1H13 was 17%, compared with 38% in Japanese restaurants and 30% in Chinese restaurants. More expansion in industrial catering would increase overall margin dilution in the near term. We believe industrial catering margins can improve by integrating the upstream supply chain, and structural improvement will come when Future Bright adds restaurants in new casinos in longer term. Economies of scale central kitchen. Well-concentrated network is easier to achieve cost synergy than geographically dispersed network. Future Bright is integrating its food preparation work. 1) A HK$70m central kitchen will be completed in 2014E, to carry out food material sorting, cleaning and chopping for some restaurants and the industrial catering business. The plant has obtained approval in principle. After the final layout plan is approved, Future Bright expects construction work to take 12 months; 2) another central kitchen and logistics centre is planned, and Future Bright has rented usable floor area of 12,274sqft for that project. 7

8 Valuation Strong bargaining power is reflected in better margins than industry peers. Trading at well below the industry average. Leading profitability compared with mainland peers. As in the operational matrix chart, Future Bright is delivering much better margins than its peers. After excluding one-off gains, core net margin is still at 14%, higher than Tsui Wah and Xiao Nan Guo. Despite its prudent execution in the Macau market, we believe its discounted valuation next to peers is due to 1) lack of confidence from its unsuccessful carnival amusement park business by the previous management team, and 2) low liquidity. However, we believe restructuring by the current major shareholder has been successful in delivering strong performance in a totally different business and in a new market, and liquidity was enhanced recently with the gradual improvement in its reputation. Undervalued: buy to run on the casino openings from 2015E. Future Bright is currently trading at a PER of 12.3x on our 2014E forecast, lower than the industry average of 23.2x. We believe the current industry-low valuation is not counting: 1) market leader in Macau with much stronger bargaining power than its peers, 2) a good proxy for the booming mass market gaming in Macau. Initiate coverage with BUY rating, with TP of HK$3.00. Our target price is equivalent to 0.9x PEG for 2014E/core EPS E CAGR. It translates into 15x 2014E PER, still well below the industry average. We also cross-checked with DCF model (terminal growth of 2% during 2018E-21E and 1% afterwards, WACC of 10.4%) suggesting HK$4.50 per share. Therefore, we believe our TP is undemanding and the current share price provides good long-term upside for investors looking for non-gaming play on the Macau gaming sector. Catalysts. 1) Signing contracts with casinos for staff catering, 2) Quicker than expected breakeven of food souvenir business, 3) Signing contract with casinos to open more than four restaurants in each property. Risks. 1) Change in China s visa policy, impacting on visitor arrivals to Macau, 2) Insufficient labour supply from outside Macau, resulting in the labour cost hike, 3) Conflict between China and Japan, impacting on turnover in Japanese cuisine restaurants, 4) Not able to open restaurant in new casino resorts. 8

9 Comparable Valuation Table Company Ticker Price 52-Wk Mkt Cap 3m Avg PER Dividends Yield Price Range Turnover E 2014E E 2014E (HK$) (HK$) (US$m) (US$m) (x) (x) (x) (%) (%) (%) FUTURE BRIGHT^ 703 HK / TSUI WAH* 1314 HK / TAO HEUNG 573 HK / XIAO NAN GUO 3666 HK / TANG PALACE 1181 HK / n.a. n.a. 7.2 n.a. n.a. AJISEN CHINA 538 HK / 9 1, CAFE DE CORAL* 341 HK / , FAIRWOOD* 52 HK / Simple Avg Mkt Cap Avg Company Ticker 2014E PEG PBR ROE Net Debt/Equity (3-year EPS CAGR) E 2014E E 2014E E 2014E (x) (x) (x) (%) (%) (%) (%) (%) (%) FUTURE BRIGHT 703 HK Net Cash Net Cash TSUI WAH* 1314 HK Net Cash Net Cash Net Cash TAO HEUNG 573 HK Net Cash Net Cash Net Cash XIAO NAN GUO 3666 HK Net Cash TANG PALACE 1181 HK n.a. 1.2 n.a. n.a n.a. n.a. Net Cash Net Cash Net Cash AJISEN CHINA 538 HK Net Cash Net Cash Net Cash CAFE DE CORAL* 341 HK Net Cash Net Cash Net Cash FAIRWOOD* 52 HK Net Cash Net Cash Net Cash Simple Avg Mkt Cap Avg Source: Company, Bloomberg Estimates, CGIHK Research Updated as of September 10, 2013 * Latest financial year end in March ^ Core EPS Operating Matrix FY2012 Figures FUTURE BRIGHT TSUI WAH* TAO HEUNG XIAO NAN GUO TANG PALACE AJISEN CHINA^ CAFE DE CORAL* FAIRWOOD* 703 HK 1314 HK 573 HK 3666 HK 1181 HK 538 HK 341 HK 52 HK (HK$m) (HK$m) (HK$m) (RMBm) (RMBm) (HK$m) (HK$m) (HK$m) Revenue , , , , , ,929.2 Gross profit , Operating profit Net profit Gross margin 71.3% 69.9% 15.6% 68.1% 61.2% 70.4% 14.2% 13.7% Operating margin 22.9% excluding other gains 13.1% 9.4% 11.9% 9.1% 7.8% 10.1% 8.6% Net margin 37.5% 12.0% 7.4% 8.9% 6.6% 5.1% 8.5% 7.2% Revenue breakdown Restaurant operations 98% 98% 94% 97% 100% 97% 98% 100% Others 2% 2% 6% 3% 0% 3% 2% 0% Revenue breakdown Mainland 2% 19% 26% 85% 100% 86% 18% 10% Hong Kong 0% 80% 74% 15% 0% 11% 79% 90% Macau 98% 1% 0% 0% 0% 0% 0% 0% Others 0% 0% 0% 0% 0% 0% 3% 0% No. of restaurants (Latest) Mainland Hong Kong Macau Others Source: Company data, CGIHK Research * Financial year end in March, ^ Geographical revenue breakdown refers to restaurant operations only. 9

10 DISCLAIMER For private perusal only. This report (including any information attached) is issued by China Galaxy International Securities (Hong Kong) Co., Limited, one of the subsidiaries of the China Galaxy International Financial Holdings Limited, to individual addressees whether they are professional, institutional clients or otherwise, in good faith from sources believed to be reliable, but no representation or warranty (expressly or implied) is made as to their accuracy, correctness and/or completeness. Where any part of the information, opinions or estimates contained herein reflects the personal views and opinions of the analyst who prepared this report, such views and opinions may not correspond to the published view of China Galaxy International Financial Holdings Limited and any of its subsidiaries. This report shall not be construed as an offer, invitation or solicitation to buy or sell any securities of the company or companies referred to herein. All opinions and estimates reflect the judgment of the analyst on the date of this report and are subject to change without notice. China Galaxy International Financial Holdings and its group companies may have business relationships with companies covered in research reports, including investment banking and related services, e.g. placing agent, lead manager, sponsor, underwriter or proprietary investor. Please take note that member companies of China Galaxy International Financial Holdings Limited (including but not limited to China Galaxy International Securities (Hong Kong) Co., Ltd) and/or their directors, officers, agents and employees ( the Relevant Parties ) may have an interest in securities of the company or companies referred to in this report. The Relevant Parties hereby disclaim any of their liabilities arising from the inaccuracy, incorrectness and incompleteness of this report and its attachment/s and/or any action or omission made in reliance thereof. Accordingly, this report must be read in conjunction with this disclaimer. COPYRIGHT RESERVED China Galaxy International Securities (Hong Kong) Co. Limited, CE No.AXM459, Room , 35/F, Cosco Tower, Grand Millennium Plaza, 183 Queen s Road Central, Sheung Wan, Hong Kong. General line: CONTACT US John Mulcahy Wong Chi Man, CFA Frank Miao, CFA Wayne Fung, CFA Angela Han Lee Vicky Lai johnmul@chinastock.com.hk cmwong@chinastock.com.hk frankmiao@chinastock.com.hk waynefung@chinastock.com.hk angelahanlee@chinastock.com.hk vickylai@chinastock.com.hk 10