Café de Coral (LHS) China / Hong Kong Company Guide

Transcription

1 China / Hong Kong Company Guide Version 2 Bloomberg: 341 HK EQUITY Reuters: 341.HK Refer to important disclosures at the end of this report DBS Group Research. Equity 7 July 2016 HOLD Last Traded Price: HK$25.00 (HSI : 20,495) Price Target: HK$24.50 (-2% downside) Potential Catalyst: Stronger than expected topline sales growth Where we differ: n.m Analyst Alice HUI CFA, alice_hui@hk.dbsvickers.com Alison FOK alison_fok@hk.dbsvickers.com What s New YTD sales performance on track with improvement noted in China Expect earnings growth to resume in FY17 Fair valuation; maintain HOLD with unchanged TP of HK$24.5 Price Relative HK$ Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 (LHS) Relative HSI INDEX (RHS) Relative Index Forecasts and Valuation FY Mar (HK$ m) 2015A 2016A 2017F 2018F Turnover 7,356 7,567 7,942 8,399 EBITDA ,023 1,139 Pre-tax Profit Net Profit EPS (HK$) EPS Gth (%) 0.8 (12.5) Diluted EPS (HK$) DPS (HK$) BV Per Share (HK$) PE (X) P/Cash Flow (X) P/Free CF (X) EV/EBITDA (X) Net Div Yield (%) P/Book Value (X) Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) Earnings Rev (%): Nil Nil Consensus EPS (HK$) Other Broker Recs: B: 1 S: 0 H: 2 Source of all data: Company, DBSV, Thomson Reuters, HKEX Moving forward Helped by resilience in fast food business. Despite market volatilities in FY16, (CdC) managed to see SSSG stay solid at 4%. We believe HK fast food business should remain resilient, which together with its growing exposure to casual dining segment, should drive earnings growth moving ahead. After the Company s efforts in consolidating its China business in the past couple of years, with lower base, we expect performance to improve in FY17. All-in, we expect earnings growth to resume to 10% in FY17. Yet current valuation should have priced in its solid fundamentals, hence our HOLD rating on the counter. Strong control in costs. On a positive note, we expect the cost environment to ease. With a general consolidation in retail sector, rental pressure is likely to alleviate this year in Hong Kong. Staff costs will rise steadily, in light of progressive raises on minimum wages, which should be partly offset by improving efficiency and positive SSSG. As for China operations, sales performance has stabilized in recent months with margins expected to benefit from the VAT reform. Overall, we expect a mild improvement in margins for FY3/17. Solid store opening pipeline. In FY3/17, CdC plans a gross opening of stores in Hong Kong, predominantly focusing on QSR outlets, while China aims to open 10 outlets, with focus mainly on repositioning its stores to better locations. The company has budgeted a slightly higher capex of HK$500m for FY17. Valuation: CdC remains a defensive play, with potential for higher payout supported by strong cash flow (net cash of HK$1.2bn). While risk of de-rating is relatively low, room for further re-rating is limited at >25x FY17F PE. Maintain HOLD with TP at HK$24.5, based on 25x 12- month PE. Key Risks to Our View: Significant economic downturn, cost inflationary pressure or food safety issues. At A Glance Issued Capital (m shrs) 584 Mkt. Cap (HK$m/US$m) 14,592 / 1,881 Major Shareholders Lo's Family & Associates (%) 37.3 Matthews Int'l Capital Mgmt (%) 9.0 Arisaig Partners (%) 5.0 Free Float (%) m Avg. Daily Val. (US$m) 1.3 ICB Industry : Consumer Services / Travel & Leisure sa- PY

2 CRITICAL DATA POINTS TO WATCH Earnings Drivers: A dominant player with room to grow market share. Being one of the leading fast food players in Hong Kong, we expect to sustain steady growth for its fast food business, driven by (i) organic industry growth, with HK fast food market posting c.6% p.a. in the past five years; and (ii) solid store opening plans Food cost as % of sales Multi-brand strategy provides potential new drivers in the long run. While HK fast food is expected to remain the core contributor representing more than 50% of CdC s revenue, the company s multi-brand strategy should help to enrich its product offerings and provide better diversification in the long run. With more than 15 brands within its portfolio, the company has been introducing new casual restaurant concepts to freshen up its image recently, including the Korean casual dining brand The Cup as well as Japanese brand Dondonya Shokudo ( 丼丼亭 ). These brands, given initial start-up costs, will likely dilute earnings in the near term, but could potentially become new growth drivers in the longer run. Strong cost competitiveness. has much stronger cost advantages over its smaller peers, given its larger size hence enabling better economies of scale through bulk purchasing as well as central processing ability. In terms of rental cost, it has also been well managed at a steady c.11% level in the past few years, as a big chunk of its stores are located in non-prime locations (such as residential estates) while the company also owns a portion of its own stores. Going forward, we expect cost environment to remain manageable, with room for margin enhancement as efficiency improves. Staff cost as % of sales Rental cost as % of sales China business needs more time. Representing 15-16% of total sales, profit contribution from China business remains small with performance lagging behind that in HK. We expect the soft China s macro environment would likely overshadow its China sales in the near term, with store opening pace likely to remain cautious. Yet there should be room for margin improvement, especially with the VAT reform which could add 2-3ppt benefits to margin. Page 2

3 Balance Sheet: is in a strong net cash position (HK$1.2 bn as of Mar-16). With solid operating cash flow at HK$800m p.a., the company has more than sufficient to finance its capex (c.hk$500m) while maintaining decent payout. Share Price Drivers: Stronger SSSG momentum. While fast food market is generally more resilient against any economic downturn, it is not totally immune to such. SSSG has slowed in FY16 but should macro environment improves, growth momentum could resume and hence beneficial to earnings. Leverage & Asset Turnover (x) Gross Debt to Equity (LHS) Asset Turnover (RHS) HK$m Capital Expenditure Key Risks: Significant economic downturn. A slowdown in overall eatingout market would negatively affect sales momentum, and hence earnings Cost inflationary pressure. Food, staff and rental costs accounted for 31%, 28% and 11% of its FY3/15 sales respectively. While CdC has shown its strong cost management ability, any sharp fluctuation in such costs will have an adverse impact on profitability. Food safety issues. Food retailers are highly sensitive to food safety issues which could potentially affect their brand reputation and hence sales. Company Background: Established in 1968, Cafe de Coral is the largest Chinese fast food operator in Hong Kong. The company was publicly listed on the HK Stock Exchange in Apart from running fast food restaurants under the Cafe de Coral brand name, the company has been diversifying its brand portfolio in both quickservice restaurants and specialty restaurants with brands including Super Super Congee & Noodles, Oliver s Super Sandwiches, Espressamente Illy, Mixian Sense, Spaghetti House, 360 Stage and PizzaStage. The company also engages in institutional caterings under Asia Pacific Catering. Capital Expenditure (-) ROE 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% PB Band (x) Forward PE Band +2sd: 32.1x +1sd: 28.6x Avg: 25x 1sd: 21.5x 2sd: 17.9x (x) Jul-12 Jul-13 Jul-14 Jul-15 Jul sd: 4.63x +1sd: 4.32x Avg: 4x 1sd: 3.68x 2sd: 3.37x 2.9 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Page 3

4 Key Assumptions FY Mar Food cost as % of sales Staff cost as % of sales Rental cost as % of sales Segmental Breakdown (HK$ m) FY Mar Revenues (HK$ m) Hong Kong 5,589 6,124 6,448 6,778 7,136 PRC 1,237 1,232 1,119 1,164 1,263 Total 6,826 7,356 7,567 7,942 8,399 Income Statement (HK$ m) FY Mar Revenue 6,826 7,356 7,567 7,942 8,399 Cost of Goods Sold (5,842) (6,333) (6,523) (6,824) (7,189) Gross Profit 984 1,023 1,045 1,118 1,210 Other Opng (Exp)/Inc (241) (315) (429) (439) (455) Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc (4) (5) Net Interest (Exp)/Inc Dividend Income Exceptional Gain/(Loss) (60) (15) Pre-tax Profit Tax (110) (117) (110) (124) (139) Minority Interest (1) (1) Preference Dividend Net Profit EBITDA ,023 1,139 Growth Revenue Gth (%) EBITDA Gth (%) 14.1 (0.6) (7.4) Opg Profit Gth (%) 16.1 (4.9) (13.1) Net Profit Gth (%) (11.7) Margins & Ratio Gross Margins (%) Opg Profit Margin (%) Net Profit Margin (%) ROAE (%) ROA (%) ROCE (%) Div Payout Ratio (%) Net Interest Cover (x) NM NM NM NM NM Page 4

5 Interim Income Statement (HK$ m) FY Mar 2H2014 1H2015 2H2015 1H2016 2H2016 Revenue 3,500 3,625 3,731 3,726 3,841 Cost of Goods Sold (2,947) (3,156) (3,177) (3,268) (3,254) Gross Profit Other Oper. (Exp)/Inc (95) (169) (147) (211) (218) Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc (2) (4) (1) 0 0 Net Interest (Exp)/Inc Exceptional Gain/(Loss) (60) (8) (7) 0 0 Pre-tax Profit Tax (64) (52) (65) (48) (63) Minority Interest (1) Net Profit Growth Revenue Gth (%) Opg Profit Gth (%) (11.3) (18.1) (9.3) Net Profit Gth (%) (14.7) (9.6) Margins Gross Margins (%) Opg Profit Margins (%) Net Profit Margins (%) Balance Sheet (HK$ m) FY Mar Net Fixed Assets 2,251 2,304 2,291 2,570 2,702 Invts in Associates & JVs Other LT Assets Cash & ST Invts 1,035 1,073 1,187 1,031 1,094 Inventory Debtors Other Current Assets Total Assets 4,568 4,562 4,445 4,587 4,810 ST Debt Creditors Other Current Liab LT Debt Other LT Liabilities Shareholder s Equity 3,729 3,672 3,538 3,643 3,819 Minority Interests Total Cap. & Liab. 4,568 4,562 4,445 4,587 4,810 Non-Cash Wkg. Capital (368) (285) (325) (340) (359) Net Cash/(Debt) 1,035 1,073 1,187 1,031 1,094 Debtors Turn (avg days) Creditors Turn (avg days) Inventory Turn (avg days) Asset Turnover (x) Current Ratio (x) Quick Ratio (x) Net Debt/Equity (X) CASH CASH CASH CASH CASH Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH Capex to Debt (%) N/A N/A N/A N/A N/A Z-Score (X) Page 5

6 Cash Flow Statement (HK$ m) FY Mar Pre-Tax Profit Dep. & Amort Tax Paid (123) (113) (117) (110) (124) Assoc. & JV Inc/(loss) (Pft)/ Loss on disposal of FAs Chg in Wkg.Cap. (44) (47) (21) (141) (29) Other Operating CF Net Operating CF ,017 Capital Exp.(net) (240) (358) (406) (490) (496) Other Invts.(net) Invts in Assoc. & JV Div from Assoc & JV Other Investing CF 91 (7) Net Investing CF (149) (364) (231) (490) (496) Div Paid (518) (391) (460) (467) (457) Chg in Gross Debt Capital Issues 44 (70) Other Financing CF Net Financing CF (475) (461) (460) (467) (457) Currency Adjustments (1) Chg in Cash (156) 64 Opg CFPS (HK$) Free CFPS (HK$) Target Price & Ratings History HK$ S.No. Date Closing Target Rating Price Price 1: 29-Sep-15 HK$26.30 HK$28.00 Hold 2: 1-Dec-15 HK$25.20 HK$25.00 Hold 3: 22-Jun-16 HK$23.35 HK$24.50 Hold Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Source: DBS Vickers Page 6

7 DBSV recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps) FULLY VALUED (negative total return i.e. > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame) Share price appreciation + dividends GENERAL DISCLOSURE/DISCLAIMER This report is prepared by DBS Vickers (Hong Kong) Limited ( DBSVHK ) This report is solely intended for the clients of DBS Bank Ltd., DBS Vickers Securities (Singapore) Pte Ltd ( DBSVS ) and DBSVHK, its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBSVHK. 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