20130823-美银美林-Weak_1H13__remain_cautious_on_near-term_growth_12页_355kb

Summary of Xiao Nan Guo (XNG) 1H13 Performance and Investment Outlook

Core Content

Xiao Nan Guo (XNG), a leading full-service restaurant chain based in Shanghai, reported a 43% decline in earnings for the first half of 2013 (1H13) to RMB32 million, despite a 5% increase in sales. The company's performance was impacted by industry-wide headwinds and the challenges of transitioning to a family dining segment. The earnings decline was largely attributed to a 8.7% drop in same-store sales (SSSG) and a 398 basis points (bps) contraction in net margins. Although same-store traffic growth was positive at 1.7%, per capita spending fell by 10.2% due to reduced business and government clientele.

The operating margin declined by 554 bps to 6.3%, primarily due to rising labor and rental costs, which offset improvements in gross profit margin (up 115 bps). The company's multi-brand strategy includes expanding its "The Dining Room" brand, with plans to open five more restaurants in 2013 and accelerate expansion to 10 in 2014 and 15 in 2015. This brand is expected to be a long-term growth engine due to its focus on personal spending and lower capital expenditure (CAPEX) of RMB3 million per store.

XNG also plans to launch a new brand targeting the family dining segment, which may help weather macroeconomic weakness. However, the short-term earnings contribution from these new brands is expected to be limited due to their small size. The company's management believes that the SSSG could improve in 4Q13 due to a lower base, but the overall turnaround remains uncertain given the weak macroeconomic environment.

Key Financials

• Revenue: RMB1,089 million (2011A), RMB1,332 million (2012A), RMB1,421 million (2013E), RMB1,665 million (2014E), RMB2,018 million (2015E)
• Gross Profit: RMB727 million (2011A), RMB908 million (2012A), RMB967 million (2013E), RMB1,149 million (2014E), RMB1,393 million (2015E)
• Operating Profit: RMB144 million (2011A), RMB154 million (2012A), RMB124 million (2013E), RMB152 million (2014E), RMB189 million (2015E)
• Net Income (Adjusted): RMB107 million (2011A), RMB119 million (2012A), RMB100 million (2013E), RMB120 million (2014E), RMB148 million (2015E)
• EPS (2013E): RMB0.067, with a YoY change of -27.2%
• Free Cash Flow Yield (2013E): -3.91%, turning positive in 2015E at 1.57%
• ROE (2013E): 11.8%
• Net Debt-to-Equity Ratio (2013E): -14.1%
• Operating Margin (2013E): 8.7%, declining from 13.2% in 2011A

Valuation Metrics

• P/E (2013E): 14.63x, declining to 10.04x in 2015E
• Dividend Yield (2013E): 2.75%, rising to 4.06% in 2015E
• EV/EBITDA (2013E): 6.26x, declining to 4.27x in 2015E
• Free Cash Flow (2013E): -RMB57 million, turning positive in 2015E at RMB23 million

Investment Thesis

• XNG's brand name reflects its product/service quality and broad consumer appeal.
• The company has a strong foundation for capitalizing on industry growth and gaining market share.
• Standardization, a hub-and-spoke network, and experienced management have supported its rapid expansion.
• However, the current earnings decline and low near-term visibility have led to a cautious "Underperform" rating.

Key Takeaways

• SSSG: 1Q13 was at -5%, worsening to -11% in 2Q13 due to avian flu and government restrictions on entertainment and hospitality. July and August showed slight improvement, but 3Q13 is expected to remain under pressure.
• New Store Pipeline: XNG aims to open 22 new stores in 2013, with 7 being "The Dining Room" restaurants.
• CAPEX Guidance: Reduced to RMB200-250 million for 2013, reflecting lower CAPEX for the "The Dining Room" brand.
• M&A Strategy: The company is actively seeking opportunities in the family dining segment with per capita spending of around RMB100-150.
• Private Rooms Performance: Declined by 16% in Shanghai Min, with traffic down 5% and ASP down 11%. Management is focusing on wedding banquet sales, which account for 15% of Shanghai stores' revenue.

Stock Data

• Price: HK$1.25
• Price Objective: HK$1.05
• Volatility Risk: HIGH
• 52-Week Range: HK$1.12-HK$1.62
• Market Value: HK$1,844 million
• Average Daily Volume: 561,667
• BofAML Ticker / Exchange: XMAHY / HKG
• Bloomberg / Reuters: 3666 HK / 3666.HK
• Est. 5-Yr EPS / DPS Growth: 2.0% / 7.3%
• Free Float: 25.0%

Conclusion

Despite the company's long-term multi-brand strategy and potential for growth, the near-term outlook remains cautious due to macroeconomic pressures and limited visibility on earnings recovery. The current financial performance, coupled with the challenges of transitioning to new segments, suggests a need for patience and further monitoring of the market environment before any significant turnaround can be anticipated.