Targets To Open 150 Tai Er Restaurants In 2022

Same-store sales recovery for Jiu Mao Jiu and Tai Er slowed down in Dec 21 due to declining footfall in malls. Jiumaojiu targets to open 150 Tai Er restaurants in 2022, and will close some Jiu Mao Jiu restaurants when their contracts expire. We remain cautiously optimistic in 2022 given the lack of earnings visibility due to the government’s strict containment measures. Effective control of virus spread and vaccine effectiveness will be key to recovery. Maintain BUY. Target price: HK$25.60.

WHAT’S NEW

Dec 21 same-store sales still shy of pre-pandemic levels. In Dec 21, same-store sales (SSS) for Jiu Mao Jiu/Tai Er recovered to 80%/82% from Dec 19. Due to the declining footfall in shopping malls as a result of the spread of the Omicron variant, the recovery pace of SSS has actually declined. In Oct 21, SSS for Jiu Mao Jiu/Tai Er was “more than 90%”/”nearly 90%” of Oct 19 levels, and figures dropped further to 82%/82% of prepandemic levels in Nov 21.

Store opening plans for Jiumaojiu. According to Jiumaojiu, it plans to open 150 Tai Er restaurants and 10 Song Chongqing Hotpot restaurants in 2022. It also plans to shut down some of Jiu Mao Jiu restaurants when contracts are due.

Jiumaojiu’s national supply chain centre base on track. In Dec 21, Jiumaojiu started construction work of its national supply chain centre base in Guangzhou, in line with its previous guidance to start work in 4Q21. The comprehensive base will integrate functions such as raw material storage, food processing, shipment distribution, personnel training and cultural display. The base covers over 39,000sqm and is expected to create 1,000 new jobs. The base is expected to commence operation after 24 months.

Catering market in 2021 is estimated to recover to 2019 levels. The 2021 China Chain Catering Industry Report estimates the size of the catering market to recover to 2019’s level of Rmb4,700b in 2021. The catering market in China has been growing at a 10.1% 5-year CAGR from 2014-19, and is estimated to reach Rmb6,600b in 2024. According to NBS, total retail sales value (RSV) for catering enterprises with revenue above Rmb2m was up 26.7% yoy to Rmb941.3b in 11M21, whereas enterprises with all revenue ranges recorded a sales of Rmb4,205.4b, up 21.6% yoy (0.4% higher than 11M19).

People are encouraged to “stay put” during Chinese New Year. Numerous local provinces, including Tianjin, Shenyang, Liaoning, Beijing, Shanghai, Guangdong, have encouraged people to “not leave unless necessary” and stay put during the Chinese New Year holidays in order to curb the spread of the more contagious Omicron variant.

Recent price trend of food raw materials. For the 52nd week of 2021, the average wholesale price for 28 types of vegetables monitored by the Ministry of Agriculture and Rural Affairs rose 0.8% wow to Rmb5.06 per kg, a slight increase after falling for six consecutive weeks. Average wholesale pork/chicken prices fell 1.1%/0.4% wow to Rmb23.36/Rmb17.29 per kg while average wholesale lamb prices increased 0.8% wow to Rmb71.82 per kg; average wholesale beef prices remained the same wow at Rmb77.29 per kg. As of 11 Jan 22, average wholesale price for 28 types of vegetables was Rmb5.00 per kg, down 2% from a day ago. Average wholesale price for pork/beef/lamb/chicken was Rmb22.20/Rmb77.26/ Rmb72.14/Rmb17.23 respectively, down 2.8%/1.6%/0.2%/0.5% from a day ago.

STOCK IMPACT

Cautiously optimistic in 2022. Jiumaojiu has guided to open 150 Tai Er stores in 2022, which implies an optimistic tone for the year as this is the upper bound of its previously guided 130-150 store opening number range. Furthermore, we reckon that its Song Chongqing Hotpot has formed its initial operating model and is now in the midst of verifying this operating model. A further revision of operating model would likely be needed for large scale new store openings in the future. Song Chongqing Hotpot would be another growth engine for the company if the operating model is proven successful.

Development in the upstream supply chain for more autonomy. Jiumaojiu has been expanding its involvement in the upstream supply chain. It has a self-raised bass fish supply project which is expected to meet the group’s demand by end-22. Moreover, the company has said that it aims to search more suppliers for pickled vegetables, chrysanthemum, rice, Sichuan peppercorn, etc. The national supply chain centre base in Guangzhou, which is set to commence operation after 24 months, will be able to provide Jiumaojiu the autonomy in terms of food safety and cost efficiency.

Waiting for positive signs of control over virus spread. In our view, we do not see material positive fundamental signals for the sector due to the strict virus containment measures imposed by the government. Although we are seeing a 21.6% yoy improvement in RSV for the sector in 11M21, note that the ytd yoy growth has been declining (8M21: 34.4% yoy; 9M21: 29.8% yoy; 10M21: 25.7% yoy; 11M21: 21.6% yoy). We think vaccine effectiveness and the effective control of cases will be key proxies for recovery in the catering sector. Share prices may forward price in the potential improvement in fundamentals according to vaccine effectiveness. Based on our experience from last year’s “stay put” campaign, the RSV for the catering sector in 2M21 was 96.1% of 2M19, almost reaching 2019 levels. Hence, we are not pessimistic on the sector’s performance in 2M22, while the effective control of the number of COVID-19 cases will be key to recovery.

EARNINGS REVISION/RISK

Earnings revision. We revise our 2022/23 earnings forecasts by 1.3%/1.1% respectively and keep 2021 earnings forecast unchanged.

Risks include: a) the development of Tai Er and Song Chongqing hotpot restaurants may not meet expectation, and b) the resurgence of COVID-19 cases.

VALUATION/RECOMMENDATION

Maintain BUY and fine-tune target price to HK$25.60. Despite near-term challenges and unclear earnings visibility for the catering sector, we maintain BUY on Jiumaojiu as we are optimistic on: a) Tai Er restaurant’s development, and b) the potential for Song Chongqing hotpot becoming the next growth driver. Our target price implies 73.2x 2021F PE and 45.3x 2022F PE.