SSSG has slowed down a bit since May
- The catering recovery has slowed down since May. Tai Er’s SSSG was 5% and 8% yoy in Jun and May, respectively, vs. 33% yoy in Apr.
- By end-Jun, the company had opened 46 Tai Er stores and 16 Song Hotpot stores.
- We expect the company’s top line to grow by 42% and 30% yoy in 1H23F and 2H23F.
- We expect the OPM to improve to 13.5% and 13.7% in 1H23F and FY23F.
- Reiterate Add with an unchanged DCF-based TP of HK$25.
SSSG recovery has slowed down a bit since May
The catering recovery has slowed down since May. Tai Er’s SSSG was 5% and 8% yoy in Jun and May, respectively, vs. 33% yoy in Apr, and SSS were back to 81% and 80% of the 2019 level in Jun and May vs. 84% of the 2019 level in Apr. JMJ expects a better recovery in 2H23F, along with the recovery in offline traffic and travel volume. By the end of Jun, the company has opened 46 Tai Er stores and 16 Song Hotpot stores. The total number of Tai Er restaurants in operation reached 496 as at end-Jun. We expect the company to achieve its target of 120 new stores for the Tai Er brand and to exceed its target of 25 new stores for Song Hotpot. The Jun table turnover rate for Tai Er reached 4.2x (3.6x in Jun 2022) and that for Song Hotpot was 3.8x (3.9x in Jun 2022), both improving mom. Tai Er’s ASP remained stable at Rmb75–76 per customer in 1H23F, and that for Song Hotpot was c.Rmb120 per customer, slightly lower than Rmb128 in FY22. We now expect the company’s top line to grow by 42% and 30% yoy in 1H23F and
Continued OPM expansion
We expect the company’s GPM to fall slightly yoy in 1H23F, since it lowered its selling prices for certain products in 2H22. For FY23F, we expect a flattish GPM yoy. Going forward, we expect GPM improvement from a higher contribution of self-feeding bass and improved operating efficiency. We also expect the OPM to improve to 13.5% and 13.7% in 1H23F and FY23F, driven by improved operating leverage and efficient management of rental and labour expenses. In terms of mid- to long-term OPM guidance, management aims to achieve 23% OPM for Tai Er when Tai Er reaches 1,000 stores, and 20% OPM for Song Hotpot when it reaches 300–500 stores. For the Jiumaojiu brand, the OPM should remain largely stable. We now expect the company to achieve 8.0% and 8.1% NPM for 1H23F and 2H23F, and net profit to grow by 274% and 786% yoy to Rmb216m and Rmb437m in 1H23F and FY23F.
Overseas expansion on track
The Company aims to open 15 overseas Tai Er restaurants in FY23. It opened one in Malaysia in Feb and one in Singapore in Jun, and will open two in 3Q23F. The rest are expected to be opened in 4Q23. The capex per store in Singapore is roughly Rmb5m–6m and the operating profit is roughly 2–3x that of its stores in mainland China. In the midlong term, the company aims to open 200–300 restaurants in overseas markets, including South East Asia, Hong Kong, Singapore, Japan, Korea, Canada and the US.
The construction of the central kitchen in Guangdong province is on track to open in 2Q/3Q24F.
Reiterate Add with an unchanged DCF-based TP of HK$25
We reiterate our Add rating, since we believe the company has large potential for new store openings in both the domestic and overseas markets. We expect the company to have Rmb40–50m in forex losses in 1H23F, because of Rmb depreciation. We use the DCF valuation method with WACC of 17.6% and a terminal growth rate of 3%. A positive catalyst would be higher-than-expected revenue growth. The key risks include 1) weaker top-line growth due to the sluggish macro economy, 2) lower margins due to cost pressure and competition, and 3) higher-than-expected forex losses.