1HFY2019 earnings beat expectations. In 1HFY19, the Company's revenuerose slightly 1.7% YoY to HK$4,199 million. Hong Kong QSR revenue slightlywent down 0.4% YoY to HK$3,067 million while casual dining revenueincreased 9.5% YoY to HK$462 million. Café de Coral's mainland Chinarevenue rose steadily, up 7.7% YoY to HK$591 million, benefiting fromnetwork expansion in high profile locations and extended O2O deliveryservices. The Company's gross margin increased 0.4 ppt YoY to 12.3% in1HFY19, mainly due to lower raw material costs. Café de Coral'sshareholders' profit increased 16.2% YoY to HK$239 million in 1HFY2019.
The Company will accelerate its expansion in the Greater Bay Area.The catering industry in both Hong Kong and mainland China reported slowergrowth in 2Q-3Q2018, as a result, the Company's SSSG in Hong Kong andmainland China also slowed. Labor and rental costs still weigh on profitability,however, Café de Coral is applying technology to improve operatingefficiency. The Company’s membership program enhanced its competivenessin the Hong Kong fast food market. The Company plans to aggressively growits restaurant network in the Greater Bay Area.
Given the sluggish macroeconomic environment and bearish performance ofthe Hong Kong stock market, Café de Coral shows great characteristics ofdefensive strategy due to its stable revenue and high dividend payout.Moreover, accelerated expansion in the Greater Bay Area will drive theCompany’s revenue growth in mainland China. Therefore, we maintain"Accumulate" and TP at HK$22.50, which represents 24.7x FY2019 PER,22.4x FY2020 PER and 20.4x FY2021 PER.