SUMMARY. We expect CDC’s turnaround to continue in 2H19E with 5%/9%sales/ net profit growth. Fast food segment was proven to be resilient duringtough times of economic downturn. CDC’s valuation is undemanding at 20xFY20E P/E and 4.4% yield. We fined tuned our EPS and rolled over TP toHK$ 23.93, based on 25x FY20E P/E, slightly above its 5 years avg. of 24x.
Fast food sales growth remained resilient amid HK/ China macroweakness. With recent weaknesses in HK/ China economy （HK GDPgrowth: 1.3%/2.8% in 4Q/3Q18; China GDP: 6.4%/6.4%/6.5% in 1Q19/4Q/3Q18）， HK’s catering sales also experienced certain pressure. However,HK’s fast food shops remained highly resilient, even having improved in itsrecent quarter, with sales growth of 5.8%/4.1%/4.6% in 1Q19/4Q/3Q18）。
We expect CDC’s turnaround to continue in 2H19E. We expect its sales/net profit growth to be 4.5%/ 8.8% YoY in 2H19 （ending Mar 2019），comparing to 1.7%/ 16.2% in 1H19, thanks to: 1） resilient SSSG in HK at2%, same as 1H19, 2） faster institutional catering sales growth as more newcontracts were signed in 1H19, 3） quicker restaurant expansion, after a netopening of 12 new restaurants in 2H19 （~465 in total, vs 453/ 463 in 1H19/2H18）， and 4） rigid cost control, including raw material, labour and rentalcosts. We foresee its GP margin to be 12.7% （vs 12.3%/ 12.8% in 1H19/2H18）。
China expansion may speed up in FY20E/21E. We believe the Company isready for a quicker expansion in the Greater Bay Area （esp. in GZ and SZ）。 Hence we now foresee a net opening of 10/11/12 restaurants in FY19E/20E/21E （vs 3/5/8 previously）。 Staff costs associated may rise due to expansion butwould likely be offset by improving productivity and economy of scale.
Maintain BUY and raised TP to HK$ 23.93. We maintain BUY on CDC aswe find its turnaround story in F19E-21E sustainable, plus an undemandingvaluation at 20x FY20E P/E, 1.0 s.d. below its 5 years avg. of 24x. Our newTP is based on 25x FY20E P/E （rolled over from 26x FY19E P/E）。 We trimmedFY19E/20E/21E EPS by 0.4%/0.4%/ 1.6%, to factor in 1） rising raw materialprices （e.g. pork and chicken）， 2） higher staff costs in HK due to increases inmin wage to HK$ 37.5 per hour （previously at HK$ 34.0） from May 2019 and3） hiring of more staff for future China expansion.