FY2019 earnings strongly beat expectations. Café de Coral's FY2019revenue increased slightly by 0.8% YoY to HK$8,494 million, dragged downby Hong Kong fast food business, which retreated 0.6% YoY to HK$6,264million. The Company reported casual dining revenue of HK$906 million, up2.7% YoY, slowing growth rate. Meanwhile Café de Coral's revenue inmainland China rose 7.0% YoY to HK$1,152 million, benefiting fromaccelerated network expansion. The Company’s gross margin expansion wasbetter than expected, which improved 1.0 ppt YoY to 13.4% in FY2019,mainly due to lower raw material costs. Thanks to improvement in grossmargin, decrease in impairment loss and lower effective tax rate, Café deCoral's shareholders' profit rose 29.1% YoY to HK$590 million in FY2019.
The Company is expected to regain top-line growth. The Hong Kongcatering industry turned weak due to sluggish economic growth, but fast foodbusiness remained resilient. Store rationalization strategy and intensecompetition have reduced the Company’s outlets in Hong Kong, but Café deCoral will expand its branch network of QSR in Hong Kong based on positiveprospects. On the other hand, the Company has accelerated its expansion inthe Greater Bay Area alongside improving profitability.
Café de Coral is a good option to seek excess return due to its steadyoperation, solid market position, strong cash flow and relatively high payoutratio, given current market conditions. Moreover, accelerated expansion in theGreater Bay Area will drive the Company’s top-line growth. Therefore, wemaintain "Accumulate" and raise TP to HK$24.50, which represents23.3x FY2020 PER, 21.6x FY2021 PER and 21.0x FY2022 PER.