1H22 results in line with profit warning
　　Xiabuxiabu announced 1H22 results: Revenue fell 29.2% YoY to Rmb2.16bn （Xiabuxiabu restaurants down 43.1% and Coucou restaurants down 9.1%）； attributable net loss was Rmb280mn （vs. Rmb50mn in 1H21）， mainly as COVID-19 resurgence in China weighed on business operations and foot traffic recovery in 1H22, and as the firm closed 37 Xiabuxiabu restaurants, leading to an asset impairment loss of about Rmb49mn. The 1H22 results are in line with the profit warning released earlier. At end-1H22, the firm had 810 Xiabuxiabu restaurants （6 new openings in 1H22, 37 closures） and 198 Coucou restaurants （15 new openings）。 The seat turnover rate was 1.9 per day for Xiabuxiabu restaurants in 1H22 （vs. 2.3 in 1H21）， and the table turnover rate was 1.9 per day for Coucou restaurants （vs. 2.6 in 1H21）。 Same-store sales in 1H22 fell 44.1% YoY for Xiabuxiabu restaurants and 24.8% for Coucou restaurants.
　　Trends to watch
　　Same-store sales recovery under pressure due to COVID-19 resurgence and containment measures in 1H22. As the COVID-19 resurgence in 1H22 impacted restaurant operations and new openings, the firm took active efforts to generate revenue through the food delivery and group buying businesses. In 1H22, seat turnover rate at Xiabuxiabu restaurants and table turnover rate at Coucou restaurants both declined YoY, but ASP rose slightly, mainly driven by the group buying business with high ASP （ASP at Coucou also increased thanks to overseas business）。 Sales proportion of food delivery services stood at around 7.5% in 1H22. Given the improvement in the COVID-19 situation since June, we expect same-store sales for Xiabuxiabu restaurants in July 2022 to recover to 75% of the level in July 2021 （vs. recovery of 60% and 70% in May and June compared with the same period last year） and for Coucou restaurants to recover to nearly 90% of the level in July 2021 （vs. recovery of 65% and over 80% in May and June）。 However, since August, another round of COVID-19 resurgence has hit some regions such as Hainan, southern China, Chengdu, and Chongqing. We suggest watching same-store sales recovery amid the trend of COVID-19 and containment measures.
　　Pay attention to brand adjustments. The firm relaunched the value-for-money model for the Xiabu brand, offering new soup base sets with ASP limited to about Rmb50–70. The company also endeavored to lower the rents for existing stores. In addition, the Coucou brand lowered its capex for new openings （the floor area of some new stores may contract to 500–550sqm, with furnishing cost per sqm likely to drop about 10%） so as to maintain stable investment returns while pursuing expansion. Moreover, the firm introduced its cross-brand loyalty plan, established its second headquarters in Shanghai, provided equity incentives, and plans to pay dividends based on store performance.
　　Watch growth potential for food company and new brand. 1） In 1H22, revenue at the firm’s food company selling condiment products on online and offline channels reached Rmb49mn, accounting for 2.3% of the firm’s total revenue; Xiabuxiabu added 53 new distributors and absorbed about 10,000 new end-market clients. 2） The company plans to launch the first “CHEN SHAO” restaurant in Shanghai on September 24, building an integrated business model of “barbecue #43; alcoholic beverages #43; tea,” with an estimated per-store floor area of about 350–400 sqm and ASP of around Rmb250 in the future. At present, the firm aims to open six CHEN SHAO stores in Shanghai, Beijing, and Shenzhen.
　　Financials and valuation
　　Taking a prudent view on the impact of COVID-19 resurgence, we lower our 2022 earnings forecast from attributable net profit of Rmb129mn to an attributable net loss of Rmb274mn, and cut our 2023 earnings forecast 16% to Rmb281mn. The stock is trading at 14x 2023e P/E. Maintain NEUTRAL. As we expect sector valuation to improve with growth stabilizing given the marginal recovery from COVID-19 resurgence and lifting of containment measures in the mid-to-long term, we maintain our TP at HK$4.50 （15x 2023e P/E）， offering 11% upside.
　　Risks
　　Disappointing recovery of the Xiabu brand, and/or growth of the Coucou brand, and/or boost from adjustment measures.