Initiate BUY on Xiabu Xiabu Catering and put it as our sector top pick. We forecast 20%/ 53% of sales/ restaurant level OP CAGR in FY21-24E vs 9%/ -15% in FY18- 21, driven by improvements in: 1) internal communication, 2) incentive system, 3) sources sharing and synergies, and 4) price to quality and store decoration, etc.
Noted that our FY23E-24E net profit est. are about 60% higher the BBG est.
A leading multi-brand restaurant group covering all price ranges. Xiabu Xiabu Catering is the 2nd largest hotpot restaurant group in China, with ~1.2% market shares in 2021. It has three brands (Xiabu Xiabu (“XBXB”), Cou Cou and Shao Hot). As at FY21, it had 841 XBXB/ 183 Cou Cou restaurants and generated RMB 6.15bn sales and RMB 0.29bn net loss.
Reforms to better communicate, motivate staffs and unlock synergies.
After the Chairman took back in charge in mid-2021, many reforms were made: 1) simplification of management layers, 2) set-up of duo-headquarters, 3) resources consolidation between two brands, and 4) formed a new incentive system to righty align interests between staffs, customers and the group.
Return of values, to refine costs & margins and become a nationwide brand. In Shanghai, as more value-for-money combo meals are added, more store interior design are revamped, its customer rating from dianping.com had surged to 4.4 for new stores (vs 3.9 for old stores). We believe this success can be replicated elsewhere and turn XBXB into a nationwide brand. Moreover, thanks to: 1) closures of loss making stores, 2) higher productivity with bettered incentives, 3) more synergies yielded and 4) lower capex and D&A expanses, we believe its OP margin at restaurant level for XBXB/ Cou Cou can reach 17%/ 13% in FY23E, fairly close to the level in FY19. In fact, XBXB’s SSSG was the fastest among all listed brands, at 24% YoY, during 2023 CNY.
Room of expansion is still large for both old and new brands. We see huge room for XBXB to tap into the eastern and southern China, and for Cou Cou to expand to lower tier cities and overseas. We forecast a number of 1,246 XBXB and 444 Cou Cou stores by FY25E, implying 10% and 25% CAGR during FY21-25E, only 83% and 85% of company’s target of 1,500 and 520. Note that we have not factored in much from the new brand Shao Hot.
We forecast 20% sales and 140% OP CAGR in FY21-24E. Key drivers are:
1) increases in store counts, 2) seat turnover improvement, 3) more savings on staff costs, rental, D&A expenses, and 4) operating leverage.
Initiate BUY with TP of HK$ 11.61, based on SOTP valuation (23x/ 35x for XBXB/ Cou Cou), also implied a 28x FY23E P/E, ~4% discount to industry average. We find XBXB attractive, given a 20%/ 53% sales/ restaurant level OP CAGR in FY21-24E, driven by various reforms and recovery. It is trading at 19x FY23E P/E and 1.1x FY23E P/S (vs peers’ average of 29x and 2.0x).