What is new? XBXB issued a profit warning in FY22E, with sales to drop 23% YoY and net losses to be at about RMB 330mn.
　　XBXB (520 HK) issued a profit warning and expects its sales to fall by 23% YoY to RMB 4.7bn, around 14%/ 19% lower than BBG/ CMBI est.. - It also forecast net losses to be at about RMB 320mn-340mn in FY22E (vs RMB 280mn in FY21), missing BBG/ CMBI est. of about RMB 190mn. - Management believed the drag was mainly due to temporary suspension of dine-in services and operating deleverage during the pandemic in FY22E. - Given the net losses of RMB 278mn in 1H22, the implied net losses in 2H22E improved significantly to just RMB 42mn-62mn, thanks to active improvement in strategy, management and costs control.
　　Our view: The miss was mainly on sales, but a bright FY23E is still intact, driven by better costs control and strong rebound in 2023 YTD.
　　1) The key was the miss in sales, mainly the result of reduced operating days (stores were closed or dine-in was suspended during pandemic) and we do see this as an one-off event, 2) the drag was mostly in Nov/Dec 2022, in our view, where SSSG were at - 27%/ -55% for XBXB and -20%/ -55% for Cou Cou, much worse than -17% for XBXB and -14% for Cou Cou (average during Jul - Oct 2022), 3) the reforms were excellent in 2H22E, because SSS drop in 2H22E was at 22%-23% (very similar to 24%-25% in 1H22), but net margin had successfully narrowed to just -2.6% in 2H22E (from -12.8% in 1H22). This was helped by better GP margin (more in-house meat processing) and refined costs control (after simplification of management layers and use of profit sharing scheme), 4) the rebound was strong in 2023 YTD, where SSSG already improved to 36%/ 7% for XBXB and 3%/ -10% for Cou Cou in Jan/ Feb 2023, backed by better seat and table turnover of 2.3x/ 2.2x for XBXB and 2.2x/ 2.2x for Cou Cou (vs 1.6x/ 1.8x and 2.1x/ 2.2x last year). Moreover, HK segment also had a meaningful turnaround (HK was on lockdown last year) and Shao Hot’s table turnover was still climbing, from 3.0x in Jan 2023 to 4.2x in Feb 2023.
　　Maintain BUY but trim TP to HK$ 11.20, based on SOTP valuation (21x/ 35x for XBXB/ Cou Cou), also implied a 27x FY23E P/E, ~15% discount to industry average. We cut our net profit forecasts in 2023E/ 24E by 1%/ 7%, to factor in sales miss and slightly higher operating deleverage in FY22E.
　　We still find XBXB attractive, given a 16%/ 48% sales/ restaurant level OP CAGR in FY21-24E, driven by various reforms and recovery. It is trading at 19x FY23E P/E and 1.0x FY23E P/S (vs peers’ average of 32x and 2.1x).