Supported by robust XBXB and slightly weak Cou Cou performance YTD 2023, the Company is still on track to achieve its FY23E target in our view. Hence we maintain BUY and forecast a 34%sales/ 176% restaurant level OP CAGR during FY22-25E.
　　FY22 results inline but margin improved meaningfully in 2H22. Sales　declined by 23% YoY to RMB 4.7bn and registered net losses of about RMB350mn, implying a -7.5% NP margin, both are inline with profit warning.GP margin was at 61.9% (missed CMBI est. of 62.6%) but it was offset by better-than-expected other income and D&A expenses. Store numbers of both brands missed our est., but were offset by higher-than-expected ASP and seat turnover (esp. for XBXB). Most importantly, the group’s NP margin narrowed to -3% in 2H22, from -13% in 1H22, despite pandemic in 4Q22.
　　Strong XBXB and soft Cou Cou in YTD 2023; group level numbers are on track to meet management’s target. For XBXB, its SSSG in Jan-Mar 2023 was fairly robust at 20%+. According to the management, the fulfillment rate was also strong (at 100%+ in Jan-Feb and 107%+ in Mar 2023), vs FY22 target of 400K sales per store. We believe such a brilliant performance was driven mainly by: 1) improved product quality and values and 2) store image revamps. For Cou Cou, we estimate its SSSG in Jan-Mar 2023 was roughly flattish. Based on management, the fulfillment rate was slightly below expectation (at 90%+ in Jan-Feb and 95%+ in Mar 2023), vs FY22 target of 1200K sales per store. We believe that was due to weaker- than-expected economic recovery, where consumption for mid-high end is still subdued. However, we are still optimistic about FY23E, with the low base in 2Q23E and 4Q23E head. Moreover, we believe the Company is on track to achieve the ~5% pre-tax margin (or ~5.5% NP margin) target in FY23.
　　Store opening in China should reaccelerate and expansion to overseas(ex-HK) should start. The Company is now expecting 120/ 74/ 20 new stores for XBXB/ Cou Cou/ ShaoHot and may close up to 30/ 13 stores for XBXB/ Cou Cou, while around 26 stores will be overseas (mainly for Cou Cou) in FY23E. Management believes the overseas expansion will not dilute the man power to open stores in mainland China because many decent locations will likely be available, considering their long-term relationships with developers like TW’s Shin Kong Group and SOGO Group, HK’s SHK and New World, and SG’s Capital Land, etc.
　　Maintain BUY with TP of HK$ 11.21, based on SOTP valuation (21x/ 35x for XBXB/ Cou Cou), implying a 27x FY23E P/E, 22% discount to peers’　average. We find XBXB attractive, esp. after the recent share price retreat and turnaround driven by various reforms and China’s re-opening. It is trading at 16x FY23E P/E (vs peers’ average of 34x).