FY24 results were very solid, but we are slightly conservative about the SSSG ahead, given the macro uncertainty and high base kicking in. Hence, we trim our net profit forecast but remain highly confident on the mid- to long-term story.
Management has provided a conservative outlook for FY25E and we do agree with that. On one hand, store expansion continued to be fast, the management has targeted 300 new stores in FY25E, implying 30% YoY growth, sustaining the 31% growth in FY24. We are quite confident on this target, because: 1) brand power and the word of mouth are still very strong, 2) the Company has trained and reversed quite a number of staffs in the existing stores, and most importantly 3) DPC has already entered 13 new cities during the 2024 Christmas and 2025 CNY (while the new cities entered in FY24 was only at 10), management mentioned that they will enter at least 1-2 additional cities in FY25E. But on the other hand, we might have to be more cautious about the SSSG and OP margin expansion. Even though the group’s SSSG may still be positive in 1Q25E, SSSG may turn negative in 2Q25E to 4Q25E, due to: 1) macro uncertainty, 2) high base effective (esp. for those exceptionally good stores in the new markets, where their SSS may typically fall when they entered into the first 18 months and onwards, and a normalization period of 12 months may be needed before its SSSG to resume to positive), and 3) sales cannibalization in various new cities (when the 5th to 10th stores being opened in a city, the sales per store of those 1st to 4th stores may be dilution). Moreover, we are now forecasting the OP margin to be at 3.9% in FY25E, same as the last year, as we expect the GP margin to stay flattish (improvements in supply chain efficiency may be offset by any increases in retail discounts), and the surge in staff costs (to train and secure more staffs for new store expansion in the future) may be offset by the greater sales contribution from the higher productivity stores in the new markets. But still, thanks to greater overall economies of scale and a better tax rate, NP margin in FY25E should climb to 1.9% from 1.3% in FY24, in our view.
　　Maintain BUY and raise TP to HK$ 118.57, based on 2.7x FY25E P/S. Given the short-term overhangs mentioned above, we have revised down the FY25E/ 26E forecasts by 44%/ 54%, in order to factor in a more conservative SSSG assumption and operating leverage. But we are still highly confident about the Domino’s development in China in the long run. Therefore, even the counter is trading at 2.3x FY25E P/S, having a 93% premium over its peers’ average of 1.2x P/S. We still think this premium is sustainable, given the 24%/ 35% sales/ adj. net profit CAGR during FY24- 27E, still way faster than any of its listed peers.
　　A solid set of FY24 result. In FY24, DPC Dash’s sales increased by 41% YoY to RMB 4.3bn, 2%/ 1% above BBG / CMBI est., while adj. net profit surged by 1,394% YoY to RMB 55mn, beating BBG/ CMBI est. by 20%/ 12%, mostly thanks to the better-than-expected GP margin, and operating leverage. SSSG has further slowed down to 2.5% in FY24 (1.6% in 2H24 and 3.6% in 1H24) from 8.9% in FY23, but this is still way better than most of the peers (vs KFC’s -2%, Pizza Hut’s -5%, Tai Er’s -19%, JMJ’s -13%, HDL’s 3.6%). Daily sales per store rose by 4.3% YoY to RMB 13,126 in FY24, which consists of 10% order growth (from 145 to 160) and 5% drop in ASP (from RMB 87 to RMB 82). Noted that the ASP decline was mostly driven by the decrease in delivery sales mix (from 59% to 46%) and higher sales mix from the new markets (delivery mix in BJ and SH/ new markets were at 70%+/ 30%+). Store level OP margin continued to climb to 14.5% in FY24 from 13.8% in FY23.