1H25 results were stronger than expected (esp. on the opex), and these were achieved even with a small drop in SSS. Therefore, aided by various growth drivers (innovative products, fast and consistent delivery, use of more new channels and aggregators, etc.), our outlook for DPC’s development in both tier 1 and non-tier 1 cities is still positive. Maintain BUY but trim TP to HK$ 105.96.
Looking ahead into 2H25E, we believe the outlook is still constructive, even though SSS may still be dragged by the high base in new markets. The SSS decline in 1H25, in our view, are mostly affected by the high base and the inclusion of 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 as more stores are being opened (like 10 to 30), the SSS in those cities will likely normalize and resume a positive SSSG trend afterwards. Nonetheless, the SSSG in tier 1 cities was still positive in 1H25, indicating the stable and healthy development of the brand.
　　In our view, key drivers in the tier 1 cities include product innovation, better delivery and new customers from new channels. In the tier 1 cities, we do expect the SSSG or sales per store growth to be positive, aided by: 1) continuous product innovations (many new products such as the Dubai chocolate, lychee or beef wellington style pizza were launched in 1H25 and well received by market), 2) better delivery (on-time rate continued to go up in 1H25) and 3) enrollment of more new channels (such as JD and Ele.me/ Taobao, many new customers were acquired through these platforms (evidenced by the strong growth in members), the delivery war is still positive to DPC as a whole). Moreover, driven by greater economies of scale, OP margin in these cities should continue to improve.
　　Key drivers in non-tier 1 cities include: introduction of delivery services, new product launches, improvements in overall service level and quality, etc.. In the non-tier 1 cities (or the semi-new and new markets), we are still comfortable about the growth ahead, because: 1) DPC can start to offer the delivery service (many new markets are still focusing on dine-in and delivery is just not available), 2) more new items can be introduced (the menu in these markets is not as comprehensive or as new as in the tier 1 cities) and 3) the product quality and services level should further improve, as employees in these markets are still relatively young and more willing to learn. All in all, the initiatives or growth levers used in the tier 1 cities can be introduced to these markets at a steady pace and help driving healthy growth. Meanwhile, thanks to the lower staff costs and rental expenses, the OP margin should remain higher than that in the tier 1 cities and should continue to be accretive to the group.
　　The pace of store expansion in FY25E is still on track. About 190 new restaurants were opened and total store count has reached 1,198 in 1H25. The growth rate was about 31% YoY, at a similar level in FY24 and the implied growth rate of the FY25E target (300 new stores). The management also highlighted that about 70% of the new stores will be opened in the existing markets and the remaining 30% will be in the brand new markets.
　　Maintain BUY but trim TP to HK$ 105.96, based on 2x FY26E P/S (rolled over from 2.7x FY25E P/S). We have revised up our FY25E/ 26E/ 27E net profit forecasts by 45%/ 41%/ 9%, in order to factor in: 1) the result beat in 1H25, 2) stronger-than-expected margin revamp up as sales mix from the new markets continues to go up, and 3) a more conservative SSSG and sales per store assumption. Even though the stock is trading at about 1.6x FY26E P/S, about 43% higher than the peer’s average of 1.1x, we still think this premium is sustainable, given its 20% sales/ 38% adj. net profit CAGR during FY24-27E, still much faster than many peers. Therefore, we are highly confident about Domino’s development in China in the long run. We maintain BUY with a TP of HK$ 105.96, based on 2x FY26E P/S.
　　1H25 results were better than expected. In 1H25, DPC’s sales increased by 27% YoY to RMB 2.6bn, inline with BBG est. but 5% below CMBI est., while its net profit surged by 504% YoY to RMB 66mn, beating BBG est./ CMBI est. by 27%/ 72%. This beat, in our view, was mainly due to the better-than-expected margins revamp up of the new markets, or in other words, better-than-expected opex (esp. the staff costs and rental expenses). The tax rate was slightly higher than expected, but it did not change the big picture. Noted that the SSS has actually dropped by 1% in 1H25 (vs 1.6% in 2H24 and 3.6% in 1H24), however, the restaurant level OP margin can still be rather flattish, at 14.6% in 1H25 (vs 14.5% in 1H24). And thanks to the economies of scale, the adjusted net profit margin was still on the uptrend, reaching 3.5% in 1H25 (vs 2.5% in 1H24).