Xiao Nan Guo (“XNG”) is one of the largest mid-to high-end Chinesecuisine full-service restaurants in China. XNG has 3 brands, namely“Shanghai Min”, “The Dining Room” and “Maison De L’Hui”. The Companyhad a total of 72 self-owned stores at the end of 2012. 91.3% of XNG revenuein 2012 was generated from “Shanghai Min” brand and XNG will continue toopen new “Shanghai Min” restaurants in both Shanghai and other cities. Inaddition, in 2013 XNG will open its pilot casual dining brand restaurant “TheDining Room” in China, which is caters to mass market and is expected toaccount for 13.5% of XNG revenue in 2015, up from 1.5% in 2012.
XNG’s SSS growth is expected to be -5% in 1Q13 but showed slight QoQimprovement on increased patronage (+1% YoY), but ASP continued to fall(-6% YoY). Due to weak consumer sentiment in China, as well as austeritymeasures and anti-food waste campaign introduced by the Chinesegovernment, but partially offset by rising household dine-out consumption, weexpect XNG’s SSS growth in 2013 to be -0.6%. SSS growth may rebound in2H13 on recovering consumer sentiment and such growth is expected toreach 7.0% and 7.6% in 2014-2015, respectively. We expect CAGRs ofXNG’s sales and net profit to be 21.6% and 18.9% during 2012-2015,correspondingly. The Company’s EPS is expected to reach RMB0.082 in2013 and increases by 29.3% and 26.9% in 2014-2015, to RMB0.106 andRMB0.135, respectively.
CAGR of XNG EPS is expected to be 13.3% during 2012-2015. Currentvaluation is not demanding. Therefore, we initiate “Buy” with a TP ofHK$1.65. The TP represents 15.8x 2013 PER, 12.3x 2014 PER and 9.7x2015 PER. Major risks include weaker-than-expected SSS growth due to lowconsumer sentiment and higher-than-expected incremental increases inlabour costs and lease expenses.