Jiumaojiu issued a profit warning for 1H24, which is still awful compared to our already negative outlook. With risks to linger in the near future (SSSG drop may sustain and store expansion may also slow down, etc.), plus the fairly high valuation (23x FY24E P/E), we now cut our FY24E-26E net profit forecasts by 69%-57% and downgrade the stock to HOLD. We also think the implications for the catering sector and most of the peers are rather gloomy.
　　What is new? Jiumaojiu (9922 HK) reported its 2Q24 operating numbers and issued a profit warning for 1H24.
　　Tai Er/ Song/ JMJ’s table turnover was at 3.6x/ 2.8x/ 2.6x in 2Q24, trending down from 3.9x/ 3.0x/ 3.0x in 1Q24. Their respective same-store sales also went down by 18%/ 37%/ 13% YoY in 2Q24, worsening from the 14%/ 35%/ 4% drop in 1Q24. In terms of ASP, that was at RMB 69/ 104/ 55 respectively in 2Q24, comparing to RMB 75/ 121/ 59 in 1H23.
　　Moreover, Jiumaojiu has announced a profit warning. Its net profit in 1H24 is now expected to be at around RMB 67mn and representing a 70% YoY decline from RMB 222mn in 1H23. The Company explained such drop was due to: 1) declines in ASP and table turnover and corresponding operating deleverage, 2) delay in cost measures, 3) absence of gov. grants, and 4) impairment losses of PPE and right-of-use assets of certain restaurants (around RMB 40mn).
　　Management will continue to work hard for a turnaround, by the following measures: 1) introduction of new models like franchising and satellite stores for delivery, 2) refining the menu as well as the selling prices, 3) refining the staff incentive schemes, and 4) further and better cost control polices.
　　Our view: 2Q24 numbers missed the already negative outlook, 2H24E could still be tough and store expansion may therefore slow down.
　　1) We are already fairly pessimistic about the catering sector as well as Jiumaojiu in FY24E,however the Tai Er/ Song’s 18%/ 37% SSS drop in 2Q24 are even worse than our expectation of 8%/ 25%.
　　2) Tai Er recovery rate (vs 2019 level) in 2Q24 should be at around 71%, even worse than the around 76% in 1Q24; therefore even with an easier base last year, the growth was sluggish.
　　3) Although management is quite pro-active in turning around the business (e.g. tackling the lack of product innovation of its main dish and fall in young people’s spending power), the reception of new product launches has not been great and ASP adjustments are not effective enough in terms of boosting customer traffic, moreover, the cost-cutting measures are kind of late and insufficient; therefore, the operating deleverage is somewhat meaningful.
　　4) We are cautious about 3Q24E (also 2H24E), because of the weak macro and high base last year, hence we are factoring in lower table turnovers for all brands in 2H24E (3.6x/ 2.8x/ 2.8x for Tai Er/ Song/ JMJ) and we believe this could also make management slow down their store expansion plan, so we cut new store assumptions for FY24E (around 110/ 30 for Tai Er/ Song, from around 120/ 35).
　　Downgrade to HOLD and cut TP to HK$ 3.59. We are downgrading the name to HOLD, because of: 1) the tough sector outlook in 2H24E, 2) a lack of sales growth drivers, and 3) fairly high valuation. Our new TP is based on 13x FY25E P/E (rolled over from 17x FY24E P/E). The stock is now trading at 23x FY24E P/E, which is quite demanding given 6% sales growth and a 70% net profit drop in 1H24 (or CMBI est. of 19% sales growth and 56% net profit drop in FY24E).