Jiumaojiu’s FY24 results were inline with profit warning. 1Q25 trend was weak but improved QoQ. While we are increasingly positive about the company’s reforms, we still expect low margins in FY25E given the SSS drop and potential impairments. Maintain HOLD.
　　Series of transformations are still undergoing in FY25E. For the group in FY25E, they will: 1) continue to focus on product quality as their lifeline and ensure the high standard of every dish, 2) concentrate the resources in core regions (South China, Hong Kong and Macau), to improve store formats and supply chain, etc., 3) optimize and simplify the corporate structure (cutting some management layers to improve transparency and help business to react more quickly to any changes) and 4) put digitalization as one of the key focuses and to better leverage the new supply chain centre (including the central kitchens and processing factories) in Guangzhou. For JMJ brand in FY25E, management is aiming to focus more on Guangdong and Hainan, improve the store efficiency (by introducing more automatic machines) and further refine different store formats (e.g. kids store, delivery store as well as airport store). For Tai Er brand in FY25E, management will be: 1) very prudent on new store expansion (CMBI est. about 30-40 gross openings and 20 gross closures), 2) very decisive on store closures (will shut it down quickly if any of those fall below expectations and 3) refinement of different store formats (particularly the new one just launched in Guangzhou, emphasising on fresh slaughter and freshness of ingredients). For Song hot pot in FY25E, the Company will increase the proportion of fresh goods, improve employee’s happiness and in turn, to help providing more thoughtful, more scenario-based and ceremonial services to customers, in order to fulfil their emotional needs.
　　In the meantime, we are still conservative about the margins in FY25E. In our view, two key factors will affect the financial performance in FY25E: 1) the SSSG (and seat turnover) trend, and 2) amounts of impairment related to any potential store closures. Our base scenario now is assuming: 1) a flattish seat turnover in FY25E vs FY24, implying a bottom out in 2Q25E-3Q25E and YoY growth in 4Q25E, and 2) a similar level of store closures related impairment in FY25E (about 20 Tai Er stores may be shut down) vs FY24 (around 14 Tai Er and 10 Song hotpot stores were shut down). And the situation may improve in FY25E, with improvements in seat turnover and much less stores shutdown. As a result, we are expecting 0%/3.3% net profit margin in FY25E and FY26E.
　　Maintain HOLD and fine-tune TP to HK$ 2.56, based on 15x FY26E P/E (rolled over from 9x FY25E P/E). We cut our FY25E/ 26E net profit forecasts by 100%/ 52%, to factor in: 1) weak SSSG, 2) slowdown in expansion and 3) more store closures. The new TP is based on 15x FY26E P/E (as we have to be more forward-looking given the reforms and impairments). Trading at 17x FY26E P/E, the stock is not attractive.