We are delighted to see SSS decline to narrow in 2Q25E with some initial success in the store format upgrades. However, while the turnaround is still on track in general and fairly constructive, it is just kind of inline with the market’s expectation. What is more important is the sustainability into 2H25E and FY26E and potential beat on top of that. We will monitor this closely going forward.
　　Maintain HOLD but raise TP to HK$ 2.99.
　　SSS has trended better in 2Q25E, potential turnaround is still on track.
　　According to the management, Tai Er brand’s SSS decline has started to narrow, to double digit/ low double digit/ single digit in Apr/ May/ Jun 2025, after a 21.2% drop in 1Q25. With the policy change on cutting back discounts and promotion late last year, ASP has become more stable, and hence the SSS decline in 2Q25E is mostly related to volume. However, in terms of absolute level, the table turnover should have bottomed out since 4Q24 and improved QoQ into 2Q25E. We estimate Tai Er’s table turnover to be at around 3.3x in 2Q25E, compared to 3.1x in 1Q25. The reasons behind such improvement were: 1) low base last year, 2) reduction in level of competition, resulting in much lower drag on the ASP, 3) extended holidays, inducing higher tourism and catering related demand, 4) spillover effect from the home appliances subsidies, where overall consumer sentiment was also improved.
　　Positive progress was made in the transformation. One important
　　reform carried out by the Tai Er brand is the upgrade in store format, which is now emphasizing more on the fresh slaughter and freshness of food ingredients, and we believe the performance is so far so good. For the larger-sized ones, namely those 3 stores opened in Guangzhou, the upgrades will be more thorough, and the capex and time needed will also be higher (around RMB 1.8-2mn per store and 45 days). But the traffic, in return, is very encouraging, where the table turn could be as high as 4-5x/ 6-8x during weekdays/ weekend. For the smaller-sized ones, Tai Er has upgraded about 20 stores so far, and the capex and time needed are much less (around RMB 200-300k and just a few days), but the SSS can still experience about 30% boost after the revamp. Margin-wise, we do find it positive because the management did mention that a 12% increase in sales will be able to cover all the additional costs (higher raw material costs and D&A expenses). All in all, we do think that the revamp is positive and believe the program will extend to many other stores (or even to another brand like Song hot pot). Tai Er initially plans to revamp about 50 stores by 1H25E, 70+ by Jul 2025, and they are targeting for 100-150 more stores in 2H25E.
　　We think Jiumaojiu group is on track to achieve a bottom out in margin in
　　1H25E, vs 2H24. While the macro environment and the catering industry itself are the biggest swing factors, we have become slightly more positive about Jiumaojiu group, esp. on its margin, because: 1)the table turnover may still be falling YoY in 1H25E, but it is highly likely to improve HoH, even though the Company plans to close another 70 stores in 1H25E, but the associated impairment costs have all been incurred last year, 2)the unit economics are still improving (e.g. number of staffs, rental expenses and the overall efficiency), therefore the breakeven level of table turnover is also trending down.
　　Shares repurchase program unveiled by broad, which is independent from the
　　regular dividend payout. On 6 Jun, the broad has passed the right to repurchase up to RMB 200mn worth of shares in the open market. Based on the last closing price of HK$ 2.68, that is equivalent to about 6% of the current market cap of HK$ 3.75bn.
　　And we also believe that this share repurchase program is independent from regular dividend policy, where Jiumaojiu always intends to pay out at least 40% of the net profit. We have assumed a 50% payout for FY25E in our model, and that will imply a dividend yield of about 2%.
　　Maintain HOLD but fine-tune our TP to HK$ 2.99. We have revised up our FY25E/
　　26E/ 27E net profit forecasts by 9,042%/ 33%/ 22%, in order to factor in lower store closure related impairment losses and slightly better OP margins (thanks to the initial success in the store revamp). On one hand, we did pay attention to the large amount of net cash (around RMB 1.0bn, RMB 1.4bn cash minus RMB 400mn debts) the Company has on hand. But on the other hand, the ex-cash FY25E P/E is still at around 16.5x, not particularly attractive. Therefore, we still have a HOLD rating on Jiumaojiu, but raise TP to HK$ 2.99, based on 13x FY25E P/E (down from 15x, due to more store closures and slower expansion).