Further recovery is expected but challenges remain; Café de Cora updated three-year strategic goals

Café de Coral's revenue grew by 11.8% YoY to HK$7,509 mn in FY2022, with revenue from Hong Kong and mainland China operations growing YoY by 12.0% and 11.0%. The Company's gross margin grew by 1.7 ppts YoY to 7.3% in FY2022. The Company raised new strategic three-year goals, including: i) improving profit margins from low single digits to high single digits within the next three financial years through various measures; and ii) targeting to grow its restaurant network to 280 stores in the Greater Bay Area by the end of FY2025. Guotai Junan Securities maintains "Accumulate" and TP of HK$16.00.

The Company’s shareholders’ profit decreased 94.1% YoY to HK$21 million in FY2022, mainly because the Company received a lower amount in COVID-19-related subsidies in FY2022 and the fifth wave of the local COVID-19 epidemic in 4QFY2022 brought serious disruptions to business and operations. Excluding government subsidies, the Company would record significant YoY loss contraction, which contracted from a loss of HK$280 million in FY2021 to a loss of HK$107 million in FY2022. The Company recommended a final dividend of HK$0.18 per share, representing a dividend payout ratio of 773.6% for the year.

As the peak of the fifth wave of local COVID-19 epidemic in Hong Kong has passed, Café de Coral’s business in Hong Kong is gradually recovering. Café de Coral's revenue from quick service restaurants (QSR) in Hong Kong in FY2022 increased by 8.2% YoY to HK$4,563 million. Café de Coral operated 204 stores in Hong Kong’s QSR catering market as at March 31, 2022. According to the Company, breakfast and lunch business has recovered to more than 90% of normal but dinner business is still under pressure. Meanwhile, after raises in price in late 2021, Café de Coral’s ASP in Hong Kong reached around HK$39 and the management believes that the current menu price can cover the increase in raw material costs.

Performance during this challenging period has confirmed the health and viability of Café de Coral’s operating model in mainland China. Café de Coral’s mainland China operations delivered strong performance in 1-3QFY2022 but was then interrupted by the spread of the Omicron variant in early 2022. Partial lockdowns in Shenzhen and Zhuhai due to the pandemic situation in March 2022 impacted 53 stores, leading to a loss in sales revenue and negative SSSG of 1% for the whole financial year. On the other side, although periodic resurgences of COVID-19 affected the Company’s network expansion plans in mainland China to some extent, the Company still managed to open a record number of new restaurants. As at March 31, 2022, the Company operated 136 stores in mainland China, with 21 new outlets having been opened during FY2022 on a gross basis or 15 new outlets on a net basis. In FY2022, Café de Coral's revenue from the mainland China market grew 11.2% YoY to HK$1,332 million. Looking forward, the Company is expected to focus on its single brand strategy in the Greater Bay Area and targets to grow its restaurant network to 280 stores by the end of FY2025.