by winston » Wed Jan 14, 2015 8:29 am
not vested
Facing structural headwinds
Ajisen’s 4Q14 PRC SSSG was down by 1.1% yoy while Hong Kong SSSG was down by 2.2% yoy, below our expectations. We cut FY14-16 earnings forecasts
by 7.9-18.7% and lower our DCF-based target price from HK$6.8 to HK$5.7 (WACC 11.8%).
We downgrade the stock from Add to Hold due to several headwinds:
1) difficulty in launching new products,
2) low likelihood of SSSG improvement in the short term, and
3) intensifying competition as high-end restaurants start to target mass market customers.
What Happened
Ajisen’s 4Q14 performance was worse than expected.
PRC SSSG has been deteriorating qoq in FY14. Ajisen cancelled its UCC afternoon tea service after merely one month of its debut in Oct in Shanghai. Management said the service was cancelled due to the lack of advertising for the new product, leading to weak market reception. However, Ajisen will re-launch this product after WiFi is installed in the stores in 1H15 and will embark on more marketing.
The cancellation of the afternoon tea made us concerned about Ajisen’s capability to develop new products successfully, which may make the company lack meaningful SSSG catalysts in the near term. We now expect Ajisen’s PRC SSSG to be 2% for FY14 and 3.5% for FY15.
What We Think
We have seen intensifying competition from high-end restaurants, as these restaurants have been hit hard by anti-corruption measures and are now
launching cheaper products targeting mass market customers. For example, South Beauty (俏江南) has started to offer lunch boxes targeting white-collar
workers while XiaoNanGuo has launched cheaper casual food style products in its Nanxiaoguan (南小馆) restaurants.
We believe this may become a structural trend and negatively impact the SSSG of existing mass market players, such as Ajisen. Compared to its high-end competitors, Ajisen’s menu is a bit simple while the high-end Chinese food players can offer greater variety.
What You Should Do
One positive highlight in FY14 was that Ajisen did a commendable job controlling its operational costs through measures such as more part-time
workers and shutting down inefficient stores. However, we think the company’s stock price will be under pressure as long as SSSG shows no meaningful
improvement. We downgrade to Hold.
Source: CIMB
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