Café de Coral: Share price collapsed -80% in the past 10 years. What's cooking?
[First Take] Café de Coral Holdings Limited (341; 341 HK)
Disclaimer: This is a record of my investment decisions, not financial advice. I may change my decisions without notice. Use this only for education and entertainment. Do not rely on this for your investment decisions.
About
Share price: HKD 4.68
Market capitalisation: HKD 2,682 mn (USD 343 mn)
Enterprise value (EV): HKD 3,755 mn (USD 481 mn)
Average daily volume (ADV): HKD 5.9 mn (USD 0.8 mn)
NTM P/E: 16x; LTM P/B: 1x
Time spent: ~2 hours
My Decision
Pass
Background
At first glance, Café de Coral Holdings Limited (341; 314 HK) looks attractive. It now trades at NTM P/E ~ 16x. Historically, 341 trades at a premium (NTM P/E ~25x). The consensus saw 341 as a steady ‘compounder’ through all economic conditions. Its focus on budget meals allows it to grow even in tough economic times.
However, I have reservations whether the current valuation is attractive enough. It will become attractive to me if net profit after tax (NPAT) can recover to historical levels. For two reasons that I will discuss below, I believe a recovery is unlikely.
Business model
Breakdown of 2024 revenue (HKD 8.6 bn, -1.4% YoY):
60% from Quick Service Restaurants (HK) (-0.3% YoY);
17% from mainland China (-1.3% YoY);
10% from Casual Dining (HK) (-6.4% YoY);
12% from Institutional Catering (HK) (-2.0% YoY);
1% from others (-7.4% YoY).
No single customer represents >10% of the group’s revenue.
Public comparables include Fairwood Holdings Limited (52; 52 HK); Greggs plc (GRG; GRG LN).
My Reasons
No clear path to recovery. I believe NPAT will unlikely return to historical levels because of 2 reasons:
Competition from Shenzhen. Operating costs in Shenzhen can be up to 50% lower [1]. For the price of a meal in Hong Kong, you can get 2 meals. Previously, Hong Kong restaurants were shielded from the competition from Shenzhen. But with the express train opening in 2018, it became easier for customers to move to Shenzhen for meals. The increased competition was not apparent immediately because 2019 protests, 2020 – 2022 COVID-19 lockdowns obscured the effects. The intense competition from low-cost Shenzhen operators looks like a permanent change. Accordingly, Café de Coral’s NPAT is unlikely to return to pre-2018 levels.
‘This this rice’. Consumer preferences have shifted from restaurant budget meals to ‘This this rice’. In Hong Kong, this refers to a cheap, takeaway-style meal of white rice topped with usually two (sometimes three) cooked Cantonese dishes, known in Chinese as 兩餸飯. Anecdotes from my friends in Hong Kong confirm this trend. The shift seems to be driven by increasingly budget conscious consumers. It is still not clear whether consumer preference will ever shift back to meals at 341.
Factors that could lead to a change in my decision
Less intense competition. Indications that competition from Shenzhen has subsided (e.g. higher prices in Shenzhen, increased difficulty for consumers to reach Shenzhen, lower rent and labour costs in Hong Kong).
Return of consumer preference. Evidence that the shift in consumer trends towards ‘this this rice’ is temporary.
Fall in valuation. If NTM P/E falls to ~10x or below without significant deterioration in business fundamentals. This would happen if share price declines to < HKD 2.85.
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