Cafe de Coral's margin to suffer rising cost pressure

Profit growth is likely to be limited.

It has been noted that recent communication with management suggests that Cafe de Coral continues to maintain a healthy SSSG but faces rising cost pressure.

According to a research note from Jefferies, CDC had a total of 461 restaurants as of March 2015, of which 335 were in Hong Kong (vs. 331 in Mar 2014) and 126 in mainland China/overseas (vs. 123 in March 2014).

Management also targets opening (gross, before store closures) 30 stores in Hong Kong and c20 in mainland China). It intends to slow down expansion in mainland China to focus on improving its operations and profitability.

The company will continue the multi-brand strategy and intends to expand the store network of new brands. And SSSG in Hong Kong maintained at mid-high single digit in recent months, vs. c10% SSSG in Apr.14-Sep.14.

Here's more from Jefferies:

It incurred higher staff cost in 2HFY15 (Oct.14-Mar.15) due to additional hires to improve operations in both mainland China and Hong Kong.

It also raised wages for frontline staff by c8% in May 2015, in line with the increase in minimum wage requirement in Hong Kong.

We like CDC’s strong operations, execution and multi-brand model. Its mass market positioning in Hong Kong and largely local customer base should help it withstand a slowing retail market in Hong Kong, led by slowdown in tourist spending.

However, we expect rising cost pressure to weigh on its margin, and see limited earnings upside in the near term.