Tang Palace 2H12 results dragged by high costs of new stores

Pace of store openings to ease in 2013-2014.

Here's from OSK-HK:

In 1H12, the group opened two Tang’s Cuisine Chinese restaurants each in Shanghai Marriot Hotel Hongqiao and the Venetian Macau. Moreover, 4 Pepper Lunch restaurants were opened in 2H12 to-date, with 2 more to be added before end-Dec. As economies of scale have not yet kicked in, operating expenses in 2H12 are likely to exceed our expectations. As a result, we have raised our projections for staff cost and rental expense in FY12-14F.

The management of Tang Palace’s peers including Fairwood (52 HK, NR), Café de Coral (341 HK, NR), Hop Hing (47 HK, NR), and Yum! (YUM US, NR) have all recently commented on the challenging environment in China’s food and beverage industry, attributable to the sluggish economy and rise in operating costs. In particular, Fairwood and Café de Coral have expressed their decisions to adopt a more prudent development strategy in China going forward. Tang Palace also plans to take a cautious approach in opening new stores, which we agree is a sensible strategy. As we have lowered our store opening assumptions in FY13F and 14F, our sales projections are cut by 5% and 9% respectively. We keep our sales forecast in FY12F intact since the 2 stores which were renovated in 1H12 are recording satisfactory sales.

Reiterate BUY, with lower TP of HKD2.02. The counter is currently trading at 7.0x FY13F, significantly below its peers’ average of 15.7x and its post-IPO forward mean of 9.1x. Our TP of HKD2.02 is, pegged to 9x FY13F P/E, the stock’s post-IPO forward mean. Previously, our TP was based on 11x FY12F P/E.