Xiabuxiabu Catering Management (China) Hldgs Co Ltd Shs Unitary 144A/Reg S 00520

Xiabuxiabu Earnings: Lowering Fair Value Estimate Amid Uncertainty Around Coucou

We incorrectly believed that consumer downtrading would significantly benefit Xiabuxiabu’s namesake chain, and continued difficulties at Coucou further obscured the prospects for near-term profitability. As a result, we are lowering the group’s fair value estimate by 57% to HKD 2.0 per share. Despite this downward revision, we still view the valuation as attractive, partly due to the firm’s net cash position (including financial assets) that amounts to about one third of its current market capitalization. While individual performance matters, restaurant operators are heavily dependent on the macroeconomic outlook. Going into 2024, our base case assumes that the operating environment will be slightly better than that of late 2023, and therefore the company should still record positive revenue growth and a slight improvement in operating margin. That said, given the lack of visibility in Coucou’s turnaround efforts, our preferred picks in the Chinese restaurant space are Yum China and Jiumaojiu.