CEO's Report

On behalf of our management team, I am delighted to present our Company’s results for FY2015/16 and to share our vision for Café de Coral.

The year under review was one of steady growth in our main businesses as well as setbacks in the Mainland of China, where we remain committed to building our brands. With the successful leadership transition and organisational adjustments we have made across our business units during the year, we are confident that we can take the Group to an even higher level in the years ahead.

HIGHLIGHTS OF THE YEAR

The Group’s revenue grew 2.9% to HK$7,567 million, and profit attributable to shareholders decreased 11.7% to HK$518 million. If excluding the fair value change on investment properties, gain from the disposal of leasehold properties as well as the loss attributable to a discontinued operation, the adjusted net profit would have decreased by 6.6%. FY2015/16 earnings per share amounted to HK$0.9, and the payment of a final dividend of HK63 cents per share together with a special dividend of HK35 cents per share to shareholders for the financial year ended 31 March 2016 has been recommended, representing a total dividend payout ratio of 130.7% for the year.

Key achievements of the year included the following:

Continuing solid performance of our core quick service restaurants (QSR) and institutional catering business. The QSR and institutional catering segment, which accounted for 87% of the Group’s revenue in Hong Kong, continued to be the mainstay of our business thanks to our strengths and competitive advantages in the mass market sector. We recorded satisfactory results from this segment during the year with the continuous expansion of our QSR outlets.

Growth in the fast casual and casual dining sector. In 2015/16, we continued to look at opportunities for further diversifying our business in the fast casual and casual dining segment. Among our fast casual brands, our home-grown brands — Shanghai Lao Lao and Mixian Sense — performed particularly well. Our franchise co-operation with well-known Japanese and Korean brands also made progress as planned.

Implementation of our succession plan. As a core component of our current 5-year strategic plan, our succession plan and organisational restructuring were completed successfully, and a smooth leadership transition was made among our senior management team across all of our major businesses. As a result, we have established a strong and vibrant platform for the next phase of our development.

BUILDING ON OUR FOUNDATION

Our success as a business depends on our ability to adapt to changes in the market and customer preferences and to remain relevant, which we do through a continuous process of review and refinement. Today, based on what we have learned over the years, we are expanding through a number of initiatives that support our long-term growth in the markets we serve.

5-Year Strategic Growth Plan
Our 5-year strategic plan guides our development in the Group’s key markets of Hong Kong and Mainland China and allows us to build on our operational platform.

In 2015/16, we were on track with this plan and recorded milestone achievements in our business development that helped to reinforce our leadership in Hong Kong’s fast food industry. We also continued to make a strategic leap forward in the fast casual and casual dining segment, built up our senior management team and completed the infrastructure we require for our long-term sustainablegrowth.

Despite macroeconomic conditions and intense market competition, we remain firm in our conviction that our blueprint for sustainable growth is fundamentally sound and will ultimately enable us to accomplish the objectives set out by our Board.

Strengthening our Commitment to Sustainability
During the year, we launched a comprehensive sustainability programme across all of our operations and functions. We continued to build and strengthen this platform as a solid framework for guiding our corporate governance and long-term business development in the following areas:

Risk management. We have always regarded risk management as being fundamental to our success and have adopted international best practices that guide our business decisions. After the launch of a risk management and internal control enhancement project endorsed by the Board last year, we developed an Enterprise Risk Management approach that will help to protect our business and guard against operational risks.

Supply chain management. To ensure fresh, timely and responsive deliveries to our customers, we have developed a reliable supply chain that underpins our business today. During the year, we further strengthened this part of our business by re-structuring and centralising our supply chain management team. We also reinforced Group policies and processes to ensure food quality and safety by undertaking a comprehensive upgrade of our supply chain management.

Other achievements included accreditation in ISO 22000 (the international food safety standard) for our Taipo Central Processing Centre and, most recently, our Central Processing Centre in Guangzhou, China. This certification represents our unwavering commitment to stringent food quality and safety standards while helping us to deliver and live up to our corporate motto, “A Hundred Points of Excellence”.

Once again this year, we are publishing the Group’s sustainability report simultaneously with our annual report. In this third report, we discuss our sustainability performance and the progress we have made towards achieving our targets. We were honoured to receive recognition for our sustainability initiatives during the year by being selected as a constituent member of the Hang Seng Corporate Sustainability Benchmark Index.

Our People, Our Future
Our long-term succession programme proceeded according to plan during the year, ensuring a smooth transition of leadership among our senior management ranks. The Group now has a team of seasoned younger professionals in place across all of our business operations and corporate functions. With this strong talent pool, we are better equipped to overcome challenges in the market and to proceed to the next phase of our development.

As of 31 March 2016, we had a workforce of 17,575 employees. Recruiting and retaining good people continued to be a top priority for the Company during the year, particularly in a highly competitive labour market. We offer competitive staff remuneration and benefits packages and promote work-life balance as part of our corporate culture. In addition, we have a long-term incentive programme, including a share award scheme along with our share option programme, profit-sharing and other performance incentives. Both top and middle management executives received share awards during the year. Remuneration levels at all staff levels and for the Board of Directors are based on market rates, individual experience and qualifications, duties and responsibilities.

We are also conscious of the need to develop our people, as this benefits not only the Company but enables them to reach their full potential and enjoy a fulfilling career with us. To build staff competencies, we provide a comprehensive training and talent development programme within a structured framework, which has been further refined for both our Hong Kong and Mainland operations. We also launched a stronger Performance Management System with long-term incentives designed to motivate and bring out the best in our people.

BUSINESS REVIEW AND DIRECTION

Hong Kong Operations
In a difficult operating environment of falling retail sales, the food and beverage industry as a whole faced a challenging year in 2015/16. Despite the challenges, our Hong Kong business results achieved a 5% increase in revenue to HK$6,448 million for the twelve months ended 31 March 2016.

Our Hong Kong operation remained the top contributor to the Company’s results, representing approximately 85% of the total revenue for FY2015/16. We achieved this performance thanks to the dedication and hard work of our people, their commitment to upholding our exacting standards of quality and service, our efficient procurement and supply chain, and the continuing trust and support of our customers, many of whom have been with us over several decades.

In 2015/16, revenue from the QSR and institutional catering sector, our core business, continued to flourish, with revenue growth of 6%. Sales from comparable stores of Café de Coral fast food and Super Super Congee & Noodles both increased by approximately 4%. Café de Coral’s reputation for fast, delicious and reasonably priced meals continued to attract customers, as did our Super Super Congee & Noodles chain. During the year, we opened a total of 24 new QSR and institutional catering outlets, most of which were Café de Coral fast food and Super Super Congee & Noodles shops.

Our institutional catering businesses continued to maintain its market leading position and make a positive contribution to the Group’s performance. Despite keen market competition, Asia Pacific Catering renewed all major contracts for the year. Luncheon Star, which specialises in the preparation of healthy, nutritious lunches for schools, served a record daily average of 90,000 meals this year. Our institutional catering business is geared up to seize new business opportunities and expand its customer base. As of 31 March 2016, we operated a total of 282 QSR and institutional catering outlets, including 157 Café de Coral fast food outlets, 83 Asia Pacific Catering outlets and 40 Super Super Congee & Noodles shops.

The fast casual and casual dining segment accounted for a relatively low portion of the Group’s revenue. During the year, we continued to make a strategic leap forward in the fast casual business, which experienced a steady growth trajectory. The number of fast casual and casual dining outlets as of 31 March 2016 increased to 69 from 62 as of last year.

The Spaghetti House and spaghetti 360˚ chains remained our leading western casual dining concepts. In 2015/16, we rejuvenated The Spaghetti House brand with a totally new look and menu at our pilot restaurant in City Plaza, Hong Kong. The refreshed brand has proven very successful, and this restaurant will serve as a model for the rejuvenation of all our Spaghetti House outlets. We are also planning to rejuvenate Oliver’s Super Sandwiches in the year ahead. Our two main home-grown fast casual brands, Shanghai Lao Lao and Mixian Sense, continued to perform satisfactorily. Five more Shanghai Lao Lao outlets were opened during the year, with new dishes and a new menu being well received by customers.

Our co-operation with well-known Japanese and Korean brand owners made steady progress during the year. Among the new stores opened in 2015/16 were the first two Don Don Tei outlets in Hong Kong, which brought a new Japanese dining experience to customers in the city. THE CUP, our Korean dining concept under the franchising model, opened two more outlets during this period.

Mainland China Operations
The food and beverage industry in Mainland China as a whole experienced slower growth during the year as a result of the economic slowdown and lower consumer spending. Under these market conditions, we have deliberately adjusted our development plans and consolidated our operations in pursuit of a viable, long-term growth strategy.

As of 31 March 2016, we had a total of 110 outlets in our Café de Coral chain in Mainland China. In 2015/16, revenue from our fast food business in Southern China declined by 5%, while comparable store sales decreased 7% over the same period last year. Our performance in Eastern China also suffered as a result of softening market conditions.

In Southern China, we closed down our underperforming shops, mainly The Spaghetti House, so that we could focus our resources and strengths in growing our core business there. However, we are committed to maintaining a strong presence in Southern China and will resume our pace of expansion when the economy begins to recover.

FINANCIAL REVIEW

The Group’s revenue increased by 2.9% to HK$7,567 million, and profit attributable to shareholders decreased by 11.7% to HK$518 million in FY2015/16. If excluding certain items which are non-operating and non-recurring in nature, as shown below, the adjusted net profit would have decreased by 6.6%.

  FY2015/16 FY2014/15 Change
HK$'m HK$'m %
Profit attributable to shareholders 518.0 586.8 (11.7)
If excluding:      
  Fair value loss/(gain) on investment properties 0.9 (38.8)  
  Gain on disposal of leasehold properties (25.1) (34.5)  
  Loss attributable to discontinued operation - 15.0  
Adjusted net profit 493.8 528.5 (6.6)

Return on equity for FY2015/16 was 15% (FY2014/15: 16%), and return on assets was 12%(FY2014/15: 13%).

The Group’s financial position for FY2015/16 remained healthy. As of 31 March 2016, the Group recorded net cash of approximately HK$1,187 million, with HK$394 million in available banking facilities. As of 31 March 2016, the Group’s current ratio was 2.1 (31 March 2015: 2.0) and the cash ratio was 1.5 (31 March 2015: 1.3). The Group had no external borrowing (31 March 2015: nil) and a nil gearing ratio (ratio of total borrowing less cash and cash equivalents to total equity) (31 March 2015: nil). There has been no material change in contingent liabilities or charge on assets since 31 March 2016.

As of 31 March 2016, the Company provided guarantees of approximately HK$516 million (31 March 2015: HK$476 million) to financial institutions in connection with banking facilities granted to its subsidiaries.

With regard to foreign exchange fluctuations, the Group earned revenue and incurred costs and expenses mainly denominated in Hong Kong dollars, while those of our Mainland China business were in Renminbi. Foreign currency exposure did not pose a significant risk for the Group, but we will remain vigilant and closely monitor our exposure to movements in relevant currencies.

OUTLOOK

Although the year under review has been a challenging one, Café de Coral is well positioned for long-term sustainable growth.

We have a diversified portfolio of well-recognised brands along with a large and growing base of customers. We also have strong systems and a robust infrastructure in place that enable us to manage our business and achieve high levels of efficiency. What’s more, following the successful implementation of our succession plan we have a new team of young, energetic and motivated professionals ready to take our Company forward. Our significant investment in these platforms and talent acquisition over the past two years has been substantially completed, and our focus now is on investing in the growth of our business network.

We will remain focused on our QSR business, while seeking opportunities to grow the fast casual and casual dining segment through home-grown brands, joint ventures and franchises. We also have a clear vision for the expansion of our network, particularly in Hong Kong, both under our 5-year growth strategy and for the years beyond. Additionally, with the softening of rents in Hong Kong, we see ample opportunities to grow our market and diversify our portfolio of cuisines and dining concepts.

In the Mainland, we remain positive about the market as a whole, as it is an important growth engine for us. Under our 5-year strategic plan, we will grow our network when the market recovers and continue to strengthen our operational platform and our team.

Recognising that we can add even greater value for our customers, we are making adjustments to our service and product offerings in order to improve the overall quality and range of our dining experiences. As well as benefiting our customers, this would add value for our staff by enabling us to provide greater benefits that make Café de Coral a more attractive place to work in Hong Kong’s highly competitive labour market. While the cost implications have not yet been determined, we believe such a move would be welcomed by both our customers and staff.

APPRECIATION

Finally, special thanks must go to Mr Sunny Lo, our former CEO and new Chairman, and Mr Michael Chan, our past Chairman, as well as all the founders of Café de Coral who have laid a strong foundation for Café de Coral. We would also like to express our great appreciation for the support of our customers, shareholders and business partners and, of course, our dedicated staff whose commitment underlies the success of our Company. Together, we will create even greater value for Café de Coral in the year ahead.

Lo Tak Shing, Peter
Chief Executive Officer

Hong Kong, 22 June 2016

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