Management Discussion and Analysis

INTRODUCTION AND HIGHLIGHTS

During the year under review, the Group took proactive steps to expand our revenue base by investing in our brand, our people and the cautious expansion of our network. In particular, we stepped up investment in our workforce to meet the challenge of severe labour shortage in the food and beverage (F&B) industry, as this will help us maintain a strong and sustainable workforce for our future development. These investments had slowed down our profit growth pace as expected, but we believe that our strategy of investing in the Company is critical for supporting our growth over the long term.

We also focused on strengthening the Mainland China business and operation during the year. In Mainland China, we achieved strong same store sales growth, despite heavy competition in the F&B industry for space and customers. Other challenges affecting this market included changing consumption patterns, such as the rapid rise of e-commerce and online-to-offline (O2O) deliveries to consumers who have growing expectations of value and service. However, through our strategy of localisation, we believe we are well positioned to continue succeeding in this market.

Our key achievements for the year included the following:

Quick service restaurants (QSR) and institutional catering, our core business, continued to achieve solid sales growth, attributable to the team’s efforts to maintain and enhance our brand appeal, products and service.

Our operations in Mainland China achieved strong same store sales growth during the year. We also enhanced our operational model, which contributed to an improvement in our profit margin, and reinforced the foundation of this business for our future growth.

Our casual dining business saw growing popularity of its home grown brands and continued to adjust its portfolio to meet customer demand in preparation for trajectory growth.

Greater investment in our people helped us to achieve long-term sustainable growth, despite the
short-term impact on operating costs and margins.

RESULTS OVERVIEW

The Group’s results for FY2016/17 are presented as follows:

Revenue
The Group’s revenue increased 4.3% to HK$7,895 million (FY2015/16: HK$7,567 million). The
Group’s revenue by business division is set out below:

  FY2016/17 FY2015/16 Change
HK$'m HK$'m %
Hong Kong
       QSR and Institutional Cateringe  5,967.8  5,594.7  6.7
       Casual Dining 794.2 709.2  12.0
       Others*        154.6        144.2         7.2
       Subtotal     6,916.6     6,448.1         7.3
Mainland China        978.7     1,119.1   (12.5)
Group     7,895.3     7,567.2         4.3

* Represents mainly income from food processing and distribution and rental income

Gross Profit Margin
Gross profit margin decreased to 13.4% (FY2015/16: 13.8%), primarily due to the increase in manpower expenses arising from our enhancement of compensation packages. Although this investment in our workforce had a short-term impact on the Group’s margin, we believe this was necessary for the long term growth of our business.

Administrative Expenses
Administrative expenses slightly increased 0.1% to HK$430.6 million (FY2015/16: HK$430.0 million).

Profit Attributable to Equity Holders
The Group’s profit attributable to equity holders decreased 2.7% to HK$503.8 million (FY2015/16: HK$518.0 million). If excluding certain items which are non-operating and non-recurring in nature as shown below, the adjusted net profit increased 1.9% to HK$503.4 million (FY2015/16: HK$493.8 million).

  FY2016/17 FY2015/16 Change
HK$'m HK$'m %
Profit attributable to equity holders 503.8 518.0 (2.7)
Excluding:      
  Fair value (gain)/loss on investment properties (0.4) (0.9)  
  Gain on disposal of leasehold properties                -        (25.1)                   
   
Adjusted net profit       503.4        493.8            1.9

Segment Results
Hong Kong segment results decreased 6.2% to HK$808.8 million (FY2015/16: HK$862.1 million), mainly due to the increase in manpower expense. Mainland China segment results increased 147.5% to HK$131.3 million (FY2015/16: HK$53.1 million), mainly due to strong same store sales growth and improvement in profit margin.

Basic Earnings Per Share
The Group’s basic earnings per share decreased 3.3% to HK$0.87 (FY2015/16: HK$0.90).

Dividend
The Board is pleased to recommend the payment of a final dividend of HK63 cents per share to shareholders for the financial year ended 31 March 2017 (FY2015/16: HK63 cents), representing a total dividend payout ratio of 94.1% for the year.

BUSINESS ANALYSIS

QSR and Institutional Catering
FY2016/17 saw continuously growing demand for fast food service in Hong Kong as consumers became more value driven and price sensitive.

The Group remained a market leader in the QSR and institutional catering sector. Contributing 75.6% of the Group’s total revenue for FY2016/17, the QSR and institutional catering business in Hong Kong continued to record solid revenue growth. Total revenue from this business division amounted to HK$5,967.8 million, representing a 6.7% increase from the year before. By the end of FY2016/17, our QSR and institutional catering business had a total of 295 operating units as compared with 282 operating units in the previous year.

By continuing to focus on our value-for-money strategy, Café de Coral fast food achieved good same store growth in the first half of the year, although this softened in the second half, amounting to 4% for the whole year. Throughout the year, Café de Coral fast food developed exciting new products that were well received by customers, further differentiating us from our competitors. We also maintained a cautious approach with regard to price adjustments which, together with the value for money we offer and careful menu engineering, enabled us to sustain market share and transaction volume.

In a softening leasing market, Café de Coral fast food took the opportunity to expand its restaurant network and provide customers with a greater choice of locations. During the year, Café de Coral fast food opened 10 new outlets, bringing the total number of stores operated under the brand to 166 as of 31 March 2017 (31 March 2016: 157 stores). For the year ahead, Café de Coral fast food has a strong pipeline of new store openings in its business development plan, with 12 stores to be opened in the coming months.

Super Super Congee & Noodles achieved a much expanded network with more new stores opened. As a result of the expanded chain, it recorded softer same store sales growth of 1% and continued to focus on network consolidation to enhance and sustain growth. With 12 stores opened during the year, the number of outlets under this brand amounted to 50 as of 31 March 2017, as compared with 40 stores in the previous year. 4 new stores are scheduled to be opened in the coming months. In 2017/18, the chain will continue to roll out the new store design created during the review period, which features a traditional yet contemporary local neighbourhood concept.

Our institutional catering brands maintained their leading position in the market and made a positive contribution to the Group’s revenue during the year. The overall performance of Asia Pacific Catering and Luncheon Star remained strong. Asia Pacific Catering successfully retained most of its strategic contracts under reasonable terms and secured new clients. The number of operating units at the end of the review period was 79, as compared with 83 in the previous year. New contract development will remain an important task for the business in the year ahead. Luncheon Star continued to be the largest student lunch service provider in Hong Kong for a 12th consecutive year. During the year, our school catering arm enhanced operational efficiency by expanding its production plant and improving production flow. Constant efforts have also been made to provide more tailored, flexible and popular services to the schools and students it serves.

Casual Dining
Despite intense competition in the casual dining sector, the Group has been committed to develop its casual dining business as this business will increasingly contribute to the Group’s results and business development. During the year, we further penetrated the local F&B market with a stronger brand portfolio. We undertook brand renovation exercises, consolidated some of our old brands and fine-tuned new brands by extending their positions in large regional shopping malls. These combined efforts resulted in a 12% increase in revenue as compared with the year before, reaching HK$794.2 million in FY2016/17. The total number of shops in the casual dining business at the end of the review period was 64, compared with 69 last year.

Our two main home-grown casual dining brands, Shanghai Lao Lao and Mixian Sense, recorded outstanding performance for the reporting year. Shanghai Lao Lao has developed into a popular Chinese catering chain operating 10 outlets as of 31 March 2017 with 4 new shops scheduled to be opened in the near future. Mixian Sense, another promising chain specialising in mixian noodles, achieved 12 consecutive months of double digit growth during the year attributable to menu and product innovation. It will continue to grow its network to increase market penetration, with 11 new store openings scheduled in the months ahead.

The Spaghetti House and Oliver’s Super Sandwiches undertook a brand revamp during the year with updated designs and integrated menus in order to achieve growth momentum. These two restaurant chains operated 12 and 19 shops respectively as of 31 March 2017, as compared with 17 and 21 shops respectively last year. THE CUP and Don Don Tei, our franchised brands, also revamped their menus to appeal to local tastes.

Mainland China Operations
Our operations in Mainland China delivered solid results as a result of the Group’s business consolidation strategy over the past few years. In 2016/17, we focused on enhancing the foundation of our business and refining our products and services. In particular, we brought in a team of local managers with extensive experience in the domestic market and deep knowledge of local tastes. Other factors underlying the satisfactory performance of this business included the rejuvenation of our signature products, a revamp of our menu and a series of promotions as part of our new Customer Relationship Management programme. New business models have also been developed, including e-commerce and O2O deliveries, in response to changes in consumption behaviour and higher service expectations among our customers.

As a result of these initiatives, our fast food business in Southern China recorded encouraging same store sales growth of 6%, despite an overall revenue decrease of 8.7% from the year before to HK$870.6 million mainly due to the strategic closure of non-performing stores and the impact of the changes in the VAT rules during the year. In addition, better pricing and labour management, improvements in supply chain efficiency and a tax rebate due to the VAT reform under the PRC tax system all helped to increase our operating margin for the year.

As at the end of the year, our Mainland business operated 99 outlets, compared with 114 last year. Looking ahead, the continuous rise in our profit margin in Mainland China gives us a solid platform on which to expand our business for the future. We will step up our network expansion in Guangdong Province to achieve our objectives in this market. At the same time, we will launch more local promotions and marketing campaigns and develop new products that align more closely with local tastes.

KEYS TO SUCCESS

The success of Café de Coral Group is underpinned by a coordinated strategy of investments in our people, brand, processes and network.

Investing in Our People
As of 31 March 2017, we had a workforce of 18,771 employees (31 March 2016: 17,575).

We recognise that we can only grow as a company by attracting and retaining high quality people. Given the keen competition in the F&B industry for labour, especially young people, we have adopted a multi-faceted strategy that makes the Company a more attractive and rewarding place to work. Under this strategy, we endeavour to offer competitive pay and benefits, encourage work-life balance and provide training that enables our staff to reach their full potential.


In 2016/17, we successfully completed our succession plan with a young and dynamic new management team ready to take the Company forward. In addition, we made significant enhancements to our employee remuneration and staff wellbeing in order to improve staff recruitment and retention in preparation for our forthcoming growth. We continued to invest in long-term incentive programmes for our employees, including share award and share option schemes, a profit sharing programme and other performance incentives. Remuneration at all staff levels is based on market benchmarks as well as individual experience, qualifications, duties and responsibilities.

The Group is committed to enhance the capabilities and competitiveness of our staff by providing quality training and career development programmes. During the year, our “Certificate in Restaurant Management” programme successfully attained Qualification Framework Accreditation by the HKSAR Government, reflecting the industry’s recognition of our sustained efforts in staff development. We strongly believe that our investment in people, despite having a short term impact on the Group’s financial performance, is vital to the Group’s long-term success.

Brand Building
The Group’s success is based on its strong stable of brands, starting with Café de Coral fast food which has grown from a single small shop in 1968 into an extensive network of restaurants across Hong Kong and Southern China. Among our major competitors in this sector, Café de Coral fast food enjoyed the highest brand awareness, brand loyalty and market penetration, as indicated in brand audits conducted by independent surveyor during the year. To further enhance our brand value, we launched the “Happiness First” brand campaign and our new 6G concept store to build on our strengths as “the Canteen for Hong Kong People”. We also initiated a large-scale Customer Journey programme under which we will continue to generate a high level of brand awareness and offer in-store experiences and customer service that uphold our strong commitment of delivering “A Hundred Points of Excellence”.

Building Our Network
We understand that having a wide range of strategic locations is critical for our next phase of growth. Currently, our network covers 359 operating units in Hong Kong and 99 outlets in Mainland China. We see the softening leasing market as an opportune time to expand our network more aggressively, despite keen competition for good locations. Leveraging on the Group’s core brands and multi-brand business development strategy, we are striving to expand our restaurant network as this is crucial for our sustainable growth and future success.

Supply Chain Management
Maintaining food quality and consumer confidence is our top priority. The Group’s supply chain and quality assurance teams, together with our ISO and HACCP certified processing plants, are responsible for maintaining and monitoring sound and robust food safety management systems. In recent years, we have been making substantial investments to centralise our supply chain management, including technology and system upgrades such as our Branch Management System (BMS). This fully integrated supply chain and inventory management system has automated our raw material procurement process for greater efficiency, traceability, inventory management and food safety.

Sustainability
We were honoured to be included in the Hang Seng Corporate Sustainability Benchmark Index for a second consecutive year. Sustainability is the core value of our Group and guides us in the way we do business. Covering four aspects, our sustainability commitment includes Total Customer Satisfaction, Focus on People, Investing in Community and Resource Optimisation, all of which have been embedded in our operations. Our sustainability performance for the year is set out in greater detail in our standalone 2017 Sustainability Report — the fourth since we began reporting.

FINANCIAL REVIEW

Financial Position
The Group’s financial position for FY2016/17 remained healthy. As of 31 March 2017, the Group recorded net cash of approximately HK$790 million, with HK$306 million in available banking facilities. The Group’s current ratio as of the same date was 1.5 (31 March 2016: 2.1), and the cash ratio was 1.0 (31 March 2016: 1.5). The Group had no external borrowing (31 March 2016: nil) and a nil gearing ratio (ratio of total borrowing less cash and cash equivalents to total equity) (31 March 2016: nil). There has been no material change in contingent liabilities or charge on assets since 31 March 2017.

The Group’s return on equity for FY2016/17 was 14% (FY2015/16: 15%), and return on assets was 11% (FY2015/16: 12%).

Capital Expenditure and Commitment
During the year, the Group’s capital expenditure was HK$595 million (FY2015/16: HK$366 million). As at 31 March 2017, the Group’s outstanding capital commitments were HK$613 million (31 March 2016: HK$481 million).

Contingent Liabilities
As of 31 March 2017, the Company provided guarantees of approximately HK$415 million (31 March 2016: HK$516 million) to financial institutions in connection with banking facilities granted to its subsidiaries.

Financial Risk Management
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

Our performance during the year gave new impetus to our expansion. Although operating conditions in the F&B industry will continue to be challenging under weak market sentiments and intensifying competition, we are cautiously optimistic about the future and are fully confident in our ability to build our brand and achieve long-term sustainable growth.

In the year ahead, we believe the market in Hong Kong will continue to be highly competitive for talent and space. We will maintain our investments in people, although this may impact our margins, albeit at a more modest level. On the other hand, we anticipate food costs to remain mostly stable as a result of our efforts to purchase directly from source, and expect to capitalise on a slightly softer leasing market for our future branch development. Despite higher short-term costs arising from our investments in people and capital expenditure for our stores and system enhancements, we are confident in our ability to regain momentum on the path to improving our margins in the near future.

For our QSR business, we believe demand will remain strong for our products and services, and are confident that with new store openings, stronger supply chain management and menu engineering we will be able to deliver stronger results. We will maintain a cautious and vigilant pricing strategy and continue to focus on creating value for our customers and a sustainable business operation.

The Group is also optimistic about the casual dining business and remains determined to increase market share in this sector. We will continue to fine-tune our brand portfolio and invest in our emerging chains so that they can make a greater contribution to the Group’s business growth strategy.

Although competition is likely to remain keen in Mainland China, we are optimistic about our prospects in the country, where we have a long history and a strong foundation. This will involve building our brand presence in strategic locations of core cities in Southern China, increasing our brand penetration in second and third tier cities, enhancing brand loyalty and winning over new customers.

Finally, we look forward to the continued support of our loyal customers, dedicated staff, shareholders and other stakeholders as the Group embarks on its next phase of growth.

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