Management Discussion and Analysis

INTRODUCTION AND HIGHLIGHTS

Café de Coral Group faced a number of challenges during the first six months of FY2019/20.

Market sentiment has been weakening, which affected our quick service restaurant (QSR) and casual dining businesses in Hong Kong and hindered revenue growth. In order to maintain sales and protect market share, the Group launched more value meals and promotions, which affected margins in the short term. On the other hand, operating costs including labour cost and rental expenses have been rising, resulting in a decline in profit during the period under review.

To overcome short-term obstacles, the Group is committed to implementing various measures to control costs and uplift productivity to safeguard margins. Although these measures may take some time to be reflected in our results, the Group is confident in its ability to return to sustainable growth.

During the reporting period, our QSR business focused on product quality enhancement and expanded its network after a period of consolidation last year. Going forward, the business will maintain its focus on cost control and efficiency to sustainably grow operations in a challenging operating environment.

Internal improvements in recent years have been reflected in the product and service quality of the casual dining business. The business is well positioned for growth when market sentiment improves.

The Mainland China business continued to deliver healthy growth, and accelerated the pace of expansion with new stores in strategic locations in major cities. Based on the strength of the market, the Group is allocating additional resources to capitalise on business opportunities in the Greater Bay Area.

RESULTS OVERVIEW

The Group has retrospectively adopted HKFRS 16 “Leases” with effect from 1 April 2019 and restated prior period comparatives. Right-of-use assets and lease liabilities have been recognised for all leases, except for short-term and low-value leases. Depreciation of right-of-use assets and finance cost on lease liabilities have been recognised accordingly in the condensed consolidated income statement.

Revenue
For the six months ended 30 September 2019, the Group’s revenue increased by 1.6% to HK$4,263.8 million (2018: HK$4,198.5 million). Revenue by business division is set out below:

Six months ended 30 September

  2019 2018 Change
HK$'m HK$'m (%)
Hong Kong
       QSR and Institutional Catering  3,133.4  3,066.8 2.2
       Casual Dining 442.8 461.9  (4.1)
       Others*         75.7        79.1        (4.4)
       Subtotal     3,651.9     3,607.8          1.2
Mainland China         611.9        590.7          3.6
Group     4,263.8     4,198.5          1.6

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

Gross Profit Margin
Gross profit margin decreased to 11.7% for the six months ended 30 September 2019 (2018: 13.4%).

Administrative Expenses
Administrative expenses increased by 8.5% to HK$259.9 million during the six months ended 30 September 2019 (2018: HK$239.5 million).

Key Costs
The breakdown of major expenses is set out below:

Six months ended 30 September

  2019   2018  
HK$'m % of
revenue
HK$’m
(Restated)
% of
revenue
Cost of raw materials and packing  1,188.6 27.9 1,154.0 27.5
Staff cost 1,389.6 32.6 1,341.6 32.0
Rental costs* 531.1 12.5 526.0 12.5

* Includes rental related depreciation in right-of-use assets and finance cost of lease liabilities as well as rental costs of short-term lease and low-value leases and turnover rent.

Other Gains/(Losses), Net
Other (losses)/gains, net decreased by HK$12.8 million, mainly due to an increase of impairment loss in property, plant and equipment by HK$8.2 million (2018: Nil).

Profit Attributable to Equity Holders
The Group’s profit attributable to equity holders decreased 34.5% to HK$149.7 million for the six months ended 30 September 2019 (2018: HK$228.7 million), primarily due to unattained growth in the Group’s sales amidst the weakened market sentiment.

Segment Results
The segment results represented operating profit before fair value change on investment properties, depreciation and amortisation and impairment loss of property, plant and equipment but less depreciation of right-of-use assets – properties and finance costs of lease liabilities. Hong Kong segment results decreased 21.2% to HK$298.2 million for the six months ended 30 September 2019 (2018: HK$378.4 million), mainly due to weakened market sentiment during the period. Mainland China segment results decreased 6.3% to HK$73.7 million (2018: HK$78.7 million), mainly due to RMB depreciation and loss of operating days for more shops under renovation during the period.

Basic Earnings Per Share
The Group’s basic earnings per share decreased 34.5% to HK25.81 cents for the six months ended 30 September 2019 (2018: HK39.41 cents).

Interim Dividend
Board has declared the payment of an interim dividend of HK19 cents per share to shareholders for the six months ended 30 September 2019 (2018: HK19 cents).

BUSINESS ANALYSIS

QSR and Institutional Catering
During the six-month period ended 30 September 2019, revenue from this division increased by 2.2% to HK$3,133.4 million (2018: HK$3,066.8 million). The Group’s QSR and institutional catering business had a total of 303 outlets as of 30 September 2019 (31 March 2019: 298).

Café de Coral fast food experienced flat same store sales growth during the first half of the fiscal year. Sales growth of the brand, in particular during the period’s peak summer sales season as well as weekends, was affected by the weakened market sentiment – although business outside affected areas enjoyed moderate growth. Profit margins of the business for the period were hit by more value meals and promotions to boost sales, as well as increasing operating costs and overhead expenses.

As a result, Café de Coral fast food has been taking both short term and longer term actions to control costs and tighten operational expenses, including effective manpower deployment as well as controlling rental expenses to protect margins. The Group will also accelerate the use of technology and automation – which will further enhance productivity and streamline operations for the future.

Following a period of network consolidation last year, Café de Coral fast food opened 7 new shops during the first half of FY2019/20, ending the period with 165 outlets (31 March 2019: 162). New shop openings for the second half of the year will focus more on community areas with high potential and better returns. In a move to explore new sales channels, the business will be launching delivery service in Q3 through foodpanda and mobile apps.

Facing the same challenges in Hong Kong, Super Super Congee & Noodles witnessed -1% same store sales growth during the reporting period.

Super Super Congee & Noodles continued to strengthen its brand image as Hong Kong’s leading congee and noodle chain, offering high quality, authentic, yet affordable Chinese cuisine that caters to local tastes. During the period under review, the brand opened 3 new shops, operating a total of 48 outlets at 30 September 2019 (31 March 2019: 49). The business installed Kitchen Video Systems (KVS) and Table Position Systems (TPS) at all branches to enhance customer experience, and also initiated trial runs of self-service kiosks at 3 designated branches. The business is actively exploring other sales channels through delivery services.

The Group’s institutional catering brands, Asia Pacific Catering and Luncheon Star, performed well in a keenly competitive market. Asia Pacific Catering gained 3 new major contracts, ending the period under review with 90 operating units (31 March 2019: 87). Luncheon Star strengthened its leadership position as the No. 1 student lunch service provider in Hong Kong, while increasing production capacity to facilitate business expansion and upgrading production lines to enhance operational efficiency.

Casual Dining
Revenue from the casual dining business decreased by 4.1% to HK$442.8 million (2018: HK$461.9 million). Performance of the division was impacted by the adverse market environment, in particular at a number of key locations included in the Group’s casual dining portfolio. However, business in unaffected areas has enjoyed moderate growth – underlining the success of internal improvement on fundamentals over the past few years. The business operated 65 outlets at 30 September 2019 (31 March 2019: 60).

The Chinese cuisine brands, Shanghai Lao Lao and Mixian Sense, ended the period under review with networks of 13 and 20 shops, respectively (31 March 2019: 12 and 17 shops, respectively). Shanghai Lao Lao opened 2 new shops during the period, whilst Mixian Sense expanded its network with the opening of 3 new shops, and increased its brand loyalty. The brands are expected to deliver a more solid contribution to the Group’s casual dining portfolio.

The non-Chinese brands, The Spaghetti House and Oliver’s Super Sandwiches, operated with 8 and 14 shops, respectively (31 March 2019: 7 and 13 shops, respectively) at the end of the reporting period. Although the closure of certain key shops impacted performance, The Spaghetti House opened 3 new shops during the period, and its 40th Anniversary campaign and repositioning as a family restaurant have generated positive market response. Stronger brand positioning at Oliver’s Super Sandwiches led to positive same store sales growth during the period under review, and the opening of an outlet at the City University campus has expanded brand presence beyond commercial and retail districts.

The Group continued to fine-tune the business models of its franchised brands.

Mainland China
The Revenue from Mainland China increased by 3.6% to HK$611.9 million (2018: HK$590.7 million), in spite of a 4.5% decrease in Renminbi against Hong Kong dollars as compared to the corresponding period last year.

Our Southern China fast food business carried the strong momentum of the previous financial year into the first half of FY2019/20, achieving a 9.6% increase in revenue to RMB516.0 million with same store sales growth of 6% as existing outlets maintained healthy growth and new shops performed well.

Our branch network in Mainland China continued to expand, with 5 new shops opened in strategic city locations including Guangzhou, Shenzhen and Zhuhai – bringing the total number of outlets to 107 at 30 September 2019 (31 March 2019: 107). An additional 16 shops are planned to open during the second half of the fiscal year. The Group has established strategic alliances with eight real estate developers operating in the Greater Bay Area to jointly collaborate on network expansion.

The Southern China fast food operation also accelerated re-imaging of its new 6G stores, which will facilitate same store sales growth. New and re-imaged stores are expected to deliver increasing contributions to profit during the remaining half of the fiscal year.

Successful product enhancements such as the sizzling plate promotion drove sales growth during the peak summer season, leveraging high quality steak platters and a coordinated marketing campaign. O2O deliveries continued to outperform expectations and drove overall sales during the period under review.

KEYS TO SUCCESS

Brand Building
We This year marks the Group’s “Year of Quality”, an internal effort to drive continuous enhancement of our product quality, which underpins the essence of the brand. During the period, Café de Coral fast food rolled out brand campaigns featuring “Hong Kong Style Curry” and “Sizzling Plates” which generated positive response and enhanced affinity with the brand, which will help to build brand fundamentals in the long run.

At the same time, advances and improvements in technology – such as the rollout of Kitchen Video Systems – allow us to fulfil our customer promise of continuous enhancement of the dining experience with greater efficiency.

People Development
As of 30 September 2019, the Group had a workforce of 20,337 employees (31 March 2019: 19,110).

Training in 2019 continued to focus on developing staff at all levels, with a particular focus on a Service Excellence mindset based on “Quality, Service and Cleanliness” guidelines to enhance the customer experience and operational efficiency.

Effective leadership and talent development are critical to the Group’s ongoing success. Our internal programme, accredited by the Qualification Framework (QF) Scheme of the Hong Kong Council for Accreditation of Academic & Vocational Qualifications was launched to develop the management talent pool at the branch level. The Group also introduced a Continuous Leadership Development programme to enhance our leadership pipeline from the frontline to area management.

The Group reviews internal equity and market benchmarking on pay level regularly. Remuneration at all staff levels is based on individual experience, qualifications, duties and responsibilities. Qualified employees are entitled to participate in profit sharing bonus and performance incentive programmes as well as share award and share option schemes.

Network Expansion
As of 30 September 2019, the Group had a network of 368 stores in Hong Kong and 107 stores in Mainland China.

Taking a prudent approach to network optimisation against the backdrop of the current operating environment, the Group has tightened review of our shop portfolio in Hong Kong and is focusing on good locations with better returns. Leveraging the brand’s reputation, experience and bargaining power, we are actively exploring better opportunities to optimise our portfolio as well as controlling rental expenses to protect margins.

In Mainland China, the Group’s strategic alliances with eight real estate developers in the Greater Bay Area will facilitate acceleration of the Group’s network expansion in the region.

Supply Chain Management
Placing great importance on food safety and transparency, we have strengthened the Group’s data management capabilities by upgrading supply chain systems and adopting international standards to enhance efficiency and food traceability.

This year, the Group was named the Diamond Enterprise Winner in GS1 Hong Kong’s Quality Food Traceability Scheme 2019 for the second consecutive year.

Sustainability
During the period under review, we continued efforts to reduce disposable, single-use plastic items in our stores as well as other resource optimisation initiatives. Recognising our long-term efforts in sustainability, the Group was included in the Hang Seng Corporate Sustainability Benchmark Index for the fifth consecutive year. We shall report our sustainability performance in greater detail in the Company’s Sustainability Report 2019/20.

FINANCIAL REVIEW

Financial Position
The Group’s financial position remained healthy during the period under review. As of 30 September 2019, the Group had net cash of approximately HK$553 million, with HK$785 million in available banking facilities. The Group’s current ratio as of the same date was 0.6 (31 March 2019: 0.8) and the cash ratio was 0.3 (31 March 2019: 0.5). The Group had no external borrowing (31 March 2019: Nil) and a nil gearing ratio (ratio of total borrowing less cash and cash equivalents to total equity) (31 March 2019: Nil).

Capital Expenditure and Commitment
During the period under review, the Group’s capital expenditure (excluding right-of-use assets) was HK$275 million (2018: HK$143 million). As at 30 September 2019, the Group’s outstanding capital commitments (excluding right-of-use assets) were HK$323 million (31 March 2019: HK$580 million).

Contingent Liabilities
As of 30 September 2019, the Company provided guarantees of approximately HK$945 million (31 March 2019: HK$915 million) to financial institutions in connection with banking facilities granted to its subsidiaries. The Group had no charge on assets as of 30 September 2019).

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 businesses 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

Lookingahead, the Group expects market sentiment may take some time to improve. Whilst taking a prudent view on revenue performance for the full financial year, we are implementing decisive actions to protect margins by controlling costs, reviewing and re-engineering overhead as well as driving efficiency and productivity.

Efficiency and productivity enhancement involves development and implementation of new ways of working, including reviews of kitchen layouts and related staff deployment ratios. We are also leveraging technology to enhance core kitchen management systems, while employing best-in-class equipment in new kitchen designs to improve throughput without compromising quality.

With the benefit of a healthy cash flow and strong pool of resources, the Group is well positioned to capitalise on attractive business opportunities despite the challenging external environment – allowing us to choose the most favourable options to grow our talent pool, enhance our operations and expand our business. At the same time, we will allocate additional resources to areas of high growth, including the Greater Bay Area in Mainland China.

Having grown together with Hong Kong for over 50 years, the Group is confident in its ability to navigate this challenging market environment; and we will continue to focus on serving high quality, high value meals for customers from all walks of life.

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