Management Discussion and Analysis

INTRODUCTION AND HIGHLIGHTS

Operating against the backdrop of an increasingly competitive market, the Group delivered solid, positive results during FY2018/19. Improvements in operating efficiency and margins led to strong growth in profit during the year under review, building on a steady foundation of stable revenue. The recent years’ investment in internal operations is also delivering tangible results.

With manpower costs firmly under control in our core quick service restaurant (QSR) business, the Group was able to improve both margins and profitability. Focusing on our Customer Journey, we rolled out the Service Champion Campaign to enhance our customer service, as well as technology upgrades to streamline the customer experience while improving productivity.

The casual dining business successfully groomed its key brands to deliver a meaningful profit contribution to the Group during the year under review. Improvements to business fundamentals have received positive response from customers, in turn driving same store sales growth.

The Group’s operations in Mainland China continued to perform. The business is healthy and stable, and is steadily growing in scale – with new store openings more than doubling those of the previous year.

With investments in people now largely complete, combined with ongoing internal improvement efforts, the Group is beginning to reap the benefits of these strategic moves as profit growth accelerates. We remain confident in the Group’s business prospects for the foreseeable future.

RESULTS OVERVIEW

Revenue
For the year ended 31 March 2019, the Group increased revenue by 0.8% to HK$8,493.9 million (FY2017/18: HK$8,427.4 million). Revenue by business division is set out below:

 
  FY2018/19 FY2017/18 Change
HK$'m HK$'m %
Hong Kong
       QSR and Institutional Catering  6,264.4  6,301.9 (0.6)
       Casual Dining 905.8 882.0  2.7
       Others*           171.8        167.3        2.7
       Subtotal     7,342.0     7,351.2          (0.1)
Mainland China         1,151.9        1,076.2          7.0
Group     8,493.9     8,427.4          0.8

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

Gross Profit Margin
Gross profit margin increased to 13.4% (FY2017/18: 12.4%), primarily due to a decrease in the cost of raw materials and packing from 28.5% of revenue in the last reporting year to 27.5% in the current year and firm control of manpower expenses.

Other Gains/(Losses), Net
Other gains/(losses), net increased by HK$31.4 million, mainly due to a decrease of impairment loss in property, plant and equipment by HK$29.5 million to HK$3.5 million (FY2017/18: HK$33.0 million).

Administrative Expenses
Administrative expenses decreased 2.4% to HK$447.8 million (FY2017/18: HK$458.8 million), mainly due to decrease of share based compensation expenses by HK$27.4 million as no performance shares awarded had been vested due to the non-attainment of the vesting targets).

Income Tax Expense
Income tax expense increased 6.4% to HK$129.8 million (FY2017/18: HK$121.9 million). If excluding withholding tax on dividend of HK$17.9 million recorded in the last reporting year, the income tax expense would increase 24.7%, which is commensurate with the growth of profit before income tax.

Profit Attributable to Equity Holders
The Group’s profit attributable to equity holders increased 28.9% to HK$590.3 million (FY2017/18: HK$458.1 million), primarily due to improvements in operating efficiency and profit margins.

Segment Results
Hong Kong segment results increased 11.7% to HK$884.7 million (FY2017/18: HK$792.2 million), mainly due to improvement of gross profit margin. Mainland China results increased 19.1% to HK$162.0 million (FY2017/18: HK$136.0 million), mainly due to branch network expansion and positive same store sales growth.

Basic Earnings Per Share
The Group’s basic earnings per share increased 29.1% to HK$1.02 (FY2017/18: HK$0.79).

Dividend
The Board is pleased to recommend the payment of a final dividend of HK65 cents per share (FY2017/18: HK63 cents), representing a total dividend payout ratio of 83.3% for the year.

BUSINESS ANALYSIS

QSR and Institutional Catering
During the year under review, revenue from the Group’s QSR and institutional catering businesses decreased slightly by 0.6% to HK$6,264.4 million (FY2017/18: HK$6,301.9 million). The businesses maintained their leadership positions in Hong Kong’s market, and contributed 73.8% of the Group’s total revenue for FY2018/19. The Group’s QSR and institutional catering business had a total of 298 outlets as at 31 March 2019 (31 March 2018: 298).

Although the Hong Kong market remains very competitive, sentiment is positive and the fast food segment continues to grow. In order to maximise growth opportunities, the Group is maintaining its focus on improving all parts of the Customer Journey. With the manpower investment programme in previous years now largely complete, costs are stable and under control – and margins are improving as a result.

Consumers remained price sensitive and continued to be attracted by price cuts and value promotions. Café de Coral fast food recorded flat same store sales growth during the year under review. A store rationalisation strategy saw the opening of 1 shop during the year, and 162 shops at year end (31 March 2018: 167). With network consolidation now complete, the Group expects to expand its network. 7 new outlets have been scheduled to open in the months ahead.

Substantial effort has been invested to improve the Customer Journey and dining experience, including introduction of a revamped customer service model with emphases on quality, service, cleanliness and ambience. Café de Coral fast food has also applied new technologies to increase operational efficiency and stay abreast of changing consumer habits. Smart Ordering Kiosks have been introduced at selected outlets, and a new Kitchen Video System has been installed to improve efficiency and reduce waiting time for customers.

As part of our constant efforts to introduce new products to satisfy customers’ taste buds, Café de Coral fast food has revamped its key hero products with upgraded recipes and menu mixes, such as Teppan dishes with pastry-covered soup, as well as curry and hotpot series. Supported by cross-media advertising campaigns, these promotions have been well received by customers. A new customer loyalty programme was launched in May 2018 and proved to be highly popular with end users, with a significant increase in membership. Club 100 Apps were subsequently launched in the fourth quarter to further attract mobile users with more frequent engagement.

The Group has strengthened Super Super Congee & Noodles brand positioning as Hong Kong’s No. 1 leading neighbourhood chain, providing nostalgic traditional and authentic Chinese cuisine (congee, noodles and wok-fried dishes), building on enthusiastic response to the chain’s 20th Anniversary promotion launched in August 2018. At the same time, a re-engineered menu focusing on hero products – wonton noodles and congee – as well as popular seasonal items including clay pot rice and hotpot, has helped to drive sales.

The Super Super Congee & Noodles brand recorded same store sales growth of 2% during the year. Deliberately pacing growth to focus on operational improvement, the Group ended the financial year with 49 stores (31 March 2018: 50). Meal Delivery Service was implemented at dinner in 28 branches with warm response, and will be rolled out to all branches to further improve customer satisfaction.

Asia Pacific Catering and Luncheon Star, the Group’s institutional catering brands, retained their market leadership during the year. Faced with keen market competition, Asia Pacific Catering reshuffled a number of key contracts – ending the year with 87 operating units (31 March 2018: 81). Luncheon Star maintained healthy growth in revenue as Hong Kong’s largest student lunch service provider for 14 consecutive years. The business pioneered new technology including the industry’s first mobile ordering service, while building production capacity for future expansion.

Casual Dining
The casual dining business presented a substantial increase in profit contribution to the Group, riding on improved market penetration, same store sales growth and customer loyalty. The business achieved revenue of HK$905.8 million during the year under review, an increase of 2.7% compared to the previous year (FY2017/18: HK$882.0 million). Following rationalisation of the brand portfolio and branch network, the division operated 60 shops at the end of the year (31 March 2018: 68).

The Group’s Chinese cuisine brands, Shanghai Lao Lao and Mixian Sense, maintained sizeable networks and shop presence with 12 and 17 shops at year end, respectively (31 March 2018: 14 and 15 shops, respectively). Shanghai Lao Lao, our leading home grown brand, was successful in its “must try” promotions and Star Chef collaborations during the year. Mixian Sense, now a sizeable chain on its own with 3 more shops opened during year, introduced QR code ordering to improve the customer experience and operational efficiency, and also launched a new VIP programme to encourage customer response.

Non-Chinese cuisine brands continued to rationalise their branch networks to improve performance. The Spaghetti House ended the year with 7 shops (31 March 2018: 9), and Oliver’s Super Sandwiches operated 13 shops at year end (31 March 2018: 15). The Spaghetti House continued to build its brand as a preferred family restaurant through Star Chef collaborations and other seasonal promotions. Meanwhile, the branding programme at Oliver’s Super Sandwiches yielded positive sales growth in signature products across all key categories. Both brands benefitted from menu re-engineering with enhanced ingredients, as well as renewed VIP programmes to drive loyalty and repeat purchases.

The Group continued to fine-tune the business models of its franchised brands, while exploring potential for future scalability.

Mainland China Operations
The Mainland China market represents a major opportunity for the Group’s business. Continuing last year’s momentum, the Mainland China business delivered strong performance during the year, achieving 7.0% growth in revenue to HK$1,151.9 million (FY2017/18: HK$1,076.2 million), and same store sales growth of 2%.

Building on management’s confidence in the market, the Group doubled the number of store openings compared to the previous twelve months. 16 shops were opened during the year under review, ending the financial year with 107 stores (31 March 2018: 97). Further accelerating the pace of growth, there are plans to open an additional 20 shops in FY2019/20. With natural synergies and ties to our home market of Hong Kong, the Group’s business has organically evolved around the major markets of the Greater Bay Area. We will continue to focus our efforts to capture the benefits of growing urbanization in the region, especially in the nearby cities of Guangzhou and Shenzhen.

In addition to the stable growth of the dine-in business, the Group has experienced healthy upside coming from rising online-to-offline (O2O) delivery sales. While O2O sales are providing an exciting new channel for future expansion, our business model remains focused on the dine-in sector.

Uplifting the value of our brand through investment in both hardware and software, we rolled out our new sixth-generation (6G) store design to warm customer response, and also launched a Customer Service Ambassador programme to further enhance customer satisfaction. As an early adopter of new technology, the Group has developed a new “virtual store” sales channel featuring online ordering through WeChat, supported by JingDong logistics delivery service.

KEYS TO SUCCESS

Brand Building
We continue to strategically differentiate our brand by enhancing our Customer Journey. Through efforts such as our intensive Service Champion Campaign, as well as introducing new and engaging store designs, we continue to focus on the customer experience as a key component of our brand.

Moving forward, the Group’s multi-brand strategy will be key to capturing additional market share by offering consumers a greater variety of choice. An example is our establishment at JP Plaza in Causeway Bay, where the Group operates a number of outlets offering different types of cuisine – appealing to both landlords and consumers. The Group continues to seize opportunities to roll out along this concept in other locations in Hong Kong.

We have also worked to enhance our brand’s reputation and standing in the community. As a responsible corporate citizen, our community efforts have been shaped around three principles - fostering social integration through activities such as our Community Spring Feast, nurturing young people through support of events like Music Station, and promoting sustainable living via efforts including our single-use plastic reduction campaign.

Now that the Group’s 50th Anniversary celebrations have concluded, we are ready to focus on the challenges of the next 50 years. Connecting and engaging with the community, we are leveraging our branch network to build relationships directly with customers through our stores.

People Development
As of 31 March 2019, the Group had a workforce of 19,110 employees (31 March 2018: 18,940).

In support of operations’ revamped customer service model during the year, intensive training and competition programmes were conducted across all shops to reinforce the Group’s philosophy of customer service excellence. To develop management bench strength for the future, the Group has also launched booster camps for management – giving managers practical training in leadership and people management skills to better implement the “Quality, Service and Cleanliness” guidelines. These concerted efforts from top management to frontline staff have resulted in notable improvement in customer experience and operational efficiency.

Our in-house training programmes continue to draw professional recognition by the Qualification Framework (QF) Scheme of the Hong Kong Council for Accreditation of Academic & Vocational Qualifications, with our Professional Certificate in Train the Trainer course receiving QF Level 4 accreditation in September 2018 – the Group’s second programme to achieve QF Level 4 accreditation. In Mainland China, the Group is investing in frontline staff development, and building core management capability for future growth.

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 31 March 2019, the Group had a network of 358 stores in Hong Kong and 107 stores in Mainland China.

In Hong Kong, an improved operation model and stronger profit margins – combined with an enhanced brand mix – is enabling access to better shop locations.

The Group is building its presence in all major regions and cities in Southern China, taking advantage of rapidly increasing urbanization and organic development opportunities as the business grows outward from Hong Kong. In line with these goals, we have committed to an aggressive store opening plan focused on Guangzhou and Shenzhen.

Supply Chain Management
Caring deeply about the food our customers eat, the Group emphasises supply chain management across all markets and brands.

In Hong Kong, we have invested in systems and technology upgrades throughout operational processes – from procurement, manufacturing, storage and logistics – to enhance supply chain efficiency. In recognition of our efforts, the Group was named the Diamond Enterprise Winner in GS1 Hong Kong’s Quality Food Traceability Scheme 2018 (2017: Gold Winner). With a renewed focus on efficiency and traceability, the Group’s theme for FY2019/20 is “Building on Quality”.

Our operations in Mainland China successfully implemented a new Branch Management System developed from the system at the Group’s Hong Kong Headquarters to enhance traceability and quality management, laying a solid foundation in supply chain and store management.

Sustainability
Recognising our long-term efforts in sustainability, the Group was included in the Hang Seng Corporate Sustainability Benchmark Index for the fourth consecutive year. We report our sustainability performance in greater detail in the Company’s Sustainability Report 2018/19.

FINANCIAL REVIEW

Financial Position
During the year under review, the Group’s financial position remained healthy. As of 31 March 2019, the Group recorded net cash of approximately HK$836 million, with HK$782 million in available banking facilities. The Group’s current ratio as of the same date was 1.4 (31 March 2018: 1.4), and the cash ratio was 0.9 (31 March 2018: 0.9). The Group had no external borrowing (31 March 2018: nil) and a nil gearing ratio (ratio of total borrowing less cash and cash equivalents to total equity) (31 March 2018: nil).

The Group’s return on equity for FY2018/19 was 17% (FY2017/18: 13%), and return on assets was 13% (FY2017/18: 10%).

Capital Expenditure and Commitment
During the year under review, the Group’s capital expenditure was HK$290 million (FY2017/18: HK$462 million). As at 31 March 2019, the Group’s outstanding capital commitments were HK$580 million (31 March 2018: HK$480 million).

Contingent Liabilities
As of 31 March 2019, the Company provided guarantees of approximately HK$915 million (31 March 2018: HK$415 million) to financial institutions in connection with banking facilities granted to its subsidiaries. The Group had no charge on assets as of 31 March 2019 (31 March 2018: nil).

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

Looking to the year ahead, we anticipate continued health in the Hong Kong market, although the low unemployment rate may prove to be a challenge in hiring. The Mainland China market is expected to remain a driver of growth, albeit at a slower, more measured rate. The Group remains confident in our management team and the execution capabilities of our frontline staff to deliver continued improvement in the year ahead.

Although labour costs may prove to be a challenge with the incremental rise in Hong Kong’s minimum wage, the prospects for the Hong Kong QSR business remain positive. The Group will continue to invest in the Customer Journey and technology upgrades, while taking advantage of availability of better shop locations to expand the branch network.

The casual dining business is actively seeking opportunities to roll out more outlets under the Group’s multi-brand strategy, taking advantage of natural synergies to increase future contributions to profit.

In Mainland China, the Group will capitalise on market opportunities to open new outlets, focusing on Guangzhou and Shenzhen while expanding our portfolio in second and third tier cities.

Having passed the major milestone of our 50th Anniversary, the Group is ready to face the challenges of the coming decades with fresh enthusiasm and sharper focus on the fundamentals behind business success.

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