Can Café de Coral Holdings Limited Serve Great Returns For Investors?
February 5, 2020
Café de Coral Holdings Limited (“Café de Coral”) (HKG: 0341) is one of Asia’s largest publicly listed restaurant and catering groups operating quick-service restaurants, casual dining chains and institutional catering, with over 450 outlets in Hong Kong and Mainland China. The Group is also a major operator in the food processing business with 4 ISO-certified plants in Hong Kong and Mainland China.
As of 31 December
2019, the Group has a market capitalisation of approximately HK$10.81 billion.
In this article, we will take a closer look at the business, management and
financial aspects of the Group, to see if it is worth an investment.
Café de Coral is often
regarded as the “Canteen of Hongkongers”, feeding Hong Kong’s working-class
since 1969. The Group has four strategic business units, namely:
Quick Service Restaurants (“QSR”): The Group’s flagship brand of Café de Coral is the undisputed market leader in the fast-food sector in Hong Kong. It has also developed Super Super Congee & Noodles to boost its long-term growth in Hong Kong’s competitive Chinese QSR area.
Casual Dining: Consist of homegrown Chinese casual dining brands (Shanghai Lao Lao and Mixian Sense) and Western-style restaurants (The Spaghetti House, Oliver’s Super Sandwiches, 360 series and Little Onion). The Group has also co-operated with overseas restaurant groups and introduced THE CUP and Don Don Tei, servicing Korean and Japanese cuisines respectively.
Institutional Catering: The Group set up Asia Pacific Catering (Hong Kong) in 1990 to target organizational clients such as universities, hospitals, government, and public and private institutions. In 1999, the Group entered the student catering business with the introduction of Luncheon Star, which has subsequently grown to become one of Hong Kong’s largest school lunch providers.
Food Processing & Distribution: Café de Coral owns central food processing centres in Tai Po and Guangzhou. These facilities enable streamlined standardization of food quality and ensure total control over an ever-increasing volume and range of products and ingredients.
Separately, Scanfoods is involved in
the production, distribution and selling of ham and sausage products in Hong
Kong and Mainland China under the “Viking Boat” brand. It is one of the leading
ham suppliers in Hong Kong and accounts for significant market share in the
domestic processed meat market.
Readers can view the
Group’s corporate video here and a write up by South China Morning Post on
its origins here.
wise, the Hong Kong QSR and Institutional Catering is the largest contributor
at 73.8%, followed by Mainland China at 13.6%, Hong Kong Casual Dining at
10.7%, and Others at 1.9%, for the financial year (“FY”) ended 31 March 2019.
Saturated domestic market and growing pains
If we were to track
the Café de Coral’s revenue distribution from FY2016 to FY2019, we would
discover that the Group is facing slow growth in an increasingly saturated Hong
Kong market. Revenue from its largest
segment – QSR and Institutional Catering is only growing at a compound annual
growth rate (“CAGR”) of 3.84% from FY2016 to FY2019. Further, our estimation of
revenue per unit (shop) for the same period inched ever marginally from
HK$19.8m in FY2016 to HK$21.0m in FY2019.
Meanwhile, the Group has not been able to make much headway in its expansion to Mainland China. The number of operation units (shops) has declined from 114 to 107 over FY2016 to FY2019, and growth was lacklustre at 0.97% in revenue over the same period. Moreover, our estimation of revenue per unit (shop) for the same period only edged slightly from HK$9.8m in FY2016 to HK$10.8m in FY2019.
In fact, Café de Coral
has not had much success in its overseas ventures in the past. The Group had in
2000, through a joint venture with Ken Fowler Enterprises, acquired Machu Work.
At that time, Manchu Work was Canada’s largest and US’s second-largest Chinese
fast-food chain, and is one of the only two national brands in Oriental food, with
the other being Panda Express.
Fast forward to 2014,
the Group announced its disposal of loss-making operating and franchising
assets in Manchu Wok, Sense Asian and Wasabi Griss and Noodle restaurants in
North America, to focus on its core businesses and key markets in Hong Kong and
Mainland China. A loss of HK$4.7 million was recorded on the said disposal. Clearly,
there is no guarantee that domestic success can be replicated easily overseas.
Café de Coral is led by
the Lo / Chan Family. Collectively, the family owns approximately 32.63% of the
Company, and have the following family members on the board of directors:
Mr. Lo Hoi Kwong, Sunny (Chairman)
Ms. Lo Pik Ling, Anita (Non-executive Director)
Mr. Chan Yue Kwong, Michael (Non-executive Director)
Mr. Lo Tak Shing, Peter (Chief Executive Officer)
Mr. Lo Ming Shing, Ian (Executive Director)
Since it is a family
business, investors can expect the management to be motivated and hands-on to
ensure its longevity and continued success.
(Source: FY2019 annual
Treatment of workers and pay battle
The corporate duty of
today’s enterprise is to strike a balance between business objectives and
social responsibility. When a new minimum wage law was passed in 2010, Café de
Coral offered 3,000 front-line staff an increase of HK2.00 and HK3.50 in their
hourly rates of HK22.00 to HK25.00 on condition that they forfeit their right
to up to 45 minutes of paid lunch break. This would have resulted in lower pay
in some cases for staff.
The above decision by
then chairman, Mr. Chan Yue Kwong, Michael, did not sit well with the public,
with many condemning the restaurant for exploiting legal loopholes. The move
sparked weeks of trade union protests and threats to boycott the eatery.
Eventually, the Group-backed down in face of intense public pressure, ditching
the plan to deprive staff of paid meal times. However, this incident tarnished
it’s business and reputation. An article on this event is attached here.
The F&B industry
is highly competitive. How management navigates inherent inflationary pressures
within the economic environment can make or break the business. However,
whatever measures taken, we hope that fair consideration is given to the
welfare of employees since they are a company’s greatest asset.
Measure 1: Growth in revenue and profits
Café de Coral has found
it challenging to grow its revenue and profits meaningfully over the past 6
years. The Group has only registered CAGR of 4.47% in revenue and 0.31% from FY
2014 to FY2019. The lack of growth in
profits is particularly worrisome, it could indicate that the Group lacks pricing
power to pass on increases in input costs to customers.
Measure 2: Profitability
Both the Group’s gross
and net profit margins have remained fairly stable around 13-14% and 6-9%
respectively. To be fair, the low profitability ratios are indicative of the
F&B industry where the barrier of entry is low, and competition is plentiful
and fierce. In spite of these disadvantages, the Group has achieved double-digit
return on equity ratios over the same period which is commendable.
Measure 3: Liquidity
No major concerns here
as Café de Coral has a strong balance sheet and has recorded positive current
and cash ratios for the past 6 years. In fact, the Group has zero borrowings,
and cash and cash equivalents of HK$835.5 million as of 31 March 2019.
Round 4: Dividends payout
Historically, Café de
Coral has been a generous dividend payer and is often regarded by investors as
an “income” stock, as demand for affordable restaurants is unlikely to change
much in economic downturns. Since the management team are also major
shareholders, the high payouts are likely to continue. Please note that the
dividend payouts for FY2016 and FY2018 are elevated since special dividends of
HK$0.35 per share was declared in both years.
With a closing share
price of HK$18.46 as at 31 December 2019, Café de Coral is trading at a price
of earnings (PE) ratio of 21.44, with an indicative yield of 4.55%. While the defensive
nature of the business may be attractive to some investors, the lack of growth
prospects and challenging industry dynamics keeps this Company off of my watch
list for the moment.
An accountant by training, F.I.R.E 2030 is a student of value investing since 2012. She believes that successful investing requires discipline and patience. But with the right knowledge and temperament, ordinary investors can achieve extraordinary results. These articles are her journals on stocks and the investing journey toward financial freedom in 2030.