CAFE DE CORAL(341.HK)：MORE TIME IS NEEDED FOR INDUSTRY TURNAROUND

Core Viewpoint - CDC's FY25 results were disappointing, particularly regarding dividends, leading to a downgrade to HOLD due to ongoing pressures in sales and a challenging industry environment [1][6]. Sales Performance - CDC's sales declined by 1.4% YoY to HK$ 8.6 billion, with net profit dropping by 25% YoY to HK$ 233 million, missing estimates by approximately 19% [6]. - Same-store sales (SSS) continued to decline, with negative trends persisting into April, May, and June 2025, particularly in Hong Kong [2][3]. Industry Environment - The industry environment remains unfavorable, with increased competition from two/three-dish rice establishments and a trend of Hong Kong residents traveling more abroad or to mainland China [3][5]. - The number of two/three-dish rice shops in Hong Kong has increased to over 600, up from less than 400 a few years ago [3]. Margin and Cost Management - There is potential for margin improvement due to a 17% reduction in average base rent for recently renewed contracts, but overall improvements may be limited by competitive pricing pressures and rising minimum wage [4]. - The minimum wage in Hong Kong has been raised to HK$ 42 per hour, effective May 2025, adding to cost pressures [4]. Future Outlook - The outlook for FY26E is subdued, with a forecast of 0% same-store sales growth for both CDC HK and mainland China, down from previous estimates of 2% and 3% [2][5]. - The management plans to increase the number of stores by a modest 10 to 15 in FY26E, following a stagnant FY25 [5]. Dividend and Profit Forecasts - The dividend payout for FY25 was lower than expected at 100%, compared to an estimate of 110%, with a significant drop in the dividend amount in 2H25 [6]. - FY26E and FY27E net profit forecasts have been revised down by 30% and 23%, respectively, due to slower store expansion, negative same-store sales growth, and higher impairment losses [5].