The company's business improved in the first half of 2014: In the first half of 2014, Xiaonan's overall revenue increased 9.6% to 740 million yuan. Affected by many marketing and promotional activities, gross margin fell 1.8 percentage points to 67.1%. Net profit fell 98.2% year over year to 578,000 yuan. The profit after deduction was 5.5 million yuan, slightly lower than our expectations, but the loss was reversed month-on-month, a significant improvement from the loss of 31 million yuan in the second half of 2013. The worst time for fundamentals is over, and business is gradually improving.

Same-store revenue has been corrected since the second quarter: the company's same-store sales fell 1.8% in the first half of the year, of which 4.3% fell in the first quarter, and was already corrected in the second quarter, up 1.1%. The improvement continued in July and August, and was stronger than in the second quarter. The revenue of the main brand Xiaonanguo in mainland China fell 2.4%, and the revenue of the South Xiaoguan same-store increased 3.1%. The company expects the contribution from prices to change from negative to positive in same-store growth during the year.

The store opening plan is proceeding as scheduled: the company continues to adjust and optimize the layout of its main brand Xiaonanguo, and will open 1-2 new stores in the second half of the year. The goal of 10-12 stores throughout the year remains unchanged. 3 stores have been opened in the first half of the year, 7 out of 7-9 new stores have implemented locations in the second half of the year, and 10-12 new stores will continue to be opened in 2015, indicating that the brand is developing smoothly. Moving into Tier 2 cities will further expand the space for opening stores in the future.

The multi-brand strategy is still the highlight of future growth: Xiaonanguo has been actively experimenting with different types of catering business formats, and multiple brands are working at the same time. Its “Little South Country” has already opened its first store and will promote it to second-tier cities once the operation is mature. Uncle Chase already has 16 stores, contributing HK$3.4 million in net management revenue. Starting in 2014/8, the Xiaonan Congress collaborated with a third party to establish a milk tea shop brand. Furthermore, the company also plans to cooperate with the Japanese restaurant chain “Oreno Co., Ltd. (Oreno)” to develop Japanese and Western food in the Greater China region.

Maintaining the buying rating, the target price was lowered from HK$1.6 to HK$1.3: the impact of the crackdown on official consumption on the middle and high-end catering industry gradually faded, the industry situation gradually stabilized, and supply and demand entered a new equilibrium. 2014 is still an adjustment year for Xiaonan. We believe Xiaonan's business has returned to an upward trajectory, fundamentals have already reached a low point, and future revenue recovery will determine the room for stock prices to rise. As profitability for the first half of the year was slightly lower than our previous estimates, we lowered our earnings per share forecast for 2014-2016 to HK$0.01, HK$0.064, and HK$0.089. The company was given a price-earnings ratio of 20 times that of 2015, a target price of HK$1.3 was obtained, and the purchase rating was maintained.