According to the National Bureau of Statistics, domestic food and beverage revenue in 2015 was RMB 3,231 billion, up 11.7% year on year, and 2.0 percentage points faster than in 2014. Among them, food and beverage revenue per unit above the limit reached RMB 866.7 billion in 2015, up 7.0% year on year, and the growth rate was 4.8 percentage points faster than in 2014. In the first 4 months of 2016, the domestic catering industry continued to grow rapidly. Overall catering revenue increased by 11.4%. Among them, the growth rate of food and beverage revenue per unit above the limit also reached 7.0%. The overall revenue growth rate of the catering industry was 1.3 percentage points faster than the overall retail sales growth rate (the difference in growth rates between 2014 and 2015 was -2.5 percentage points and 1.1 percentage points, respectively). Although transformation and upgrading is still the main tone of the restaurant industry this year and next two years, the China Culinary Association believes that consumption in the Chinese restaurant industry, which is dominated by the popular market and adapts to multiple levels of diversified consumption needs, will move towards the goal of reaching 50 billion yuan in sales in 2020. The compound annual growth rate for the period is 9.1%. Among them, the performance of Xiaonan, which is relatively quick to transform and benefit from the opening of Shanghai Disney, is expected to improve markedly in 2016.

As of December 31, 2015, Xiaonanguo operated a total of 139 restaurants, including 81 “Shanghai Xiaonanguo,” 30 “Pokka,” 22 “Nan Xiao Guan,” 3 “Hui Gong Guan,” 2 “My”, and 1 “Wolfgang Puck.” Xiaonanguo is actively optimizing its store portfolio and made a loss of RMB 67 million in asset provision in 2015 due to store closures last year and this year. Little Nanguo will adopt a completely different strategy for Chinese food and Western food in 2016: in terms of Chinese food, apart from opening 2 Chinese restaurants at Shanghai Disney, the company has no plans to open new Chinese food stores in other regions. The focus in 2016 is to focus on boosting same-store sales growth in Shanghai stores, closing stores with low synergy and losses in second- and third-tier cities, and improving the profit margins of existing stores; in terms of Western food, Shanghai Disney will have 2 Western food restaurants in Little South China, and the company is likely to continue opening new Western food stores in 2016. In 2015, Xiaonanguo's same-store sales growth rate was 1.9%, mainly driven by the fact that per capita consumption of beneficiaries was no longer declining and customer traffic continued to rise. Although the company's same-store sales fell 1.4% in the first quarter of 2016, we believe Shanghai Disney will drive revenue from restaurants within the park and around Shanghai. The management of Xiaonanguo expects the same-store sales growth rate of stores located in Shanghai to be 2-4 percentage points higher for the year than stores in other regions. Referring to Xiaonanguo's same-store sales data for 2010 (Shanghai World Expo, a period of 6 months, with more than 73 million visitors), the company's same-store sales growth rate in Shanghai stores in 2010 was 15.6%, but the same-store sales growth rate for stores located in other regions of China was only 9.1%. Therefore, we think it is likely that Shanghai Disney's same-store sales growth rate will exceed expectations after opening.

In addition to expecting the growth rate of same-store sales to accelerate, Xiaonanguo also implemented different measures and benefited from national policies in terms of open source savings in 2016. On the open source side, Xiaonanguo proposed a product commercialization strategy, hoping to sell the company's own products through different channels; in terms of savings, integrating Xiaonanguo and the top 100 Hong Kong back offices is expected to reduce headquarters expenses. Furthermore, profits and profit margins in the restaurant industry are also expected to increase slightly after the business reform. On the other hand, capital expenses are expected to be drastically reduced in 2016, and the company will return to a net cash position. We expect Xiaonanguo's same-store sales growth rates to reach 3.9%, 4.3%, and 3.6% respectively in 2016-2018. The company recorded a loss of RMB 93 million in 2015, but looking ahead to 2016, one-time closing costs will be drastically reduced and same-store sales growth will accelerate. We expect the company's net profit to reach RMB 41 million in 2016. The current price is equivalent to 17.0 times the company's price-earnings ratio in 2016 and 10.8 times the price-earnings ratio in 2017. The valuation is not high. Our investment rating for Little South China is “buy”, and the target price is HK$0.85, which is equivalent to 26.2 times the 2016 price-earnings ratio and 16.7 times the 2017 price-earnings ratio.