In the first half of '13, the domestic high-end catering industry was affected by the slowdown in economic growth and government restrictions on consumption of public funds. In addition, some regions were hit by the bird flu. Same-store sales fell markedly, while operating costs such as labor, rent, and depreciation were relatively fixed. Therefore, the profit situation of the general industry was not very good. As far as Xiaonanguo is concerned, same-store sales fell 8.7% in the first half of the year, of which the situation in the second quarter was even worse. As a result, the company's net profit fell sharply by 43.3% year on year. However, data from the National Bureau of Statistics for August showed that domestic food and beverage revenue growth was faster than the previous seven months, while the year-on-year decline in food and beverage revenue for enterprises above the quota was narrower than in the previous seven months. We believe that the operating conditions of the catering industry will slowly improve, while the performance expectations of the small southern countries with relatively rapid transformation and good management quality will be faster than those of their peers to record a marked improvement. Xiaonanguo now operates restaurants under three brands, including “Shanghai Xiaonanguo,” “Nan Xiao Guan,” and “Hui Gong.” “Shanghai Xiaonanguo” caters to middle and high-end consumers. The dishes are mainly large dishes, and the consumption per capita is about RMB 220; the “South Restaurant” caters to the middle and low end consumer markets. The dishes are mainly dim sum and snacks, with a per capita consumption of about RMB 70; “Hui Gongguan” is a high-end brand, with a target audience of business customers. The menu is mainly Cantonese cuisine, and the per capita consumption is about RMB 500. Since the domestic mass consumer market is completely unaffected by government restrictions on spending with public funds, and the impact of the slowdown in economic growth is relatively small, management will speed up the pace of opening stores in the “South Pavilion.” Xiaonanguo opened its first domestic “South Pavilion” in Shanghai at the end of June. The turnover rate reached 4 times, and the store's profit margin before tax (excluding administrative expenses) reached more than 18%, which is higher than “Shanghai Xiaonanguo” and “Hui Gongguan.” The company's goal is to open 4-5 more “South Pavilions” in China by the end of '13, and will open about 12 more in China and Hong Kong in '14. The contribution of the “South Pavilion” to the company will increase rapidly. On the other hand, management now also hopes to develop a “small southern country” dominated by mid-range consumption. The “Little South” will focus on exquisite dishes, and the per capita consumption will be between RMB 120-180. The company plans to transform some of the existing “Little South” stores into “Little South” or open new stores to gain market share in mid-range food and beverage consumption. Although per capita consumption is relatively low in “South China” and “Little South”, there is no inevitable direct relationship between gross margin and per capita consumption. Coupled with the high turnover rate, store profit margins are also expected to be higher than “Shanghai Xiaonanguo” and “Hui Gongguan.” As for the “Little South of Shanghai,” which contributed the most, and the “Hui Mansion,” which recorded losses in the first half of the year, the company is also taking measures to improve their performance. We expect that in the future, the pace of expansion of the “Little South of Shanghai” will slow down, and that the opening of new stores may also be mainly asset-light (for example, opening a hotel can reduce investment in decoration and kitchen). The ratio of lobbies to rooms will be adjusted in new stores, restaurants that focus on official consumption will be closed, and restaurants that focus on official consumption and continue to promote their brand of packaged food to increase revenue sources. “Hui Gongguan”, on the other hand, will strengthen the promotion of conference services to increase revenue outside of stores. Up to now, Xiaonanguo has operated 80 restaurants. We expect the number to increase to 90 by the end of '13, and next year the company expects to open 20-25 more stores, half of which will be “South Restaurant.” The company has central kitchen facilities to support expansion, and many managers have worked for domestic and foreign food industry giants and are capable of supporting the company's future development. We expect the decline in same-store sales in Xiaonanguo in the second half of '13 to be narrower than in the first half of the year, but performance will still drop sharply year on year, but there will be a slight improvement from month to month. Looking ahead to 14 years, we expect that the increase in customer traffic will drive a moderate increase in same-store sales. Coupled with the increase in the contribution of “Minami Xiaoguan,” we expect a significant increase in performance from year to year. We expect Xiaonanguo's net profit per share in 13 and 14 to be RMB 0.048 and 0.082 respectively. The current price is equivalent to 21.2 times and 12.5 times the company's price-earnings ratio for 13 and 14, respectively. The valuation is attractive. Our investment rating for Xiaonan is “buy,” and the target price is HK$1.65, which is equivalent to 15.7 times the 14-year price-earnings ratio.