Xiaonanguo recorded only a small profit in the first half of 14, in line with our expectations. The company's revenue was 743 million yuan, up 9.6% from a year earlier, while same-store sales fell 1.8%. Same-store sales were-4.3% in the first quarter of 14, but turned positive to 1.1% in the second quarter of 14. The same-store sales of "Shanghai Xiaonanguo" fell 2.4% in the first half of 14 years, but the same-store sales of "Huigong" and "Nanxiao Pavilion" increased by 7.6% and 3.1% respectively in the same period. Due to the decline in gross profit margin, relatively fixed operating costs and losses caused by shop closures, net profit plunged 98.2% year-on-year to 0.6 million yuan. The company operated 88 stores at the end of June 14, 5 more than at the end of December 13.

Same-store sales in the third quarter of 14 are expected to continue to improve on a quarterly basis, and the company is considering publishing quarterly same-store sales data on a regular basis. The performance of "Nanxiao Pavilion" in China is satisfactory to the management, and the company will continue to open stores in first-and second-tier cities. We expect the company to operate 96, 116 and 139 restaurants respectively in 14-16. Same-store sales in 14-16 are expected to reach 1.5%, 4.3% and 4.1%, respectively. In addition, the company's management business is expected to make a profit contribution to the company. We expect the company's net profit per share for 14-16 years to be 0.007 yuan, 0.044 yuan and 0.087 yuan respectively, an increase of 8.2 times, 5.5 times and 1.0 times respectively over the same period last year.

Valuations are still attractive as 15-year earnings are expected to grow significantly. We maintain Xiaonanguo's "buy" rating with a target price of HK $1.65, equivalent to 29.6 times 15-year earnings and 14.8 times 16-year earnings.