Key points of investment:

The company announced its 2018 report: full-year operating income was 1,777 million yuan, down 4.48% from the previous year; the net profit of the mother was 73,042 million yuan, down 46.29% from the previous year, lower than our expectations (155 million yuan/ +13.97%); after deducting non-net profit of 57.1609 million yuan, a year-on-year decrease of 52.14%. Affected by increased competition in the catering industry, the company's annual number of visitors decreased by 4.77% year on year, leading to a year-on-year decline in the company's operating income and profit level in 2018. During the reporting period, the company strengthened marketing measures, which increased the sales expense ratio by 3.15pct to 41.17%; the company's R&D expense ratio was 0.04%, and the management expense ratio decreased by 0.06pct to 12.31% after excluding R&D expenses; due to the increase in Internet payments, the amount of handling fees decreased by 0.15pct to -0.11%, and the year-on-year increase in interest on company deposits.

Revenue and profit from the main business are under pressure from competition, and store replication incubation and quality improvement are progressing in an orderly manner. According to the report, the company received 7,7047 million guests (-4.77%), and the company's main business revenue from the catering business fell 5.40% to 1,276 million yuan, and gross margin fell -0.91 pct to 68.80%; revenue from the product sales business fell 2.09% to 451 million yuan, and gross margin fell -4.18pct to 31.74%. The decline in revenue and profit from the main business was mainly affected by increased competition in the catering industry. The company focuses on the Beijing-Tianjin-Hebei and Yangtze River Delta regional markets, steadily increasing the number of stores, actively developing members, and using new communities to cultivate new consumer groups. In 2018, the company opened 3 new directly-managed enterprises and 5 new franchised stores; as of December 31, 2018, there were 121 member enterprises (stores) of the company, including 46 directly managed enterprises and 75 franchised enterprises. On the basis of expanding stores, key annual implementation projects such as roast duck quality, dining area atmosphere, service standards, and kitchen were used to improve quality. The proportion of stores nationwide that reached the four-star standard increased from 30.39% to 69.90%, an increase of 39.51 pct.

Focus on building time-honored classic boutique stores and promote the Quanjude complex store opening model. The Quanjude brand is the city's business card of Beijing. In 2019, the company plans to pilot the creation of at least one classic boutique store with an excellent image and good reputation. The three major brands, Imitation Restaurant, Fengzeyuan Hotel, and Sichuan Restaurant, aim to create long-established boutiques, simultaneously improving the quality of dishes and the quality of service. The Shanghai regional company promoted the iterative upgrading and classified operation of the Quanjude brand, used several newly opened stores as pilot projects, explored a complex business model adapted to the new situation and needs of the lifestyle service industry, clarified store positioning in terms of store environment, product positioning, food presentation, etc., and researched and formulated the “Quanjude Complex Store Opening Model” to better suit the experience needs of young consumers. It is expected that the replication plan will be promoted and 3 to 4 mixed-use stores will be opened in 2019.

Profit prediction and investment suggestions: As the market environment changes, the company adjusts its business strategy in due course, transforms to popular restaurants, implements store miniaturization and menu refinement, and terminates fund-raising projects in due course to seek new investment opportunities. As an established Chinese restaurant brand, the company is speeding up the brand segmentation of stock companies, and the time-honored brands will gradually gain new vitality. Adjusting 2019/2020 and adding 2021 profit forecasts, the estimated EPS for 2019-2021 will be 0.27/0.29/0.31 yuan respectively (the original estimate for 2019/2020 was 0.54/0.58 yuan), and the corresponding PE was 49/46/43 times. The company was affected by increased competition in the industry, single-store operating efficiency declined, and performance fell short of expectations. We lowered our rating to “neutral”.

Risk warning: food safety risks; operating risks during the incubation period of opening new directly-managed stores, etc.