Adjusted net profit decreased by 62.7% compared with the same period last year.

Nine Mao issued a profit warning on Monday night. In fiscal year 23, Jiujiu is expected to record revenue of about 4.0057 billion yuan (down 4.2 per cent from a year earlier and 14.7 per cent lower than the CCI forecast). The net profit should be no less than 4.7 million yuan (down 86.2% from the same period last year, 82.0% lower than the CCI forecast). After deducting a foreign exchange loss of 78.9 million yuan, net profit fell 62.7 per cent from a year earlier (52.3 per cent lower than the CCI forecast). Revenue in the second half of 22 should be 2.107 billion yuan (down 2.4 per cent from a year earlier, 24.7 per cent lower than the CCI forecast). The adjusted net profit in the second half of 22 should be 68 million yuan (down 55.7% from the same period last year, 67.3% lower than the CCI forecast).

... ... Due to the epidemic situation of COVID-19

Jiumaojiu explained that due to the limitations of the COVID-19 epidemic, restaurants in most parts of China are unable to achieve full operational capacity. Negative operating leverage leads to a decline in customer flow and revenue, which in turn leads to a decline in net profit. As the epidemic continues in fiscal year 22, we do not think the decline in net revenue and net profit is unexpected.

FY23 is recovering, but it still takes time.

With the relaxation of epidemic restrictions in December 22, we should expect a recovery in FY23. In fact, same-store sales of Taier-branded restaurants grew by 6% in January, compared with 4% for 99-branded restaurants. Although this is a good start to FY23 and we don't have enough details, we don't think the revenue of each restaurant is close to the level before COVID-19 's epidemic.

Maintain the overweight rating and target price of HK $24.1

In view of the fact that 99 Mao only issued a profit warning and did not release many financial details, we will not change our forecast for the time being. Nevertheless, we believe that the market should have digested the unsatisfactory results for fiscal year 22. We further believe that there should be a recovery in FY23 and expect more details about the new restaurant opening when the actual results for FY22 are announced in March. We maintain our target price of HK $24.1 (previously HK $24.1) and increase our rating.

The main catalysts: turnaround rate and same-store sales are better than expected.

Main risks: changes in consumer behavior and fewer meals out; profit margins are lower than expected.