YTD 2023 performance of XBXB and Cou Cou were far below expectation, evidenced by weak SSS recovery rate and margins. Just because of its cheap valuation, we maintain BUY and cut TP to HK$ 4.89, based on 15x FY24E P/E.

1H23 results inline, but demand is still weak. Group sales increased by 32% YoY to RMB 2.8bn and registered a profit of RMB 2mn (from losses of RMB 277mn last year) in 1H23, implying a 0.1% NP margin, both are inline with CMBI est. and the positive profit alert. GP margin slightly improved to 62.6%, which is a mixture of better input costs (e.g. lamb and beef tripe) and fall in ASP (for all brands). But the operating leverage generated from rental (+1%) and D&A ( -13%) expenses were more than offset by a jump in staff costs (+24%). Even though sales for both brands had missed the original guidance mentioned back in Mar 2023, XBXB's performance in 1H23 was still relatively better, as the 29% sales increase was a result of 29% SSSG and 4% store count growth, while its seat turnover also jumped to 2.4x, from 1.9x last year. We do believe its reform was effective, because new stores' seat turnover is higher (at 2.7x) vs old stores (at 2.2x). On the other hand, Cou Cou was disappointing, perhaps due to consumption trade down and not so successful new products. Its 32% sales growth was driven by just 9% SSSG and 26% store count growth, the seat turnover was just at 2.1x, vs 1.9x last year. A dividend of RMB 0.028 per share was proposed in 1H23, same as last year, implying a about 2% yield if we assume a similar amount in 2H23E.

FY23E guidance was revised down. Management had delayed its target of 5% pre-tax margin from FY23E to FY24E and we do concur with their view, because: 1) Cou Cou brand was hit hard under the consumption trade down (evidenced by the negative SSSG and just 70%+ SSS recovery rate during Jun - Jul 2023), it would still take time for the new team to develop more successful new products, 2) XBXB might be relatively more resilient, but its operating leverage could still be lower-than-expected, as its SSS recovery rate (also at 70%+) was still low among its peers, 3) ASP may drop further, in order to attractive more traffic, (together with the menu upgrade in Sep 2023 and greater advertising and promotion to boost paid memberships) and that could become a drag to GP margin. All in all, we are now forecasting a 2.5x/ 2.2x seat turnover for XBXB/ Cou Cou and an about 2% NP margin in FY23E.

Maintain BUY with TP of HK$ 4.89. The new TP is based on 15x FY24E P/E (unchanged). We revised down FY23E/ 24E/ 25E net profit forecasts by 50%/ 36%/ 27% to factor in:1) slower-than-expected recovery and reforms and 2) less-than-expected store expansion. It is trading at 33x FY23E P/E and 12x FY24E P/E.

FY23E store opening target was trimmed, XBXB could outperform Cou Cou, relatively speaking. Management had revised up gross opening target for XBXB to 140 (from 120) but also cut that for Cou Cou/ Shao Hot to 45 (from 70)/ 10 (from 20).Note that we do tend to be more conservative and now forecast a higher gross closure of stores in FY23E. On the other hand, overseas expansion shall continue, but management did highlight that the pace in Singapore could be slower, hence FY23E store opening target on overseas would be cut from 26 to 22.