Helens reported a net profit of RMB157m in 1H23, turning around from a net loss of RMB304m in 1H22, in line with our expectation. Excluding disposal gain/loss on store closure and share-based payment, core net profit would have reached RMB177m in 1H23, compared with a core net loss of RMB100m in 1H22. The company kicked off its "Hibeer partnership" programme in June, which would help it step up in network expansion, leveraging on resources of local partners. We expect short-term momentum in store opening but remain conservative on overall market capacity. We maintain HOLD.

Key Factors for Rating

Positive on short-term store opening momentum. Helens launched "Hibeer Partnership" programme in June and introduced a new single store format. The first partnership bar was opened in July. As of 28 Aug 2023, 90+ contracts have been signed with partners and 11 partnership stores have been opened. The partnership stores will be of small format (i.e. 180-200 sqm, compared with 400sqm for regular stores) and the breakeven point was further lowered to RMB2,500-3,000/day (from RMB5,400 for regular stores). The payback period for partners could range from 0.5-1.5 years, depending on average daily sales. We believe the new model facilitates Helens' penetration in lower tier cities and/or county level cities, leveraging on resources by local partners. That said, mgmt. intends to stay selective, in order to secure high success rate of new store openings. We expect Helens to open 120 partnership stores in 2023, which would step up to 350 and 450 in 2024 and 2025, but with low certainty.

Conservative on long-term market capacity. We remain conservative on long-term market capacity. Unlike coffee and freshly-made tea shops, which target at diversified consumption situations with broad customer base and high repeat purchase, bar operation has a focus on on-premise consumption and customer experience, with a narrower customer base, on our view. Therefore, we do not expect high store density for Helens' bars in each of such lower-tier cities/county cities. Besides, although we might see high store productivity of a few newly opened partnership stores at first, which allows Helens to enjoy a high-teens commission rate (similar to the bar-level OP margin of its self- operated bars), we see dilution of average daily sales as it paces up store opening in future. As a result, we expect average daily sales of the partnership stores to range from RMB8,500 to RMB9,500 during 2023-25. This would allow Helens to enjoy a commission rate of merely 11-12%, on our calculation, below the bar-level operating margin of its self-operated bars.

Key Risks for Rating

Downside risks: Prolonged pandemic impact and slowed economic growth; slowed network expansion; intensified competition; deteriorated same-store sales (SSS); commodity & labour inflation; and food safety incident. Upside risks: faster-than-expected store network expansion; successful roll-out of new store format; higher-than-expected SSSG; and eased competition.

Valuation

We revised down net profit forecast for 2023/24/25E by 33/38/40% on 36/41/42% revenue cut but 1.3/1.8/1.4ppts GP margin raise, to factor in the implementation of partnership programme. As a result, we revised down our EBITDA forecasts for 2023/24/25E by 34/35/38%. We derived our new TP of HK$9.2 (down 39%), based on 11.5x 2024E EV/EBITDA (changed from 18x 2023 EV/EBITDA as we roll forward one year). This indicates 23.9x and 17.6x 2024E and 2025E P/E.

1H23 Results In Line

Revenue decline by 19% YoY to RMB710m in 1H23, in line with our expectation. We believe the revenue decline was due to store network contraction (105/126 net closures in 2H22/1H23) and 100 conversion from self-operated stores to franchised stores in 2H22. That said, average daily sales for self-operated bars recovered to RMB7,900 in 1H23, from RMB7,200 in 1H22. Franchise bars registered average daily sales of RMB9,000 in 1H23, 14% higher than that of self-operated bars. GP margin expanded by 6.3ppts YoY to 72.3%, thanks to (1) increasing mix (+4.8ppt YoY) of Helens' branded products (esp. new launches such as Passion Fruit Beer Tower & Old Popsicle Tower), (2) reduced promotion discounts and (3) increased sales mix of franchise income. Operating expenses declined by 49% YoY to RMB401m, thanks to store optimisation. Operating expense to sales ratio dropped to 56.5% in 1H23, from 89.4% in 1H22, thanks to positive operating leverage and cost savings. Staff cost/D&A expense dropped by 19.6/10.5ppts YoY to 23.9/16.8% in 1H23. As a result, it registered operating profit of RMB117m in 1H23 (with OP margin of 16.5%), compared with an operating loss of RMB187m in 1H22 (with OP margin of -21.4%).