Management Discussion and Analysis

INTRODUCTION AND HIGHLIGHTS

Café de Coral Group achieved solid results in the first half of FY2018/19. The Group experienced strong profit growth as investments in internal improvements began to bear fruit. Revenue performance was stable whilst we focused on solidifying fundamentals and rationalising our branch network.

During the reporting period, the dining-out market continued to grow – although customers are becoming more selective and price-sensitive in their dining habits. At the same time, labour shortages and a record low unemployment rate are proving to be challenging for staff recruitment. However, the Group remains confident in its ability to maintain growth through good times and bad, as it has proven over the past 50 years.

Ongoing investment in operational improvements is starting to pay off in the Group’s core quick service restaurant (QSR) business – translating into greater efficiency and a broadened customer base. The business continued to fine tune its products, services, technology and operating model for optimum performance during the period. All of these initiatives have contributed to improvement in margins.

The casual dining business achieved positive growth in profit and developed strong business momentum during the first six months of the year. Reinforced portfolio and branding, supported by a commitment to quality ingredients and seasonal promotions have improved the business’ contribution to the Group’s results.

Despite a challenging operating environment, the Mainland China business continued to deliver steady growth in line with the market. During the period under review, the Group expanded its shop network in the market – including two key new outlets at the Shenzhen and Guangzhou airports.

RESULTS OVERVIEW

Revenue
For the year ended 31 March 2018, the Group increased revenue by 6.7% to reach HK$8,427 million (FY2016/17: HK$7,895 million). Revenue by business division is set out below:

  For the six months ended
30 September
  2018 2017 Change
HK$'m HK$'m %
Hong Kong
       QSR and Institutional Catering  3,066.8  3,080.3  (0.4)
       Casual Dining 461.9 422.0  9.5
       Others*           79.1         77.5        2.1
       Subtotal     3,607.8     3,579.8          0.8
Mainland China         590.7        548.3          7.7
Group     4,198.5     4,128.1          1.7

* Represents mainly income from food processing and distribution and rental income

Gross Profit Margin
Gross profit margin increased to 12.3% for the six months ended 30 September 2018 (2017: 11.9%), primarily due to a decrease in the cost of raw materials and packing from 28.5% of revenue in the same period last year to 27.5% in current period and firm control of manpower expenses.

Administrative Expenses
Administrative expenses increased by 1.9% to HK$240.1 million during the six months ended 30 September 2018 (2017: HK$235.6 million).

Profit Attributable to Equity Holders
The Group’s profit attributable to equity holders increased 16.2% to HK$239.1 million for the six months ended 30 September 2018 (2017: HK$205.7 million), primarily due to improvement in profit margins and stringent cost control.

Segment Results
Hong Kong segment results increased 10.0% to HK$389.4 million for the six months ended 30 September 2018 (2017: HK$354.1 million), mainly due to improvement in margins and profitability. Mainland China results increased 2.6% to HK$78.3 million (2017: HK$76.4 million) during the same period, mainly due to branch network expansion and extended online-to-offline (O2O) delivery services.

Basic Earnings Per Share
The Group’s basic earnings per share increased 16.1% to HK41.20 cents for the six months ended 30 September 2018 (2017: HK35.48 cents).

Interim Dividend
The Board has declared the payment of an interim dividend of HK19 cents per share (2017: HK18 cents) to shareholders for the six months ended 30 September 2018.

BUSINESS ANALYSIS

QSR and Institutional Catering
For the six-month period ended 30 September 2018, the Group’s QSR and institutional catering brands maintained their respective leadership positions in the Hong Kong market, contributing 73.0% of the Group’s total revenue for the period. During the first half of the fiscal year, revenue from this division decreased slightly to HK$3,066.8 million, representing a contraction of 0.4% compared to the same period last year (2017: HK$3,080.3 million), mainly due to consolidation within the branch network. The Group’s QSR and institutional catering business had a total of 292 outlets as of 30 September 2018 (31 March 2018: 298). With manpower costs firmly under control, the division has been able to increase margins – which led to improved profitability during the period under review.

Café de Coral fast food maintained steady performance despite consumer price sensitivity, with same store sales growth of 2% during the six months ended 30 September 2018 – building on the division’s refined product and pricing strategy. In line with overarching Group initiatives, internal investments in the business are delivering meaningful returns in the form of improved margins and profitability.

Supporting its long-term commitment to improving the Customer Journey, Café de Coral fast food revamped its customer service model in May 2018 – which will eventually be rolled out across all outlets. Focusing on creating a “home-like” atmosphere for customers, the Group is emphasising on “Quality, Service and Cleanliness” as the foundations for continual improvement in the customer experience. During the period under review, Café de Coral fast food’s new customer loyalty programme proved to be highly popular with end users, attracting a significant increase in membership. The business is also applying technology to enhance the customer experience and operational efficiency.


Rationalising Café de Coral fast food’s branch network for optimum convenience, efficiency and profitability, the business opened one new store during the first half of FY2018/19, ending the period with 164 shops (31 March 2018: 167).

The Group’s other QSR brand, Super Super Congee and Noodles, recorded same store sales growth of 1% during the six months ended 30 September 2018, and operated 50 shops at the end of the period (31 March 2018: 50). Initiatives centred around menu re-engineering which included the launch of new Chinese dishes to attract families, as well as tactical marketing campaigns to highlight new hero products. A new meal delivery service was launched to improve the customer experience in the dinner segment.

Asia Pacific Catering faced an increasingly competitive market environment. The business had 78 operating units at the end of the first half of FY2018/19 (31 March 2018: 81). Although margins tightened during the period under review, management expects they will improve during the second half of the year as newly signed contracts become operational. Luncheon Star maintained its market leadership and broadened its customer base, producing a record-high number of lunchboxes during the period. Capturing market trends, it also launched the industry’s first mobile ordering app – improving convenience for consumers.

Casual Dining
By taking a focused approach to addressing fundamentals and business challenges, the casual dining business has improved its performance substantially, making a meaningful contribution to the Group’s top and bottom line results. The business achieved revenue of HK$461.9 million during the six months ended 30 September 2018, an increase of 9.5% compared to the same period last year (2017: HK$422.0 million). The division operated 63 shops as of 30 September 2018 (31 March 2018: 68). With a solid platform for future growth as a substantial business on its own, the casual dining division is actively looking for more opportunities to expand its branch network.

After a year of streamlining operations through a shop rationalisation programme, The Spaghetti House delivered strong performance as the Group’s leading casual dining brand. Menu re-engineering initiatives, seasonal promotions and “Star Chefs” collaborations helped to drive sales and strengthen the brand’s positioning in the “family restaurant” sector. Oliver’s Super Sandwiches achieved positive growth and business momentum through reinforced branding, seasonal promotions and an emphasis on quality ingredients. Both brands engaged customers through popular VIP programmes. As of 30 September 2018, The Spaghetti House and Oliver’s Super Sandwiches operated 8 outlets and 14 outlets, respectively (31 March 2018: 9 and 15 outlets, respectively).


The Group’s homegrown casual dining brand, Shanghai Lao Lao, continued to generate promising growth and is now an established chain with 13 outlets as of 30 September 2018 (31 March 2018: 14). The brand has benefited from its “Star Chefs” programme to enhance food quality, build awareness and improve the overall customer experience.

Mixian Sense has developed into a sizeable chain with 16 shops as of 30 September 2018 (31 March 2018: 15). Aiming to become a leader in the mixian (rice noodle) market, the brand has further enhanced food quality and ingredients while applying advanced technology such as QR code ordering. These improvements have been warmly received by customers.

The Group continues to fine-tune the business models of its franchised brands, THE CUP and Don Don Tei, exploring potential for scalability.

Mainland China
Amidst the highly competitive market landscape in Mainland China, the Group increased top line performance by 7.7% to HK$590.7 million during the first half of FY2018/19 (2017: HK$548.3 million). Same store sales growth remained flat during the period under review. Performance was in line with the market, and O2O delivery services continued to be a key contributor towards sales growth.

Capturing market opportunities as they develop, the Group has focused on improving its dining-in experience. During the reporting period, product improvements in the form of enhanced food quality and ingredients have been warmly received by consumers. Strengthening the Group’s branding and reputation in Mainland China, we have also rolled out our new sixth generation shop interior designs to enthusiastic response from both customers and landlords. With an emphasis on superior customer service, “Customer Service Ambassadors” are being introduced by phases, and have been fully rolled out to all outlets as of October 2018.

Accelerating branch expansion to develop the Group’s network in China, we opened seven new shops during the period under review – including two high profile locations at the Shenzhen and Guangzhou airports – for a total of 98 outlets at 30 September 2018 (31 March 2018: 97). An additional ten shops are scheduled to open during the second half of the fiscal year. Currently, the Group’s branch network covers all nine major cities and two Special Administrative Regions in the Greater Bay Area. Network expansion is expected to accelerate even more quickly in FY2019/20 compared to the current year, with particular emphasis on first tier cities within the Greater Bay Area.

KEYS TO SUCCESS

People Development
As of 30 September 2018, the Group had a workforce of 19,297 employees (31 March 2018: 18,940).

The Group’s recent investments in our people have begun to deliver returns in terms of improved retention and employee satisfaction. Serving and interacting with our customers every day, our people are the Group’s most significant asset. With this in mind, we have always emphasised customer service training and a management-oriented training system.

The quality of our in-house training programmes has been recognised by the Hong Kong Council for Accreditation of Academic and Vocational Qualifications. Further to a Level 3 Qualification Framework (QF) accreditation of one of our training courses in 2017, an additional training programme received Level 3 QF accreditation and two other programmes received Level 4 QF accreditation in 2018. The Group is the first employer in Hong Kong to receive Level 4 QF accreditation. In addition, the Group was presented the Gold Star Employer award by the Education Bureau in May 2018.

The Group reviews internal equity and market benchmarking on pay levels regularly. Remuneration at all staff levels is based on individual experience, qualifications, duties and responsibilities. Qualified employees are entitled to participate in profit sharing bonus and performance incentive programmes, as well as share award and share option schemes.

Brand Building
The Group celebrated its 50th anniversary this year. Our focus on food quality and customer service continues to drive the development of our brand, and our ongoing emphasis on enhancing the Customer Journey has led us to build upon the three core principles of “Quality, Service and Cleanliness” – aiming to enhance the overall reputation of our business by driving internal improvements that support the overall customer experience.

We also published a commemorative anniversary book titled “Café de Coral – Hongkonger’s Canteen”, highlighting our achievements over the past half-century. Featuring stories and recollections from our staff, the book illustrates how the brand grew and evolved alongside Hong Kong over the past five decades – crystallising the Group’s unique corporate culture and “Café de Coral Spirit.”


Network Expansion
As of 30 September 2018, the Group had a network of 355 stores in Hong Kong and 98 stores in Mainland China. Although retail space became more readily available in Hong Kong during the period under review, competition and rental rates for prime locations have remained high.

Despite this challenge, the Group continues to proactively expand our branch network, subject to the availability of attractive locations. We are fine-tuning our store network and actively negotiating with landlords for premium retail locations in Hong Kong.

The Group has also identified a significant number of potential outlet locations throughout the Greater Bay Area, and we plan to aggressively grow our branch network over the coming two years to further solidify our presence in the Mainland China market.

Supply Chain Management
Continuous enhancement of the Group’s Central Food Processing Centre in Hong Kong has driven improvements in efficiency and profit margins. In Mainland China, we have focused on mapping synergies between raw materials and final products – seeking to enhance both purchasing efficiency and utilisation of raw materials, while securing the entire end-to-end supply chain for improved management and cost control.

During the period under review, Café de Coral Group was named a Diamond Enterprise Winner in the 2018 Quality Food Traceability Scheme of GS1 Hong Kong – a testament to our commitment to food safety management.

Sustainability
In recognition of our efforts to grow the business in a sustainable manner, the Group was included in the Hang Seng Corporate Sustainability Benchmark Index for the fourth consecutive year.

Mindful of environmental stewardship in our business operations, we have implemented a number of short- and long-term measures to achieve our sustainability objectives. Aiming to reduce use of disposable plastic cutlery, we have replaced a number of plastic utensils with wood alternatives, and introduced a “No Straws on Friday” campaign to encourage a reduction in the use of disposable straws. We will report our environmental initiatives in greater detail in the Group’s annual Sustainability Report.

FINANCIAL REVIEW

Financial Position
The Group’s financial position remained healthy during the period under review. As of 30 September 2018, the Group had net cash of approximately HK$596 million, with HK$321 million in available banking facilities. The Group’s current ratio as of the same date was 1.1 (31 March 2018: 1.4) and the cash ratio was 0.6 (31 March 2018: 0.9). The Group had no external borrowing (31 March 2018: nil) and a nil gearing ratio (ratio of total borrowing less cash and cash equivalents to total equity) (31 March 2018: nil).

Capital Expenditure and Commitment
During the period under review, the Group’s capital expenditure was HK$143 million (2017: HK$232 million). As at 30 September 2018, the Group’s outstanding capital commitments were HK$362 million (31 March 2018: HK$480 million).

Contingent Liabilities
As of 30 September 2018, the Company provided guarantees of approximately HK$445 million (31 March 2018: HK$415 million) to financial institutions in connection with banking facilities granted to its subsidiaries. The Group had no charge on assets as of 30 September 2018 (31 March 2018: nil).

Financial Risk Management
With regard to foreign exchange fluctuations, the Group earned revenue and incurred costs and expenses mainly denominated in Hong Kong dollars, while those of our Mainland China business were in Renminbi. Foreign currency exposure did not pose a significant risk for the Group, but we will remain vigilant and closely monitor our exposure to movements in relevant currencies.

OUTLOOK

The overall outlook for the food and beverage industry remains competitive. Although the Hong Kong Government’s newly introduced minimum wage requirements will pose a challenge, the Group is confident that we can continue to drive positive growth in performance.

  • Prospects for the Hong Kong QSR business remain positive. Leveraging the business’ strong foundation and reputation, we are confident the Group will be able to reinvent the business and create greater value for our customers.

  • Casual dining will continue to fine-tune operations and actively look for opportunities to grow the business in the context of the Group’s multi-brand strategy.

  • Although the Mainland China business is expected to face challenges in the form of a tight labour market and uncertainty created by the China-US trade friction, the Group remains confident in its expansion opportunities in the Greater Bay Area – particularly in Guangzhou and Shenzhen – which will support healthy and aggressive growth, and drive future performance.

Building on lessons learned over the past 50 years, the Group is optimistic about its long-term prospects, and its ability to adapt and evolve for continuous, sustainable success.

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