Jiumaojiu: Declining Traffic and Margin Pressure Cloud Long-Term Outlook; Valuation Cut by 23%

Jiumaojiu’s profit warning for its first-half results—namely year-on-year revenue growth of about 6% compared with our estimate of 25%, was very disappointing, sending shares down more than 15% since the announcement. The key question is how much of this is a function of management being selective with promotions to avoid overspending, or if this is a change in consumers' mindset regarding dining at Jiumaojiu’s restaurants. We believe the reality is that both factors likely affected earnings, especially with a resurgence in promotional activity across the restaurant space starting this year.