Xiabuxiabu Earnings: Continues to Report Losses; Uncertainty Raised to Very High

Xiabuxiabu’s first-half earnings were hit by impairment losses on its underperforming restaurants. Excluding these noncash impairments, net loss was in line with our estimate. Given the company’s continued market share loss, we see lesser visibility over its long-term recovery trajectory and raise our Morningstar Uncertainty Rating on the company to Very High. However, we maintain our fair value estimate at HKD 2 given the in-line results. About 30% of our valuation stems from Xiabuxiabu’s CNY 521 million net cash position as at the end of June. Our top pick in the restaurant sector remains Yum China.