市场见解

Will Maxim’s Impact Dairy Farm’s Business?

Will Maxim’s poor performance have any impact on owner Dairy Farm International Holdings Ltd (SGX: D01)? –

Maxim’s Caterers Limited (Maxim’s) has been attracting quite a lot of attention since the anti-government protests in Hong Kong last year.

The restaurant group has been suffering from a declining profit, let alone Annie Wu’s comments on the protests, which have led to a drop in sales in the first quarter of 2020.

Similar to the Wu family, another shareholder of Maxim’s is Dairy Farm International Holdings Ltd (SGX: D01). It faces a challenging year itself amid Covid-19 and intense competition in the retail space.

Given the jointly-owned structure by the Wu family and Dairy Farm, I will take a look at whether Maxim’s disappointing result could taint Dairy Farm’s business performance.

Maxim’s has strong business fundamentals

According to Hong Kong Caterers’ annual report in 2019, Maxim’s earned a catering management fee of HK$372 million (US$48 million), which is 1.84% of Maxim’s total retained profits.

This shows that even Maxim’s as Dairy Farm’s key associates recorded a drop of 29% in sales growth year-on-year, it has minimal impact to the group’s overall performance as Maxim’s also has other businesses in Macau, Malaysia, Thailand, Vietnam, Cambodia and China.

According to the government’s Census and Statistic Department, total Hong Kong restaurant receipts in 2019 were HK$112.5 billion.

Assuming Maxim’s has around 80% of businesses (equivalent to total turnover of HK$4.5 billion in Hong Kong and based on the website, most brands are located in Hong Kong), Maxim’s enjoys a 3.6% market share of Hong Kong restaurant receipts.

By comparison, Café de Coral Holdings Limited (SEHK: 341) had revenue of HK$8.49 billion in 2019 and Fairwood (SEHK: 52) reported HK$2.97 billion in 2019. So, Maxim’s still has a relatively stable business amid the protests and Covid-19 situation.

Resilient business portfolio but declining profit

Although Maxim’s is facing a tough challenge, Dairy Farm Group still has growth of 6% in its group income.

Given the group’s diversified business model, it owns a portfolio of household retail brands spanning across the food, healthy & beauty, home furnishing and restaurants industries (as shown in the sales breakdown below).

Dairy Farm financials

Source: Dairy Farm 2020 First Half Results

Looking at its sales breakdown, even though sales increased, its profit decreased due to increased competition in the food and health & beauty spaces.

As a result, both earnings per share has been falling and net earnings margin have been falling over the past five years.

Hong Kong’s impact on group business

In response to the falling profit, Dairy Farm is planning to revitalise its business, particularly the hypermarket segment in Southeast Asia.

The company grew its revenue in all businesses except convenience stores, health & beauty and Maxim’s recorded a fall in sales. Yonghui and Robinsons Retail have impressively increased its sales by 22% and 32% respectively.

Social unrest went into full swing since the second half of 2019, which severely impacted Dairy Farm’s Hong Kong businesses.

In particular, this hit Manning’s which depended on tourist spending. Another associate, Maxim’s also saw its restaurants targeted.

This has all caused a fall in profit, but it will have minimal impact to the group’s overall profit as the management has put its strategic focus on revitalising Southeast Asia and growing its China businesses in the coming years.

Foolish conclusion

Although Maxim’s latest business performance does affect the group’s sales, I do not see any threat to Dairy Farm’s transformation plan as it is showing good progress.

Grocery retail in Southeast Asia is generating a handsome amount of cash flow and the management team is showing a commitment to digitalise its IKEA business. Yonghui added another 600 new stores and shows promising sales results.

The transformation plan is a long-term endeavour and hence investors who invest in Dairy Farm should not expect a quick turnaround amid the challenging times in Asia.

More reading

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Edmund R doesn’t own shares in any companies mentioned.

The Motley Fool Hong Kong Limited(www.fool.hk) 2020

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