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Café de Coral: Defensive Dividend Stock Amid Hong Kong Unrest

Sentiment in Asian stock markets has been negative recently. The Chinese economy has slowed from its historical 7%-a-year growth rate. Tensions between the US and China have increased as Trump has increased tariffs multiple times. And the social protests in Hong Kong have added to uncertainty in the market.

In times of trouble, many investors turn to safety stocks like utilities or consumer staples that won’t normally fall as much as normal stocks and provide regular dividend payouts to shareholders. In that regard, Café de Coral Holdings Limited (SEHK: 341) fits the bill.

Café de Coral Holdings is one of Hong Kong’s largest restaurant groups with quick-service restaurants, institutional catering, and casual dining chains. In Hong Kong, the company is the market leader in the fast-food sector after having won its market share with quality dishes at bargain prices.

Lately, the company has focused on mobile ordering, e-takeout and delivery, which will form a bigger part of Café de Coral’s business over time.

Strong balance sheet and attractive dividend

Over the last 50 years, Café de Coral has grown steadily in Hong Kong before branching out to the Greater Bay Area region in China. At the end of March, the company has 465 operating units, with 107 in mainland China and the rest in Hong Kong.

Sales have grown every year since 2010 and the company’s dividend has either increased or stayed the same since 2010 as well. In FY 2010, Café de Coral paid a dividend per share (DPS) of 62 HK cents and in FY 2019 that has grown to 84 HK cents. For the most recent fiscal year, the company reported basic earnings per share rose of HK$1.02, giving it a payout ratio of 82%.

In addition to steady growth, Café de Coral has a strong balance sheet. As of the end of March 2019, the company had no external borrowing and a net cash balance of HK$836 million (US$106.6 million). At its current dshare price of HK$24.70 (as at the time of writing), its shares offer investors a respectable dividend yield of 3.4%.

China as a growth market

Given that it has successfully taken advantage of its growth opportunities in Hong Kong, Café de Coral has turned to China for growth in recent years.

For the year ended March 2019, mainland China accounted for around 13.6% of sales and its operations are continuing to grow quickly. For the year, Café de Coral’s mainland China business achieved 7% sales growth to HK$1.15 billion with same store sales growth (SSSG) of 2%. In contrast, the company’s total sales ending 31 March 2019 rose only 0.8% to HK$8.49 billion.

Café de Coral opened 16 stores in mainland China for the fiscal year ended March 2019 and hopes to open another 20 more shops in the mainland in FY2019/20. As China’s middle class grows, demand for its  consumer-friendly and appealing restaurants could increase, especially in Shenzhen and Guangzhou – part of the Greater Bay Area – where it’s focusing much of its expansion efforts.

Challenges to be aware of

However, Café de Coral isn’t without challenges. The low unemployment rate in Hong Kong makes hiring more difficult and the incremental increase in the minimum wage in the city could increase labour costs in future – an issue it already grapples with.

The declining RMB in China could also lower the company’s profits in Hong Kong dollar terms. Given the company’s execution history, however, shareholders should be confident that the company can continue to grow sales and profits.

Foolish conclusion

Demand for affordable restaurants is unlikely to change much in economic downturns, as everyone needs to eat lunch and dinner. With a price-to-earnings ratio of around 24, which is slightly below its five-year average of 26, Café de Coral stock isn’t exactly expensive for a consumer staple share on a historical basis.

Given its steady sales performance and solid dividend, Café de Coral could be a safe haven in times of turbulence.

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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 Jay Yao doesn’t own shares in any companies mentioned.