Western: Recommending short-term expansion and long-term stable undervalued targets in the catering industry. Focus on operational improvement and overvalued targets during expansion period.

Western's research report recommends short-term expansion and long-term stable and undervalued targets in the catering industry, focusing on improving operations and overvalued targets in the expansion phase. The report highlights the following targets that need to be closely watched: 1) YUM CHINA (09987), with the ability to cross cycles with long-term continuous operational capabilities; 2) XIAOCAIYUAN (00999), in the expansion phase with strong team and supply chain operational capabilities; 3) HAIDILAO (06862), in a period of adjustment and reform but with a team that still has strong execution capabilities; 4) DPC DASH (01405), with a large race track and potential for high store expansion momentum. Western's main points are as follows: 1. The main direction of service consumption policy, catering is expected to benefit significantly The focus is clear on boosting consumption, and the "service consumption" policy continues to escalate. In September this year, the Ministry of Commerce proposed expanding service consumption with 19 specific measures in 5 major directions. Catering is the core content of service consumption season activities. 2. Differentiated performance in catering fundamentals, focusing on targets with high profitability The share of catering revenue in the social retail sector is gradually increasing, with elasticity significantly higher than the overall social retail sector. By 2024, catering revenue will account for 12% of total social retail revenue, and its elasticity is greater than that of the overall social retail sector. The growth rates of catering revenue in 2023 and 2024 are expected to be 20% and 5% respectively, higher than the total social retail growth rates of 7% and 4%. 3. High premium on Japanese catering valuation, cost reduction and efficiency improvement alongside multi-format integration The out-of-home dining industry is under pressure in terms of scale, with fast food performing relatively well in terms of price-to-volume exchange. Japan's out-of-home dining industry saw a decline in scale from 29.07 trillion yen in 1997 to a recovery in 2006, reaching 26.27 trillion yen in 2019 but still below the peak. Coffee shops/fast food sales have shown overall good performance. The valuation premium of the Japanese catering sector is evident, with individual stocks showing outstanding performance in terms of price increase and valuation. As of the end of November 2025, restaurants accounted for 43% of the market value in the consumer services sector in Japan, up 9 percentage points from 2014, with a prominent and continuously increasing weight; the PE ratios of leading Japanese catering companies are 25X and above. Leading Japanese catering companies have long operating cycles, with a high proportion of fast food chain formats leading the way, as well as traditional restaurants and izakayas. The report outlines three major changes in the downward phase of the Japanese catering sector: 1) balancing the ultimate value for money and consumer experience, with the extreme compression of prices requiring maintenance or even improvement of the consumer experience as a prerequisite, demanding high strategic balance and execution capabilities from catering companies. 2) Extreme efficiency in supply chain and store operations leading to high store efficiency, but the standardization complexity and difficulty level are higher in China. 3) Integration of multiple categories to form catering giants, facilitating supply chain synergy, operational capability reuse, and reaching multiple consumer groups. Risks: food safety risks; continuous decline in consumer purchasing power risks; intensifying competition risks.