Is Mr. Rice the Answer to This Chinese Company's Woes?

Robert is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Country Style Cooking (NYSE: CCSC) reported earnings earlier this week and I have gone back to my original thesis to determine if Country Style is a place I want to put more of my investment dollars.   I was looking for growth that was closer to 25 to 30% annually on the top line.  The announcement recently indicated that the company would see annual revenue growth of between 17% and 18% this year.  Not exactly what I wanted to see.  However, much has changed in the way we should look at Chinese investments and the economic engine.  This contextual change means we should reevaluate our investments in Chinese companies a little differently.  Let's take a closer look at the details of the report.

Overall, it looks like a mediocre quarter for Country Style Cooking with revenue growing at 12.6% YoY, but comparable store sales down 5.3% (I am not sure but I think both of these numbers are in local currency).  A bright spot was the 21 new stores opened in the quarter, including a trial run of 15 new "canteen style quick serve restaurants" called Mr. Rice in 4 markets which management said were well received.  The downside is that only a net of 6 new Country Style restaurants were opened in the quarter.

Another bright spot was the improvement of the restaurant's margins.  Food and Paper were lower and wages stayed relatively the same while rent increases were offset by utility reductions.  Overall it meant a 110 basis point, or 1.1%, increase in the margins to 19.5%.  As a comparison, Chipotle Mexixan Grill (NYSE: CMG) which is one of the better operators here in the states achieves restaurant margins over 25% consistently and last quarter was at 27.4%.  So there may be some room to improve there.

Net margins were very good on the surface.  There was 470 basis point increase from 2011 to 2012.  But if you dig into those numbers you see a swing in Fx of 150 basis points and a 150 basis point increase related to other income (management called these out as government subsidies in the release).  I am not sure if these are sustainable.  A better comparison, would be income from operations which showed an increase but only 20 basis points from 7 to 7.2% YoY.

Another positive area is the cash balance and cash from operations.  As of 9/30, there was $87 million in cash on the balance sheet. While there are some long term liabilities on the balance sheet the company has no long term debt to offset the cash. So I calculated that they have approximately $3.30/ADS (each ADS represents 4 shares and there are 105,462,012 shares outstanding).  Management also reported an increase in cash generated from operations of 111% in local currency as well as an increase of 166% in local currency of free cash flow (cash from ops-capital expenditures for restaurants and offices). FCF in 2012 is positive vs. negative which is also a good sign. 

Conclusion

I am continuing to hold my shares.  I am not expecting any short term explosion related to this stock but it looks like Q3 might be a step in the right direction from an operating perspective.  However, I do not think the rewards being offered right now outweigh the risks of investing in China.   If we can see some more growth in the core restaurants and the new Mr. Rice restaurants, we might have something very positive here and I might be interested in putting more into the stock at that time. 


BaltoBruiser owns shares of Country Style Cooking and Chipotle Mexican Grill. The Motley Fool owns shares of Chipotle Mexican Grill. Motley Fool newsletter services recommend Country Style Cooking and Chipotle Mexican Grill. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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