Editor: Jewel Saha, ACS

January 28, 2008

Research Associate: Khushboo Gupta, M. Fin.

Editor: Jewel Saha, ACS

Sr. Ed.: Ian Madsen, CFA;; 1-800-767-3771; x9417

N. Canal Street, Suite 1101Chicago, IL60606

Note to Readers: All new or revised material since the last report is highlighted.

Reason for Report:Partial Earnings with Revision in 4Q07 EPS Guidance

Prev. Ed.: Dec.17, 2007; Minor Changes in Estimates

Brokers’ Recommendations: Neutral: 75% (12firms); Neutral: 25% (4); Negative: 0% Prev. Ed.:14; 4;0

Brokers’ Target Price:$26.78 (↓$3.62 from the last edition; 9firms)Brokers’Avg. Expected Return: 22.03%

Recent Events: Summary

On January 11, 2008, PFCB updated its 4Q07 EPS guidance.

On January 10, 2008, PFCB sold a major stake in its Taneko Japanese Tavern restaurant in Arizona to Dallas restaurateur Jack Baum.

On January 3, 2008, PFCB reported its 4Q07 revenue.

On October 24, 2007, PFCB reported 3Q07 financial results.

Overview

Firms have identified the following factors for evaluating the investment merits of PFCB:

• P.F. Chang’s China Bistro features a blend of high-quality, traditional Chinese cuisine, and American hospitality in a sophisticated, contemporary Bistro setting. Pei Wei Asian Diner serves fresh, made-to-order Asian food in a ‘quick-casual’ contemporary setting, offering attentive counter service and take-out flexibility. Both these brands are complementary to each other and have good growth potential.
• Management is focused on developing fresh concepts to improve sales.
• PFCB plans to grow units 13% in 2007, and 10% in 2008. Management sees long-term potential for 250+ U.S. locations (from 162 after 3Q07).

• A large number of states are currently considering minimum wage increases. While these wage increases will likely lead to labor cost pressures, management has no plan to initiate price hikes to offset the cost increases.
• Other risks include continued erosion of SSS growth, decline in new unit productivity, and decline in new restaurant development.
• The Bistro and Pei Wei concepts compete with a variety of casual dining chains, fast-casual establishments, and local Asian restaurants. PFCB must provide a differentiated customer experience to continue building shares in the fragmented Asian segment.

Headquartered in Scottsdale, Arizona, P.F. Chang's China Bistro, Inc. (PFCB) owns and operates three restaurant concepts in the Asian niche. P.F. Chang's China Bistro features a blend of high-quality, traditional Chinese cuisine and American hospitality in a sophisticated, contemporary Bistro setting. Pei Wei Asian Diner offers a modest menu of freshly prepared Asian cuisine in a relaxed, warm environment offering attentive counter service and take-out flexibility. Taneko Japanese Tavern opened on October 2, 2006, and features natural, organic, and seasonal ingredients highlighting the diverse cooking styles of Japan. The company engages in the ownership and operation of restaurants in the United States under P.F. Chang’s China Bistro and Pei Wei Asian Diner brand names. The company’s website is Chang’s fiscal yearends on December 31.

January 28, 2008

Recent Events: Details

On January 10, 2008, PFCB announced it has a memorandum of understanding with longtime Dallas restaurateur Jack Baum, for the sale of its sole Taneko Japanese Tavern restaurant. Under the proposed deal, Taneko’s current management team will partner with Jack Baum’s restaurant management company, Food, Friends & Co., on the development and growth of the Taneko business, in which PFCB will retain a minority interest.

On October 24, 2007, PFCB reported 3Q07 financial results. Highlights are:

• Total revenue was $270.9 million, up 17.2% y-o-y.
• Net income was $5.3 million, down 20.2% y-o-y.
• EPS was $0.20, down 20% y-o-y.

Revenue

Provided below is a summary of revenue as compiled by Zacks Research Digest:

4Q07Summary: As per the company,consolidated revenues were $292.6 million in 4Q07 versus $252.0 million in 4Q06. Sales at company owned P.F. Chang’s China Bistro restaurants accounted for $225.9 million of consolidated revenues, sales at the company’s Pei Wei Asian Diner restaurants accounted for $65.9 million of consolidated revenues, and sales at the company’s Taneko Japanese Tavern restaurant accounted for $0.7 million of consolidated revenues.

Comparable store sales decreased 1.0% at the Bistro including a 5% increase in the average check reflecting the net impact of price and menu mix changes driven by the broader rollout of the new grill menu as well as other initiatives and decreased 0.5% at Pei Wei y/y. Bistro comps decreasey/y in October and Novemberwas 2% and 0.8% respectively,and flat in December, including a 5% increase in average check. Comps at Pei Wei decreased 0.8%, increased 0.4%, and decreased 0.9% y/y in October, November, and December, respectively.

While a higher-than-expected check average (due to the roll-out of the grill and other initiatives) led to better comps result than anticipated at the Bistro, customer traffic remained below industry averages at approximately (6.0%) y/y.

As per Zacks Digest,consolidated revenues were $292.6 million in 4Q07 versus $252.0 million in 4Q06. Sales at company owned P.F. Chang’s China Bistro restaurants accounted for $225.8 million of consolidated revenues, sales at the company’s Pei Wei Asian Diner restaurants accounted for $66.1 million of consolidated revenues, and sales at the company’s Taneko Japanese Tavern restaurant accounted for $0.7 million of consolidated revenues.

One firm (Bear Stearns) believes that sales were better than expected but remained negative with significant traffic erosion.

Provided below is a graphical representation of revenue segments as compiled by Zacks Digest:

Outlook:For Bistro, FY07 revenues are expected to increase 11.4% y-o-y compared to the company's previous forecast. The company expects Bistro full-year comparable store sales to decline 2.1% versus the company's previous forecast of a 1.6% decline, reflecting reductions in anticipated guest traffic based on the recent trends. For Pei Wei, FY07 revenues are expected to increase 34.8% y-o-y to $243.0 million versus the company's previous forecast of $247.6 million. The company reduced Pei Wei full-year comparable store sales growth expectation from its previous forecast of 0.8% to 0.0% reflecting reduction in anticipated guest traffic based on the recent trends.

One firm (J.P. Morgan) believes that traffic has yet to show sign of improvement at Bistro, it expects flat 1Q08 comps growth as it expects average check trends to continue through 1Q08. It also lowered Pei Wei1Q08E comps growth from 2% to flat y/y.

For FY08, the company expects sales weeks for Bistro and Pei Wei to increase approximately 13% y-o-y and 26% y-o-y, respectively, through the development of 18 new Bistro restaurants and 25 new Pei Wei restaurants scheduled to open during 2008.

Please refer to the Zacks Research Digest spreadsheet on PFCB for more details.

Margins

Provided below is a summary of margin as compiled by Zacks Research Digest:

3Q07Summary: Cost of sales was up 10 bps y-o-y to 27.4% of sales. Labor costsraised 110 bps y-o-y to 34.0% of sales due to de-leverage on low compsand greater-than-anticipated pressure from wage rate increases. Operating costs were 16.2% of sales (up 50 bps y-o-y). Occupancy costs were up 10 bps y-o-y to 5.9% of sales. G&A expenses were 6.4% of sales(up 20 bps y-o-y). The increase was likely afunction of increased compensation expense for the Bistro (on change in compensationstructure, which aided overall margin) and de-leverage on low comps. The D&A ratio was 5.5% of sales (up 50 bps y-o-y), due to higher amortizationexpenses (related to increased partnership buyouts) plus de-leverage. Pre-opening expenses were 1.8% of sales, up 20 bps y-o-y. Partnership investment expense (as a percent of sales) declined to 0.0%, benefiting from the elimination of the partnershipprogram at the Bistro and buyouts of existing partnership interests.

Operating income was $7.4 million, a decrease of 30.1% from $10.6 million in 3Q06. Operating margin was 2.7%, a decrease of 190 bps from 4.6% in 3Q06.

TheBistro restaurant-level operating marginas reported by the Company declined 195 bps y-o-y to 9.3%. The decrease was fueled by higher ratio for labor (up 111 bps y-o-y), cost of sales, operating costs, and G&A, partly offset by a decline in minority interest. ThePei Wei restaurant-level operating margintrended down 51 bps y-o-y to 1.5% due to the de-leverage of labor, operating, occupancy, and G&A costs.

For 2008, PFCB intends to decrease the rate of unit development, with plans to increase Pei Wei units by 17% and Bistro sites by 10%. The reduced growth rate may aid company-wide EBIT margin (-150 bps in 2007E). Slower expansion for Pei Wei in 2008 is intended to allow management to focus on improving segment operating margin and achieving more consistent returns for new locations. PFCB seeks to refine the operating model in order to reach a cost structure (labor plus other costs) that would allow Pei Wei units to produce a 30% ROIC at current sales volumes.

In addition to the impact from weakening sales, management expects higher wage rates, inefficiencies, and write-offs associated with an accelerated rollout of grills at the Bistro, and the aforementioned shift in marketing expenses at Pei Wei to result in restaurant contribution margin degradation of 250-plus basis points at both concepts in 4Q07.

Net income was $5.3 million, down 20.2% from $6.6 million in 3Q06. Net margin was 1.9%, down 100 bps from 2.9% in 3Q06.

Outlook: The Company guided that rising restaurant operating costs were higher than its initial forecasts, which would keep the company from realizing the full $0.06 benefit from higher-than-forecasted revenues in 4Q07. The company specifically pointed out labor and cost of sales as components of the higher operating costs. Costs were up both for Pei Wei and the Bistro despite the expected leverage from higher Bistro sales.

Please refer to the Zacks Research Digest spreadsheet on PFCB for more detail.

Earnings per Share

Provided below is a summary of EPS as compiled by Zacks Research Digest:

In 3Q07, EPS was $0.20, down 20% from $0.25 in 3Q06.

Outlook: PFCB updated estimates of consolidated earnings per share for 4Q07 in the range of $0.32 to $0.34 based on preliminary unaudited results, excluding an estimated charge of $0.08 related to the Company’s Taneko Japanese Tavern as discussed below ($0.24 to $0.26 per share including such charge). These revised estimates are $0.09 to $0.11 above previously reported fourth quarter earnings guidance of $0.23 per share.

The company attributedthe increased guidance to sales leverage from the $7 million higher-than-anticipated revenue, better-than-expected one-time adjustments from worker's compensation and group medical, and the sale of its Taneko Tavern concept. The company indicated that approximately half of the increase came from leverage and half from the nonrecurring gain.

Some of the firms (KeyBanc, Morgan Keegan, William Blair) raised their FY07 EPS based on the revised guidance.

The Zacks Digest model projects an average EPS of $1.27 for FY07, $1.35for FY08, and $1.62 for FY09 witha y-o-ygrowth of 2.2%,6.4% and 20.4% in FY07, FY08, and FY08, respectively.

Highlights from the EPS chart are as follows:

• 2007 forecasts (16firms) range from $1.16 to $1.29; the average is $1.27.
• 2008 forecasts (16firms) range from $1.28 to $1.43; the average is $1.35.
• 2009 forecasts (05firms) range from $1.52 to $1.70; the average is $1.62.

Please refer to the Zacks Research Digest spreadsheet on PFCB for more details.

Target Price / Valuation

Of the 16firms covering the stock, 4 gave positive ratings and 12 provided neutral ratings. The Zacks Digest average target price is$26.78 (↓ $3.62 fromthe previous report; 3.9% downside from the current price) ranging from the Digest low price target of $23.00 (17.4% downsidefrom the current price) (Friedman, Billings) to the Digest high price target of $35.00 (25.6% upside from the current price) (RBC Cap.) with the median target price at $25.00 (↓to the previous report). Thefirms with the estimated lowest target pricedid not provide anyvaluation metrics, while the firm with highest estimatedtarget price used 7.5x EV/EBITDA multiple on FY08E EPSas the valuation methodology. Valuations provided by other firms are mostly based on P/E multiples of forward earnings estimatein the range of 7.5x to 19.1x.

Since the last update,4 firms revised their target prices (Friedman, Billings, Lehman, R W. Baird, Thomas Weisel), however, none of the firms changed their ratings.

Risks to the price target include continued erosion of comps growth and new unit productivity trends and a decline in new restaurant development. Increasing competition from other casual dining peers also poses a risk.

Details regarding management effectiveness are as follows:

Please refer to the Zacks Research Digest spreadsheet on PFCB for more details.

Capital Structure/Solvency/Cash Flow/Governance/Other

Cash and Cash Flow: PFCB ended 3Q07 with a cash balance of $4.6million. Total borrowings under the credit facility were $30 million at quarter end. In 3Q07, cash flow from operations was $29.8 million, while capital expenditure was $51.6 million. PFCB is now projecting capital spending of $125-130 million for FY07 (previously $120-125 million). For 2008, the company expects capital expenditureto decline about $20 million from the FY07 level, leading the free cash flow in the $15-20 million area.

Share re-purchases: On October 19, 2007, the company's Board of Directors increased the amount of the company's current share repurchase program authorization from $50.0 million to $100.0 million. Under this program, the company may repurchase outstanding shares of its common stock from time to time in the open market or in private during the two-year period ending October 19, 2009, at prevailing market prices. The company intends to use cash on hand and available credit lines to repurchase shares under the program.

Stores Update: During 4Q07, the company opened 10 new Bistro restaurants and 7 new Pei Wei restaurants. For the full year, the company opened 20 Bistros and 38 Pei Wei locations, representing growth of 13% and 36% y/y, respectively.

Initiates to drive traffic at the Bistro: The Company recently rolled out a new menu and is in the process of installing grills in approximately 40 units by year-end 2007. The cost of these grills will add about $1.2 million to capital expenditure this year. A new menu, which includes food prepared on the new grills, has been received positively in test restaurants. The company also plans to roll out new plateware system-wide by the end of November 2007, and is also testing other initiatives on a more local basis, like “Happy Hour” in the Kansas City market. Half of the Bistro units (with total of 80-85 units) will have grills by year-end 2007 with the concept fully expected to be online by FY08.

PFCB tests new marketing campaign for Pei Wei during 4Q07: The company will spend $860,000 on marketing initiatives for Pei Wei in the cities of Minneapolis, Detroit, Dallas, Phoenix, Houston, and Philadelphia. The marketing spend will consist of $220,000 on billboards, $100,000 in drive-time radio, $100,000 for online advertising, $300,000 in direct mail, and $140,000 in outdoor PR and similar tactics. These initiatives will either run market wide or in a variety of combinations of the test cities.

Potential Divestiture of Taneko: Management stated its intention to remove the drag from Taneko going forward and concentrate on its two other concepts, P.F. Chang's China Bistro and Pei Wei Asian Diner.

One firm (Morgan Keegan) believes that the removal of this dilution along with improved margins at Pei Wei from slower development and improving sales trends at the Bistro is expected to help offset the expected 2008 inflationary pressures (commodities and labor), providing increased confidence.

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Another firm (R W. Baird) views the planned divestiture of Taneko positively, since the transaction will allow management to focus on its core brands (Bistro and Pei Wei concepts).

Another firm (Stephens) believes PFCB recognizes the demand for Japanese cuisine and is looking for a growth vehicle to monetize the opportunity.

January 28, 2008

Potentially Severe Problems

There are none other than those discussed in other sections of this report.

January 28, 2008

Long-Term Growth

Long-term growth rates for PFCB range from 16.0% (Thomas Weisel) to 22.0% (Cowen, Lehman, Morgan Keegan), with an average of 19.4%.

Management continues to believe that Taneko (opened in October 2006) can become a vehicle to support long-term growth.

One firm (R W. Baird) believes that the Pei Wei concept offers high-quality Asian cuisine (flavors from Thailand, Vietnam, Japan, Korea, and China) in a fast-casual setting. PFCB increased units by 39% in 2006 and is targeting growth of 35% in 2007 and 17% in 2008. Strong unit volumes and limited penetration levels suggest substantial growth potential for the brand. PFCB plans slower expansion in 2008 in order to focus on improving segment operating margin and achieving more consistent returns for new locations.

One firm (Lehman) believes P.F. Chang’s is the leader in the Asian segment of the restaurant industry. The firm remains comfortable with the long-term unit growth story (despite management’s more cautious near-term outlook), ultimately driven by Pei Wei, and sees limited near-term upside potential. Most of the high growth restaurant chains have faced significant stock price pressure over the past few quarters due to the slowing traffic trends across the broader category, more intensified in the casual dining sector.

Another firm (Morgan Keegan) states that given the company's strong sales-to-investment ratios and near industry high sales per square foot metrics, both brands continue to possess strong return potential and remain attractive longer-term investment vehicles.