Friends hi-fi system not very good, what do you do or say?

Keep your mouth shut at all costs. If they like the sound of their system, that is all that matters. I liked where someone just said nice and let it go. Invite the friend over to your house sometimes and just happen to ask if they would like to listen to your system. You have to understand that if your system is great, you might embarrass your friend.

"I have a friend who is a rock star"? Tell us his name. 

Make some suggestions that might help the sq like setup changes, room treatment, etc. But if you know that the speaker/amp combo will never work (for example a cool sounding amp with analytic sounding speakers or warm sounding speakers with a warm sounding amp), you might make some suggestions.

As for being friendly, you aren’t critiquing his wife, it’s audio gear. I’ve been in a few audio clubs and I’ve told members that their $40k speakers didn’t sound that good or there were a couple of times a few of us were in a listening session at a friends/audio club member house for a listening session and a couple of us were holding our hands over our ears it sounded so bad and his system was over $100k.

I do the same with cars, I’ve told friends with new corvettes/bmw’s that they can always MOVE UP to a Porsche. 

Don't lie is always my advice. If asked, tell it like you see it. In the end, it is never helpful to lie in an effort to please someone. It will eventually bite you in the rear end. And the person lied to will live and learn on fake advice.

Life long lesson: Only give advise and/or make suggestions if you are asked to contribute.