Why investors are crazy about the IPO of this Chinese restaurant

January 09, 2020 09:40
Jiumaojiu has seen the retail tranche of its initial public offering oversubscribed nearly 200 times. Photo: Sina

Chinese restaurant chain Jiumaojiu International Holdings Ltd. (09922. HK) has drawn strong demand for its initial public offering, as evidenced by an oversubscription ratio of nearly 200 times and a substantial amount of margin financing extended by brokers.

The overwhelming response might have something to do with hot-pot chain Haidilao International Holding Ltd. (06862.HK), which was listed in Hong Kong slightly more than a year ago.

Haidilao set its IPO price at HK$17.8, which was considered rather pricey. Yet, on the back of its impressive growth, with revenue surging 59 percent and net profit up 41 percent in the first half of last year, the company's share price surged to HK$33.5 on Tuesday, driving its market value to HK$177.5 billion or nearly double the initial level.

Investors are apparently keen to find the next Haidilao, and Jiumaojiu might just be that.

Haidilao has a network of 593 restaurants as of June last year, and its sales revenue reached 11.7 billion yuan (US$1.69 billion) in the first half of last year. Jiumaojiu, on the other hand, has 269 outlets across the nation and its revenue reached 1.24 billon yuan in the same period.

On average, each Haidilao restaurant is valued at HK$300 million, compared with Jiumaojiu’s HK$33 million.

That doesn't necessarily suggest that Jiumaojiu is cheaper, and there is no guarantee the sauerkraut fish restaurant chain can replicate Haidilao’s success.

First of all, Jiumaojiu is a lot smaller than Haidilao in average restaurant size, rendering the valuation per restaurant a poor base of comparison.

More importantly, the popular hot-pot chain has certain characteristics that Jiumaojiu cannot easily emulate.

A fundamental difference between the two is that hot pot is basically a self-service model: customers cook the food themselves, not chefs. That is precisely why Haidilao can scale up quickly while maintaining the same standard in each outlet.

Jiumaojiu, on the other hand, is a traditional eatery, relying on good chefs to maintain the quality of its food.

Haidilao enjoys another advantage. Because the chain operator is so popular, its restaurants are often located on the upper floors of shopping malls, where rent is much cheaper.

Besides, Haidilao can often negotiate good deals, further driving down its rental costs, as malls regard it as a magnet that can draw in more customers to patronize other shops. Shopping mall owners are thus happy to offer discount leases.

Rental cost only represented 0.8 percent of Haidilao's revenue for the first half of last year. By contrast, Jiumaojiu said rental and relevant costs account for 10 percent of its revenue, which is the average level in the restaurant industry.

This article appeared in the Hong Kong Economic Journal on Jan 8

Translation by Julie Zhu

[Chinese version 中文版]

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Hong Kong Economic Journal columnist