Casual dining chain aims for mainland expansion

Kevin Xu

Chinese restaurant operator Green Tea has filed its initial public offering application to the Hong Kong stock exchange, joining a list of mainland restaurant operators rushing to go public.

The company intends to raise US$200 million (HK$1.56 billion), according to media reports.

Citigroup Global Markets Asia and CMB International Capital act as joint sponsors. Partners Gourmet, an investment holding company under Swiss private equity firm Partners Group, holds a 28.2 percent stake in Green Tea.

Green Tea ranked fourth in 2020, with a market share of 0.5 percent in the casual Chinese cuisine restaurant market, according to China Insights Consultancy.

The casual Chinese restaurant operator mainly provides fusion cuisine and attracts diners with traditional Jiangnan style decoration and accessible prices.

The average spending per guest climbed 4.96 percent to 61.3 yuan (HK$72.76) in 2020.

The company opened the first Green Tea restaurant in 2008 in Hangzhou and has built a nationwide network of 185 restaurants in the mainland as of March 26.

Green Tea plans to open around 60 new restaurants in 2021 and 80 to 100 new restaurants each year in 2022 and 2023.

The company was caught in a reputational crisis in August last year as mainland media reported that one Green Tea restaurant in Hebei province had food safety issues. Green Tea says in the prospectus that it suspended the operations of the restaurant on August 13 to carry out food safety training for employees and implement corrective measures.

Green Tea has also been plagued with trademark infringement disputes.

"In the past, we have found that certain third parties used or imitated our trademarks or trade names without our authorization to operate restaurants in cities where we do not have a presence," the company says in the prospectus.

Mainland restaurant chain operators are expected to benefit from China's economic recovery, with the coronavirus pandemic woes receding in the mainland and a growing number of Chinese citizens dining out. Sales of China's catering industry during the three-day Qingming Festival holiday surged 81.7 percent year-on-year, according to the State Taxation Administration.

Green Tea plans to use the proceeds for opening new restaurants, repaying a short-term bank loan that it plans to borrow from a commercial bank, financing the establishment of its centralized food processing facility in Zhejiang province, upgrading IT system and related infrastructure, and funding working capital and other general corporate purposes.

Revenue increased by 32.40 percent year-on-year to 1.74 billion yuan in 2019, due to the expansion of the restaurant network, but fell by 9.62 percent to 1.57 billion yuan in 2020, mainly due to a significant drop in overall customer traffic and same store sales as a result of the impact of the coronavirus disease pandemic in the mainland.

In 2020, delivery services contributed to 14.8 percent of Green Tea's total revenue, and restaurant operation 85.1 percent.

Net profit surged by 138.89 percent year-on-year to 106.07 million yuan in 2019, but the company recorded a net loss of 55.26 million yuan last year.

In comparison, Jiumaojiu International (9922) said net profit plunged 24.54 percent in 2020, and Haidilao International (6862) reported a 86.81 percent decrease in net profit.

Green Tea's restaurant network expansion gave rise to higher staff costs, depreciation, and rentals in 2020. Meanwhile, delivery services expenses increased by 12.1 percent to 36.2 million yuan in 2020 as third-party online food delivery platforms raised their commission fee, and finance costs increased by 21.6 percent to 39.6 million yuan last year.

Substantially all of Green Tea's restaurants opened over the past three years and in operation as of December 31, achieved breakeven within one to five months of operation. In addition, it takes an average 17.5 months for the cumulative earnings before interest, tax and depreciation of its restaurants opened in 2018 and in operation as of December 31, to cover the initial outlay.