Rising costs a burden for restaurant operator

money-glitz | Stella Zhai 16 Sep 2019

Mainland restaurant chain operator Jiumaojiu International plans to raise about US$200 million (HK$1.56 billion) through an initial public offering on the Hong Kong stock market.

The latest application comes after China's largest hotpot chain Haidilao International (6862) went public on the city's stock exchange last September.

Jiumaojiu had applied for an IPO in the mainland A-share market in 2016, but withdrew due to the prolonged and uncertain listing time table in light of the overall A-share vetting process, the company prospectus says.

Founded in 2005, the fast-fashion restaurant brand operator currently manages five self-developed brands, including Northwestern China cuisines Jiu Mao Jiu, sauerkraut fish restaurant Tai Er, Chinese style crepes Double Eggs, Sichuan cold pot skewers Cooking Spicy Kebab and Cantonese cuisines Uncle Chef.

Jiu Mao Jiu and Tai Er are the two leading brands, together accounting for more than 98 percent of the total revenue since 2016.

The company owns 269 restaurants and manages 41 franchised restaurants, covering 31 cities in 11 provinces and four municipalities in the mainland.

The total revenue of Chinese fast-fashion cuisine market grew at a compound annual growth rate of 25 percent since 2014 to 181.5 billion yuan (HK$199.93 billion) in 2018, due to the expansion of shopping malls and increasing popularity of Chinese fast-fashion restaurants, and is expected to rise at a CAGR of 20.3 percent to 550.2 billion yuan in 2024, according to a commissioned report by Frost & Sullivan.

Jiumaojiu ranked third among all Chinese fast fashion restaurants in China last year based on revenue, with a market share of 1 percent, and was also the first in terms of revenue from Southern China.

It also ranked first with a market share of 4.4 percent among all sauerkraut fish restaurants in China, according to Frost & Sullivan.

The proportion of total revenue contributed by Tai Er surged from 5.8 percent in 2016 to 43.5 percent as of June 30, while that from Jiu Mao Jiu shrank from 93.8 percent to 55.2 percent.

The overall average spending per diner at its Tai Er restaurants was 75 yuan as of June 30, higher than the 56 yuan of Jiu Mao Jiu. In addition, the seat turnover rate of Tai Er, which measures the number of times one seat is used by a diner, was 4.9 times at the end of June, more than twice of the 2.3 times of Jiu Mao Jiu.

Jiumaojiu plans to open around 370 new self-operated restaurants from 2019 to 2021, among which 240 are under Tai Er and 54 restaurants are under Jiu Mao Jiu.

However, the same-store sales growth of Jiu Mao Jiu restaurants had slowed from 8.2 percent in 2017 to 1.7 percent at the end of June, seat turnover rate of this brand also slid from 2.4 times to 2.3 times during the period. Same-store sales growth of Tai Er also dropped from 34.3 percent in 2017 to 4.5 percent as of June 30.

Jiumaojiu warns that its future growth depends on its ability to open and profitably operate new restaurants, and may not be able to open new restaurants at the same rate as in the past or as quickly as planned.

In addition, raw materials and consumables costs and staff costs have been taking up over 60 percent of its total revenue since 2016, and increases in the cost of ingredients used in its restaurants may lead to declines in profit margins and operating results, the company further warns in the prospectus.

The company plans to use a part of the net proceeds raised to expand its restaurant network, and to further strengthen the supply and support capabilities for its restaurants and enhance its centralized procurement system. Some of the proceeds will be used for the repayment of part of its loan, while the rest is for working capital and general corporate purposes.

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