QiXinTian Serves Up Spicy Hong Kong IPO, Defying Pandemic with Major Expansion

Key takeaways:

  • QiXinTian, China’s No. 3 hotpot restaurant chain, has filed for a Hong Kong IPO that might worth it at greater than $2 billion
  • The corporate has doubled its restaurant rely in lower than two years, a transfer in all probability geared toward boosting its IPO valuation

By Fai Pui

A Chinese language saying goes that consuming is the “first order enterprise for extraordinary individuals.” In a rustic of extremely diversified cuisines and the place eating is an integral a part of the tradition, meals cooked at your desk in hotpots is likely one of the oldest types, with a historical past of 1,700 years.

Those self same boiling cauldrons have grow to be all the fashion lately, spawning a brand new technology of eating places catering to a variety of tastes, serving up meals at nearly any time of day. Huge names embody veteran Dong Lai Shun, in addition to the newer Haidilao (6862.HK) and Xiabuxiabu (0520.HK), that are listed in Hong Kong. Haidilao has grow to be synonymous with hotpot in China today, with explosive development that has heated its worth to greater than 100 billion yuan ($15.7 billion).

The pair of listed names might quickly be joined by QiXinTian Worldwide Holding Ltd., a newcomer recognized for its spicy crab hotpot, which filed for a Hong Kong IPO final week. The chain, which mixes fried crab, seafood and hotpot, has 256 shops throughout China, with a presence in lots of main coastal provinces, together with Zhejiang, Jiangsu and Shanghai within the Yangtze delta space, and Fujian and Guangdong within the south. A median meal prices 131 yuan ($20.64), offering inexpensive fare for middle-income Chinese language and above.

One other chain, Cantonese hotpot specialist Supreme Pot, additionally utilized for a Hong Kong IPO final September. However that deal remains to be on maintain, because it has but to go an knowledgeable evaluation.

QiXinTian, whose identify means “seven fulfilling days,” is simply one of many many names which have harnessed the latest hotpot craze to submit regular development. In line with its prospectus, annual earnings for all hotpot eating places in China rose from 395.5 billion yuan in 2016 to 438 billion yuan in 2020, representing a compound development fee of two.6%. As momentum builds, the expansion fee is predicted to speed up to 14.2% between 2020 and 2025, in line with third-party information cited within the prospectus.

Aggressive, fragmented market

China’s restaurant sector is understood for its cutthroat competitors, particularly in well-liked areas like hotpot. The nation had 500,000 to 600,000 hotpot eating places by 2020, although the trade remained extremely fragmented. Measured by income, the highest 5 solely accounted for 7.9% of the market. Some 5.8% of that belonged to undisputed chief Haidilao, whereas the second-largest took up simply 1.2%, adopted by QiXinTian at No. 3 with 0.3%.

Regardless of its comparatively small general share, QiXinTian remains to be a frontrunner within the house for hotpots within the crab and seafood class. Its income in 2020 totaled round 1.41 billion yuan, accounting for 1.2% of its market phase.

The previous two years have been difficult, to say the least, for many eating places in China and all through the world. Haidilao has had to close some eating places amid the fallout, and lots of mom-and-pop outfits have shut down fully. However QiXinTian has bucked the development and really expanded through the troubled occasions. Its restaurant rely greater than doubled from 115 in Jan. 2019 to 250 on the finish of Sept. 2021, and income grew from 1.29 billion yuan in 2019 to the 1.41 billion yuan for 2020.

The expansion even accelerated final yr, with income climbing 49.5% year-on-year within the first 9 months of 2021 to 1.48 billion yuan, largely as a consequence of China’s success in containing the pandemic and its rising retailer rely. The corporate has additionally pumped up its takeaway enterprise, whose share of whole income grew from 11.2% in 2019 to 16.4% by the tip of September final yr. Precise income for that a part of the enterprise, which has thrived on China’s latest takeout eating craze, shot up by 48.3% to 243 million yuan within the first 9 months of final yr.

The corporate can be fairly worthwhile, with earnings doubling from solely 81.15 million yuan in 2019 to 172 million yuan in 2020, and rising additional nonetheless to 259 million yuan within the first 9 months of 2021. It has achieved that development on the again of hovering internet revenue margins, which rose from 6.3% in 2019 to 17.5% within the first 9 months of final yr. These numbers counsel a relentlessly growth regardless of the pandemic, in all probability to safe a greater valuation for the IPO. Haidilao took an analogous strategy earlier than its 2018 IPO.

By way of desk turnover fee, QiXinTian is a relative laggard in contrast with its friends. It averaged 2.2 occasions per day by the tip of final September, in contrast with 2.4 occasions, 3.4 occasions and a couple of.6 occasions for Supreme Pot, Haidilao and Xiabuxiabu by the tip of June final yr, in line with its prospectus.

However the firm’s income development fee per restaurant was the best within the trade at 31.9% year-on-year within the first 9 months of final yr. By comparability, Xiabuxiabu, Haidilao and Supreme Pot posted income development ranging between 14.7% to 29.8%, exhibiting QiXinTian has each its strengths and weaknesses.

Sizzling valuations

Hotpot shares themselves have blown cold and warm through the pandemic as they handled repeated enterprise disruptions. Shares of “blue chip” Haidilao plummeted 70% in a yr however have been nonetheless buying and selling at a comparatively scorching price-to-earnings (P/E) ratio of 57 occasions by the tip of final yr. Xiabuxiabu, whose shares adopted an analogous trajectory, had a P/E ratio of round 21.3 occasions on the finish of the yr. Shares of fish hotpot specialist Jiumaojiu (9922.HK) fell by round 40%, however even now the inventory trades at a P/E ratio of 44.4 occasions.

QiXinTian has but to announce its IPO value and fundraising goal. However utilizing a mean P/E ratio of about 40 occasions from the three shares talked about above, and assuming regular revenue efficiency that may yield a 346 million yuan revenue for 2021, the corporate might get a market valuation of round 13.84 billion yuan when it goes public, making it 3 times greater than Xiabuxiabu. That will worth every of its restaurant at round 54 million yuan, on par with Haidilao.

The corporate will use many of the cash from the itemizing to increase its community, mirroring the same speedy expansions by Haidilao and Xiaobuxiabu. It plans to open one other 40 eating places in japanese China in 2022, then 230 ones in different components of China in 2023 and 2024.

However as Haidilao’s case has proven, such speedy growth will be dangerous. Following such a breakneck addition of latest shops, Haidilao closed 300 eating places in November final yr and made a significant shift in its technique to give attention to high quality over amount. Equally, Xiabuxiabu needed to shutter 200 restaurants last year, conceding that its overly aggressive growth had put immense strain on its revenue margin.

Whether or not QiXinTian will observe down an analogous boom-bust path stays a giant query because it forges forward with its itemizing. However given the lukewarm sentiment in Hong Kong proper now, it might have issue justifying a excessive valuation to traders who have been burned by the earlier increase and bust of Haidilao.

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