Key Takeaways:
- Jiumaojiu said its revenue and profit rose at least 50% and 166% last year, respectively, as diners flocked to its popular Tai Er ‘sauerkraut fish’ restaurants
- Rival Haidilao said it will report a 3.8 billion yuan to 4.5 billion yuan loss for 2021, its first-ever loss since its 2018 IPO, following an overly aggressive expansion
By Shirley Lau
When restaurant chain operator Jiumaojiu International Holdings Ltd. (9922.HK) raised funds in its January 2020 Hong Kong IPO, investors were thrilled, oversubscribing to the retail portion of the sale by nearly 200 times. At the time, rival Haidilao International Holding Ltd. (6862.HK) was as hot as the hotpot meals it served, expanding exponentially. Hopes were high that Jiumaojiu would replicate Haidilao’s success.
Two years on, it turns out investors were both right and wrong in their optimism. Last week, each company issued separate announcements that were quite different. Jiumaojiu dished out a positive profit alert, while Haidilao did the opposite with a profit warning. As if to apologize for its plunging performance, Haidilao went on to announce this week that co-founder Zhang Yong had stepped down as CEO following an overly aggressive expansion.
In many ways, this is modern China’s “Tale of Two Restaurant Chains,” centered on the nation’s love affair with hotpot-style dining over the last decade.
Jiumaojiu’s Feb. 22 announcement said it expected to post a profit of at least 330 million yuan ($52 million) last year, up 165.9% or more from 2020. Revenue for the year surged 50% or more to 4.1 billion yuan or higher. The stock rose a tiny fraction the day after the announcement, indicating investors were expecting the strong performance on the huge popularity of the company’s Tai Er “sauerkraut fish” hotpot chain.
Haidilao’s statement, released a day earlier, was far more downbeat. The company said it expected to report a net loss of 3.8 billion yuan to 4.5 billion yuan for 2021, reversing a 309.5 million profit in 2020. It will mark the first time the group has posted a loss since its highly hyped Hong Kong IPO in September 2018. It said revenue for the year would be 40 billion yuan or more, up more than 40% year-on-year.
The profit warning wasn’t a huge surprise, since Haidilao’s net profit had already plummeted 86.8% in 2020. Its shares have been moving generally downward since the announcement, closing at HK$18.52 on Thursday, down 5% from the day of the warning. Zhang was replaced as CEO by his former deputy and COO Yang Lijuan, though he will remain as chairman.
The two companies’ sharply contrasting performance is quite striking, especially when one considers both were founded around the same time, have found a hugely popular dining format, and have a similar operating model with central kitchen systems producing semi-finished dishes to ensure product quality and more efficient food preparation.
So, wherein lies the difference? It’s all in the recipe, it seems. Jiumaojiu’s strength comes largely from the trendy Tai Er chain, which contributes more than 70% of its revenue. Meantime, Haidilao’s weakness ultimately boils down to its overly aggressive expansion in recent years – a lesson that Jiumaojiu might be well advised to heed if it wants to maintain its current health.
Restaurant with perks
Zhang was a former factory worker when he founded Haidilao in 1994, known for its spicy Sichuan-style hotpot as well as quirky service perks like free manicures and massages for waiting customers, and noodle-pulling performances. At the time of its IPO, the Beijing-based company’s restaurant network had expanded through the Chinese mainland, as well as to Singapore, Taiwan and Hong Kong, making it China’s biggest hotpot chain.
In raised $963 million in its Hong Kong IPO, and saw its revenue surge 59.5% in its first year as a publicly traded company to 16.97 billion yuan, with net profit up 60.1% to 1.65 billion yuan. Its average table turnover rate was an enviable five times per day. That prosperity fueled an appetite for expansion, which saw Haidilao open 200 new stores in 2018 and 308 in 2019, dramatically expanding its footprint from its stable of just 273 restaurants in late 2017.
But its exploding empire came on the back of dubious judgment. Haidilao’s management thought 2020 was a great time to step up the aggressive expansion even more, adding another 544 new restaurants that year to take advantage of pandemic-induced low store rents. That brought its total store count to 1,597 stores by June last year.
The huge expansion fueled a doubling in revenue to 20 billion yuan in the first half of last year. But net profit totaled just 96.5 million yuan, translating to average daily net income of just 334 yuan per restaurant. Table turnover also dropped to three times a day. Zhang later acknowledged his misjudgment and “blind overconfidence,” and the group switched gears and closed or suspended operations of more than 300 restaurants in 2021.
By comparison, Jiumaojiu has grown more sensibly – at least so far. Its history dates back to 1995, when founder Guan Yihong opened a small noodle shop on southern China’s Hainan island. Jiumaojiu was established in 2005, and transformed from a traditional catering enterprise into a restaurant chain in 2010, operating stores under its namesake Jiu Mao Jiu brand.
The Guangzhou-based company was facing typical headwinds of slowing traffic and declining turnover as it matured, before finding a new formula for success with Tai Er’s establishment in 2015. Targeting young diners with its “sauerkraut fish” that had become the latest dining craze in China, Tai Er quickly grew to account for a whopping 79.2% of the company’s revenue in the first half of 2021 – up from just 6% in 2016.
As with Haidilao, the pandemic and intense competition have taken a toll on Jiumaojiu’s business, forcing it to close 66 stores in 2020. But its pain has been less severe compared with Haidilao. As of June 2021, Jiumaojiu had a much smaller 419 restaurants in 70 cities across China. Still, it remains to be seen if Jiumaojiu may eventually try to go big the same way Haidilao did. After all, there’s always the temptation to step on the accelerator when things are on the up-and-up.
As it stands, investors are still quite positive about Jiumaojiu’s growth prospects, giving it a healthy price-to-sales (P/S) ratio of 5.58 – more than double Haidilao’s 2.14.
Despite their differing fortunes, shares of both companies have followed roughly similar tracks in line with broader industry trends. Both moved up after their IPOs and peaked in mid-February 2021, with Haidilao trading as high as HK$85.80 and Jiumaojiu at $37.15. But Haidilao has moved steadily downward since then and now hovers near its IPO price of HK$17.80. Jiumaojiu has dropped by a milder 14% over the last year, and is still about 50% above its IPO price of HK$10.28.
