Feixi Old Hens is flocking to the Hong Kong Stock Market

Chicken restaurant operator LXJ International is banking on its long history and homey image as it ramps up a franchise model to boost its business

Key Takeaways:

  • LXJ International has filed for a Hong Kong listing, reporting its revenue rose 11% to 4.68 billion yuan in the first nine months of last year
  • The chicken restaurant operator’s gross margin for its franchise management business reached 81.5% last year

  

By Lee Shih Ta

The “Ugly Duckling” is a Western classic, capturing hearts with its tale of a shunned wallflower who grows up to be a beautiful swan. Now, China is rolling out its own version of this classic with its story of Feixi Old Hens, a restaurant chain with roots in the countryside that went on to wow Chinese diners with its tasty chicken soup.

The chain’s operator, LXJ International Holdings Ltd., is hoping to sell its transformative ugly duckling tale to the capital markets with plans for a Hong Kong IPO. The company is hoping to join a growing pipeline of Chinese listings flowing into Hong Kong since the end of last year, many from the consumer sector.

LXJ is a fickle bird, dismissing reports about a potential Hong Kong IPO last year, only to file its application shortly after the New Year. The company previously filed twice to list in Shanghai in 2022 and 2023, before voluntarily withdrawing its application in August 2023. In its latest listing document, the company makes it clear that a Hong Kong IPO can boost its name globally and fuel its growth story by providing access to foreign investors and capital.

The brand’s original name, Feixi Old Hens, dates back more than four decades to 1982, when founder Shu Congxuan started out raising hens in Feixi county of Eastern China’s Anhui province after his discharge from the military. He opened his first Feixi Old Hens fast-food restaurant in 2003.

Shu used hens raised on his farm over 180 days to make his signature dish, Feixi Old Chicken Soup, which quickly won over customers and led him to expand the chain’s presence across China. To date the brand has sold over 71.7 million bowls of its signature soup, operating from its current network of 1,404 restaurants in 53 Chinese cities, mainly in Anhui, Jiangsu and Zhejiang provinces and in Shanghai by the end of September. Within that network, 949 of its restaurants are self-operated and 455 are run by franchisees.

The company ranked first among Chinese-style fast-food chains in 2023 based on its transaction value, according to third-party market data in its listing document.

From country chicken to city chick

The brand got a facelift in 2012 and changed its name to LXJ, believing its original name was too long, lacked class and was too associated with greasiness due to the “fei” in its name, which means oily in Chinese. But the company hasn’t abandoned attempts to play on nostalgia by appealing to people’s desire for simpler flavors from an earlier era.

In March 2020, Shu held a party to unveil his new concept, relying on a slim, small-town budget of just 200 yuan, or $27, set in an old house complete with red-cloth-covered table and a big blackboard on the clay wall. Holding a microphone adorned simply with a piece of colorful fabric, he used the event to announce that his company had secured 1 billion yuan ($136 million) in strategic investment.

Everything about the event screamed corny, but such corny nostalgia, when pushed to the extreme, can also become the new popular. The event attracted instant attention online and Shu became an internet sensation, thrusting his company into the headlines.

LXJ’s brand of small-town chic is made for internet consumption. Hilariously corny pictures of Shu are frequently posted online and other brands names come up regularly in the conversation. Its reader-friendly copy has a human touch and causal style, clicking well with internet users. Shu once said: “You have to get into young people’s social circles if you want to run a successful restaurant business and being with them can make me feel younger as well.”

LXJ has grown steadily in recent years, with its revenue rising from 4.53 billion yuan in 2022 to 5.65 billion yuan in 2023. Meanwhile, its profit also rose 49%, from 250 million yuan to 380 million yuan over that period. The high base effect caused revenue growth to slow somewhat last year, up by 11.9% year-on-year to 4.68 billion yuan in the first nine months of 2024, while its profit rose by an even smaller 3.3% to 370 million yuan.

Fat profits in franchising

The company is a relative newcomer to franchising that has become all the rage among Chinese restaurant chains lately, only launching that part of its business in 2022 to further kickstart its growth. That business has grown quickly, with its number of franchisees jumping from 118 at the end of 2022 to 455 by last September. But those restaurants underperform its self-operated outlets, logging 12,000 yuan in average daily sales in the first nine months of last year compared with 16,000 for self-operated stores.

That said, we should also note that even though its self-operated restaurants account for as much as 89% of its total gross profit, their gross margin was only 23.8%. By comparison, gross margin for its franchise management services reached a far higher 81.5%. The company charges franchisees for the services it provides, including pre-paid franchise fees, royalty fees and fees for other services.

The company’s overall gross margin of 23.5% is relatively low by industry standards. By comparison, recently-listed Xiaocaiyuan (0999.HK) has an average gross margin of over 65%, while hotpot giant Haidilao (6862.HK) came in at 61% last year. That might partly be the result of LXJ’s higher upstream supply chain costs, given that it raises its own chickens in a husbandry business full of uncertainties.

The company is also grappling with China’s “consumption downgrade” as people spend less in a slowing economy. Spending per customer at its self-operated restaurants dropped from 29.7 yuan in 2022 to 27.6 yuan in the first nine months of last year, while the figure for its franchisees dropped from 31.5 yuan to 29.2 yuan over that time. All those figures are far less than the average spend of 61.5 yuan per customer at Xiaocaiyuan and 97.4 yuan at Haidilao, which are both more traditional table-service restaurants.

The company’s decision to source mostly from its own farms is putting its profit profile under pressure. That part of the business has remained profitable by selling cheaply but in large volume. Its current priority is to boost its growth and margins using the franchising model. On that front, it is actively converting self-operated restaurants into franchised ones, which can help to cut its costs and boost its profitability.

LXJ is just the latest catering company seeking a Hong Kong IPO, following in the footsteps of not only Xiaocaiyuan, but also bubble tea chains Mixue and Guming. Such cheap eats are in growing demand right now in China as people seek out lower-cost dining out alternatives. With its reputation, business scale and affordable image, LXJ certainly looks competitive in the current market. Now, it just needs to find the right balance between rapid expansion of its franchise business while maintaining its quality, taste, and food safety.

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