2517.HK
Guoquan Food is on a bumpy journey ahead

The hotpot ingredient supplier profited on the home dining craze during the pandemic, but now it’s struggling to adapt as consumers return to more eating out

Key Takeaways:

  • Guoquan Food’s revenue fell 15% year-on-year last year to 6.09 billion yuan, but it managed to post 9.3% profit growth on greater efficiency
  • The provider of hotpot ingredients for home dining has responded to changes in consumer dining habits, but there’s little space for more efficiency gains this year

By Ken Lo

Investors gobbled up “stay-at-home” concept companies like Guoquan Food (Shanghai) Co. Ltd. (2517.HK), a supplier of ready-made hotpot ingredients, during the pandemic. But in the current era where people are spending more time outside, such companies are finding themselves with a case of post-pandemic indigestion.

Guoquan served up a view of that indigestion in its maiden annual results released at the end of last month, following its listing in Hong Kong last November. Demand for the company’s do-it-yourself (DIY) ingredients dropped last year as more people returned to restaurant dining, causing Guoquan’s revenue to decline 15% to 6.09 billion yuan ($842 million) from 7.17 billion yuan in 2022. Such shrinkage was a far cry from the 20.4% year-on-year increase in China’s overall food and beverage sales last year, according to the National Bureau of Statistics, showing the DIY eating market is losing ground to traditional outside dining. 

Guoquan’s shrinking revenue contrasted sharply with trends for two traditional Chinese hotpot chains, Jiumaojiu (9922.HK) and Haidilao (6862.HK), whose revenue and profits both grew considerably last year. Jiumaojiu’s revenue jumped nearly 50% as its profit surged more than 8 times to 453 million yuan in its post-pandemic rebound. Haidilao’s revenue also boiled over with a 34% jump, while its profit nearly tripled to 4.5 billion yuan.

It’s worth noting that revenue and profits for both chains far exceeded levels from 2019 before the pandemic. That could reflect a major shakeup in China’s restaurant market over that time, as only the strongest survived, leaving them in far better position post-pandemic as they mopped up business from smaller peers that went belly up.

The rapid recovery in dining out is expected to weigh on eat-at-home specialists like Guoquan over the near-term. That means cost-cutting and efficiency boosting will probably move to the top of the management’s menu as it seeks to maintain profits even if revenue keeps falling.

Three-pronged approach

Guoquan Food is not sitting still as the many changes take place around it. The company has taken a three-pronged approach to contend with changing dining habits since last year, led by the development of new products and upgrading existing ones. It has also been buying factories to boost its output of self-produced ingredients that tend to have higher margins. Lastly, it has also increased its pool of franchisees to gain greater scale.

Of the three tacks, product upgrades are the most critical for their potential to create new revenue sources. Doing more self-production and boosting its store count may help its margins and economies of scale by boosting efficiency. But such efficiency boosts can only go so far and may be reaching their limits.

Using the three-pronged approach, Guoquan squeezed its cost of sales from 5.92 billion yuan in 2022 to 4.74 billion yuan last year, more than offsetting its revenue decline. As a result, its gross profit for the year rose 8.2% year-on-year to 1.35 billion yuan as its gross margin improved by nearly 5 percentage points from 17.4% in 2022 to 22.2% last year.

That helped to boost the company’s profit by 9.3% year-on-year to 263 million yuan. The figure was up by an even larger 23.8% to 318 million yuan on an adjusted basis, which typically excludes costs like employee stock-based compensation.

Guoquan had 10,307 stores in 31 provinces and regions around China at the end of last year, up by 1,086 from the end of 2022. The vast majority 10,300 of those were franchised stores, while the other seven were self-operated. Franchised stores contributed 5.37 billion yuan, or 90.3% of the company’s overall revenue last year. But the fact that overall revenue fell for the year shows that boosting revenue by simply adding more stores can only go so far.

Guoquan had about 27.9 million members by the end of last year. Its prepaid card business brought in approximately 720 million yuan for the year, up 18% year-on-year, as it continued to build up the program. Now, it just needs to make sure those customers spend their money.

Developing online sales

To better serve its franchisees, provide consumers with more shopping options and boost its own efficiency, Guoquan has also developed a variety of online sales networks and channels, including its own Guoquan Food app and WeChat mini-apps. Its products are also available on third-party takeaway platforms, as well as through channels on popular social commerce platforms like Douyin, the Chinese version of TikTok.

In addition to working with more than 279 suppliers, Guoquan also directly operates three production bases in Central China’s Henan province to produce some of its most popular key products like beef, meatballs and hotpot soup base. Such kitchens not only boost the company’s profitability and operational efficiency but can also stabilize its supplies. 

The company’s finances look relatively solid, providing a cushion as it charts its new course post-pandemic. It had 1.94 billion yuan in cash and bank deposits at the end of last year, and 678 million yuan in cash flow from operating activities during the year. Meanwhile, its interest-bearing bank loans and other borrowings totaled just 80.3 million yuan.

Chairman and CEO Yang Mingchao pointed out the company is using most of the funds raised through its IPO to extend and expand its upstream supply chains. He added the company will consider a variety of ways to invest in its upstream supply-chain partners with potential to become its own future food factories.

Guoquan currently trades at a mouth-watering price-to-earnings (P/E) ratio of 58 times for the last 12 months, several times the 16.6 times, 20 times and 16.7 times for Jiumaojiu, Haidilao and Yihai International (1579.HK), respectively. At such a rich valuation, combined with challenges ahead as DIY dining loses its luster, now may not be the best time to partake in the company’s stock.

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