Jiumaojiu Closes Out 2022 With Wash of Red, But Sees Tastier Times Post-Covid

The operator of a popular restaurant chain serving ‘sauerkraut fish’ posted a rare loss in the second half of last year, but is seen bouncing back strongly in 2023

Key Takeaways:

• Jiumaojiu’s net profit tumbled 86.2% in 2022, while its revenue dropped by 4.2%, mainly due to impact from the pandemic
• The restaurant operator’s business could bounce back with a resumption of dining out in 2022, but challenges remain, including intense competition  

By Trevor Mo

China’s catering industry had a tough year in 2022, as restaurants suffered from frequent closures under Beijing’s ultimately futile attempt to stop the spread of the highly contagious Covid Omicron variant. But a taste of spring could be just around the corner with China’s scrapping of its “zero Covid” policy, providing reason for hope among investors in these embattled companies.

That appears to be the logic behind investor reaction to an otherwise gloomy profit warning issued this week by Jiumaojiu International Holdings Ltd. (9922.HK), operator of a well-known hotpot chain serving a popular dish called “sauerkraut fish.” The company said its net profit tumbled 86.2% to 47 million yuan ($6.8 million) last year, while its revenue dropped by a milder 4.2% to 4 billion yuan.

Calculations using full-year data minus the company’s previously released figures for the first half of 2022 show it swung into the red with a 10.7 million yuan loss in the second half of the year, marking a rare loss after the company posted a 63 million yuan profit in the first half of the year. Its sales actually improved to 2.1 billion yuan in the second half from 1.9 billion yuan in the first.

The company attributed the business sluggishness to two factors, led by the continued resurgence of Covid and widespread lockdowns of major cities in China in 2022, causing sales to plunge as stores were forced to close and people avoided eating out. Global forex markets weren’t helping either, with the company citing a 78.9 million yuan forex loss related to a strong Hong Kong dollar as the other major reason behind the big profit decline.

But investors didn’t seem to mind too much, with Jiumaojiu’s shares actually rising 1% on the day of the announcement, and then largely unchanged in the following three trading days. That indicates investors have already priced in the company’s poor performance last year, and are looking ahead to brighter times as conditions in China return to normal.

After listing in Hong Kong in January 2020, Jiumaojiu’s shares soared past HK$37 at their peak in February 2021. Even after moving steadily downward from there, the stock’s latest closing price of HK$ 19.60 is still more than three times its IPO price, reflecting longer-term confidence in its popular Tai Er chain serving up sauerkraut fish.

Founded in 2005 by Chairman Guan Yihong, Jiumaojiu started out as a noodle shop on South China’s Hainan island, then later transitioned to a restaurant chain in 2010. It started out operating its namesake Jiu Mao Jiu restaurants serving Northwest Chinese cuisine, but later developed the Tai Er brand in 2015 targeting young customers.

While its Jiumaojiu name never truly took off, the Tai Er brand quickly became a big success and has become the company’s breadwinner in recent years. The chain’s success helped Jiumaojiu to more than double its revenues to 2.7 billion yuan in 2019 from 1.2 billion yuan in 2016 as it rapidly opened new stores.

That success helped the chain outperform its peers like rival hotpot operator Haidilao International Holding Ltd. (6862.HK) in the first two years of the pandemic, in part due to its relatively cautious expansion with new store openings during that time. Nonetheless, the company’s business started to take a pandemic hit early last year, though it didn’t provide specific discussion of its performance for second half of 2022 in its profit warning this week.

Good year ahead?

As China moves on from zero Covid, will spring finally be in the air for restaurants and other catering companies like Jiumaojiu? The company certainly seems to believe so. In its latest statement, it said “in view of the dismantlement of ‘zero Covid control measures’ … the board believes that the group’s business will rebound and has confidence in its future development.”

Limited industry data since Covid controls ended and life began returning to normal in mid-January appear to support the company’s optimistic view.

The most cited statistics come from a rapid consumption recovery for the industry during the recent Lunar New Year holiday from late January through early February. For example, aggregated sales for firms from the accommodation and catering industries in the southern megacity of Guangzhou, where Jiumaojiu is based, topped 4 billion yuan for the period, surpassing the pre-pandemic level in 2019, according to data from Ministry of Commerce.

Jiumaojiu is also seeing some positive signs, with same-store-sales up 6% for the Tai Er chain and 4% for Jiumaojiu in January, according to estimates from Jefferies. Believing the recovery trend will continue, the U.S. investment bank maintained its “buy” rating on the company, with a target price of HK$21.50. China Merchants Securities is equally optimistic, also maintaining a “buy” rating and targeting an even higher price of HK$24.10.

The broader investment community expects Jiumaojiu to bounce back strongly as well, with 22 analysts polled by Yahoo Finance forecasting the company’s profit will more than triple this year. They have an average price target of HK$22.52, implying about 18% upside from the stock’s current level.

In terms of valuation, Jiumaojiu has a relatively high forward price-to-earnings (P/E) ratio of 33. Haidilao is even higher at 36.5, while smaller hotpot chain Xiabuxiabu (0520.HK) is a bit lower but also relatively high at 28, according to Yahoo Finance. Those high levels appear to reflect investor confidence for a broader consumption recovery this year.

At the end of the day, there’s no question that the end of zero Covid will help to lift the entire catering industry, including Jiumaojiu. But we should also point out that dining out isn’t the only thing heating up these days. Competition is also getting hotter, and Jiumaojiu’s recent move into spicy hotpots with its Song Chongqing Hot Pot Factory chain puts it in direct competition with industry leaders Haidilao and Banu Hotpot.

Jiumaojiu still generates most of its business from the Tai Er chain, which contributed nearly 80% of its revenue in the first six months of 2022, according to its latest interim report. But the Song Chongqing Hot Pot Factory brand is increasingly seen as a new growth engine. Zheshang Security predicted that brand’s store count will grow to 40 by end of this year, up from 15 at the end of last June. 

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