9922.HK

The operator of a trendy mid-range restaurant chain is getting undermined by rising popularity of ‘poor man’s meals’ from competitors

Key Takeaways:

  • In a stunning reversal, Jiumaojiu warned it expects its profit for the six months through June to sink nearly 70% year-on-year
  • Shares of the operator of a popular mid-range restaurant chain sank 11% after the profit warning and a concurrent announcement on a sales downturn

  

By Edith Terry

It was swimming pretty for several years on the popularity of its Tai Er chain of mid-range restaurants serving up steaming pots of trendy ‘sauerkraut fish.’

But Jiumaojiu International Holdings Ltd. (9922.HK) shocked investors last week when it announced it would report a huge dip in its profit for the six months through June, even as its revenue rose modestly. The company said it expected to report revenue of about 3.06 billion yuan ($421 million) for the first half of the year, up 6.4% year-on-year. But its profit for the period tumbled by 69.8% to 67 million yuan from 222.2 million yuan a year earlier.

The company simultaneously issued a business update for the second quarter, noting that table turnover, customer spending, and same-store sales all logged big declines for its major chains. Tai Er’s same-store sales plunged 18.1%, while the metric for its smaller Song Hot Pot chain fell by an even larger 36.6%. Same-store sales for its namesake Jiu Mao Jiu chain also fell by 12.6% for the three-month period.

Declines in average spending per customer were equally worrisome, led by a nearly 10% decline to 69 yuan per customer at Tai Er in the second quarter from 75 yuan last year. Song Hot Pot customers were spending 104 yuan on average, compared to 113 yuan last year.

Investors responded by dumping Jiumaojiu shares to the tune of an 11% decline the day after the announcement, with the stock continuing to fall over the next two days. The company will release its full interim results next month.

The downbeat report is noteworthy for Jiumaojiu, which was previously riding high on the popularity of its chains. Last year, the company’s revenue jumped 50% to 6 billion yuan, with its adjusted profit rising sevenfold to 501 million yuan. Same-store sales for Tai Er grew 18.3%, while Song Hot Pot and Jiu Mao Jiu were up 10.6% and 7.4%, respectively.

So, what went wrong so quickly? Jiumaojiu blamed the sudden drop to shifting consumer habits, coupled with a high base created by its strong results a year earlier. It also faulted itself for failing to keep up with earlier cost-control measures as revenue began to weaken.

All those factors clearly played a role in the company’s current woes. Jiumaojiu’s prices are simply too high in the current economically uncertain environment where consumers favor more budget-friendly options, known as “poor man’s meals” or qionggui taocan, typically costing 40 yuan to 50 yuan per person.

Once downplayed in headier times, “poor man’s meals” have even entered advertising campaigns and are now regularly featured on Chinese social media. The phrase may have originated with McDonald’s “pair as you wish” set meals for 13.9 yuan, but has spread from Western fast-food chains to Chinese brands like Nayuki, with its 9.9 yuan breakfast set, and Nanchengxiang, a Beijing fast food brand, with a breakfast costing just 3 yuan. Even high-end brands like Xin Rong Ji, a Michelin-starred restaurant, are adopting the strategy.

Slowing growth

The Chinese catering industry continues to grow, but at a far slower pace than during earlier times. The industry generated 2.1 trillion yuan in sales during the first five months of 2024, up 5% from the previous year, but well behind the 35.8% increase in May 2023, according to the National Bureau of Statistics. Similarly, total retail sales grew by just 3.7% in May 2024 from a year earlier, far slower than the 12.7% growth in May 2023.

Jiumaojiu and many of its peers posted robust growth in the first half of last year thanks to pent-up demand for dining out after the end of Covid-19 curbs. The company opened 180 new restaurants last year, bringing its total to 726, though the rate of new openings slowed somewhat with the addition of just 45 stores in the first half of this year.

Despite the sudden downturn, Jiumaojiu said it planned to keep up its expansion for Tai Er, while pulling back on Song Hot Pot. It maintained its target of adding 80 to 100 new Tai Er restaurants in Mainland China and 15 to 20 in other markets, while it now plans to open 25 new Song Hot Pot restaurants instead of an originally targeted 35 to 40.

Jiumaojiu isn’t alone in its troubles. Shares of larger peer Haidilao (6862.HK) have also fallen by nearly 40% since it spun off its Singapore-based international arm, Super Hi International (9658.HK, HDL.US) for a listing in New York in May, complementing the chain’s existing Hong Kong listing. Super Hi’s shares have also fallen, though by a milder 18%, from their listing price on the Nasdaq.

Absent any near-term pickup for its core China operations, one possible path toward better returns for Jiumaojiu might be to follow in Haidilao’s footsteps and eventually spin off its international business. It would, of course, need to build up some scale first. It had only 18 restaurants outside China at the end of last year, all Tai Er, in Hong Kong, Singapore, Malaysia, Thailand, the U.S. and Canada. If it reaches its 2024 targets, that number could grow to between 33 and 38 stores by the end of this year. By comparison, Super Hi had 119 restaurants at the end of March.

Revenue from Jiumaojiu’s Tai Er restaurants overall grew by 44% last year to 4.4 billion yuan, accounting for 75% of total revenue. While it hasn’t broken out revenue for its international locations, some of the metrics where it does provide a breakout look decent.

Seat turnover rate was 3.9 times for Tai Er restaurants outside China last year versus 3.0 domestically; table turnover rate was 5.5 times versus the domestic chain’s 4.1; and average spending per customer outside China was 172 yuan, or more than double the 72 yuan domestically.

Jiumaojiu’s price-to-earnings (P/E) ratio has dropped considerably over the last two years as its shares tumbled, and now stands at 8.6, with a price to sales (P/S) ratio of 0.66. Those look distinctly undervalued compared to Haidilao’s P/E ratio of 14 and P/S of 1.55. Goldman Sachs recently lowered its profit forecast for Jiumaojiu by 37% over the next three years and has cut its target price from HK$6.20 to HK$3.80, although it still maintains a “buy” rating on the company.

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