Sichuan-style malatang hotpot chain has grown rapidly using a franchise model, focusing on smaller cities to build up a network of 5,783 stores

Key takeaways:

•      Leading Sichuan-style hotpot chain Yang Guofu has filed for a Hong Kong IPO, extending a recent series of restaurant listing applications

•      Company has expanded rapidly using a franchise model, but poses investor risk due to its nature as a family-run business

By Jose Qian

A couple of new restaurant IPOs in Hong Kong are literally “hotting up” the market for a style of spicy hotpots that are the latest dining craze in China.

First spicy seafood hotpot specialist QiXinTian filedfor a listing in January, and now Shanghai Yang Guofu Enterprise Management (Group) Co. Ltd., which specializes in a Sichuan spicy and numbing combination called malatang, has followed suit with its own application. Both companies are hoping to wow investors with recent rapid expansions that they hope will inflate not only their store counts but also their valuations.

QiXinTian, China’s No. 3 hotpot chain, has doubled its restaurant count in less than two years, according to its listing application at the start of the year. Yang Guofu is also growing rapidly, adding an average of three new restaurants every day over the last three years, according to Canyan Data. As of last September, Yang Guofu had 5,783 stores, including 18 in Australia, Canada, South Korea, the U.S., Japan and Singapore.

There’s no clear market valuation for Yang Guofu just yet, as the company has never turned to major private investors for funding. But earlier unsourced reports said the company recently scared off private investors with its hopes for a 20 billion yuan ($3.1 billion) valuation.

China’s malatang market was worth 133.7 billion yuan in 2021, and is expected to grow to 197.3 billion yuan in 2025, representing an annual growth rate of 11.5% over that time, according to Yang Guofu’s IPO prospectus filed late last month. The company sees potential in bringing its standardized format to the sector, citing third party data showing market share commanded by such chains is expected to grow from 22.5% in 2021 to 26% in 2025.

While smaller chains like Shenzhen-based FOOOK and Shanghai-based Xiaomanjiao are also soaking up investor cash, Yang Guofu’s main rival in the spicy world of malatang is a chain called Zhang Liang. As of mid-2021, Zhang Liang had 5,800 stores in 299 cities worldwide, making it the only rival with more than 1,000 stores.

Both brands have expanded rapidly using a franchise model focused on China’s second- and third-tier cities. Yang Guofu relies heavily on managing an external supply chain, while Zhang Liang produces mainly in-house. That means Yang Guofu is more profitable, but at the cost of some product and quality control.

According to its prospectus, Yang Guofu’s revenue shrank from 1.18 billion yuan in 2019 to 1.11 billion yuan in 2020, mostly likely due to effects of China’s pandemic when many restaurants were shuttered for months. But the figure rebounded to 1.16 billion yuan in the first nine months of last year as business returned to more normal levels. Its profit followed a similar pattern, falling from 181 million yuan in 2019 to 169 million yuan in 2020, before rebounding to 202 million yuan in the first nine months of last year.

Yang Guofu’s average order per customer totaled 29.3 yuan in the first nine months of last year, its prospectus showed. By comparison, the figure for top-tier cities like Shanghai and Shenzhen is around 40 yuan, according to takeout dining platform Meituan.

Sour times

The last two years haven’t been kind of the broader hotpot industry, largely due to pandemic-related restrictions but also partly due to overly aggressive expansions that led some chains to open less profitable stores in their rush to grow. In the first half of 2021, Xiabuxiabu (0520.HK) lost more than 40 million yuan, and industry leader Haidilao (6862.HK) is expected to record a whopping net loss of 3.8 billion yuan to 4.5 billion yuan for 2021.

Company founder Yang Guofu once said in an interview the success of the chain bearing his name owes partly to opportunistic store openings during the pandemic. He said that during that time the company aggressively hunted for high-quality shops that were previously unavailable, allowing it to quickly open new stores in prime locations.

Malatang is from Sichuan, but Yang Guofu has its roots in Northeast China. Founder Yang tried his hand at sheep herding and garbage collecting before starting his culinary career selling street food with his wife in 2003 in Bin county, a satellite city of Harbin. He modified his malatang with touches to suit local palates, and his business quickly boomed. His first batch of franchisees were relatives and friends from his hometown.

The company moved its headquarters to Shanghai in 2015, and opened its first overseas franchise in Vancouver two years later, followed by stores in Melbourne and Tokyo in 2018. Despite its rapid expansion, Yang Guofu has never turned to high-profile private financings before, in part because its asset-light franchise model required less cash.

In addition to in-store consumption, Yang Guofu, like many of China’s leading restaurant operators, has discovered big money in takeaway dining during the pandemic. China’s malatang takeaway market has rapidly grown from about 5.5 billion yuan in 2016 to about 34.8 billion yuan in 2020, and is expected to reach 70 billion yuan in 2025. Malatang is well suited to such dining, as its preparation time is short and packaging of ingredients like soup base and seasonings are generally simple and standard.

While the franchise model has helped Yang Guofu to control costs and quickly expand, it also carries its own inherent risks. Inspectors from China’s market regulator visited more than 3,000 of the company’s stores nationally last July amid a series of food safety scandals surrounding the broader hotpot industry. As a result, more than 800 of Yang Guofu’s stores were ordered to make “rectifications,” while five were warned and 24 were placed on file for investigation.

As a typical family business, Yang Guofu is a relatively high-risk enterprise, according to experts, who cite issues like insider control that may be cause for investor concerns. Before the IPO, Yang and his wife each held 38.79% of the company, and their son holds most of the rest with a 19.39% stake. The company’s key management positions are also all held by Yang family members. Yang told financial publication Caijing that the company will sell about 15% of its shares to investors in the IPO.

Yang Guofu’s listing comes as broader competition in China’s catering industry is heating up. As Haidilao’s case has shown, rapid expansions can be risky. Haidilao was once an investor favorite, helping it raise $963 million in its Hong Kong IPO in 2018. The company’s revenue surged 59.5% in its first year as a publicly traded company to nearly 17 billion yuan, fueling an appetite for expansion that saw it open more than 500 stores in the following two years.

But its choice of new locations would later prove dubious, and it closed 300 restaurants in November last year in a shift to focus on quality over quantity. Rival Xiabuxiabu similarly shuttered 200 restaurants last year, conceding it had also expanded too aggressively.

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