Domino's China Operator Makes Second Toss at Hong Kong IPO

Key Takeaways:

• DPC Dash, operator of the Domino’s pizza chain in China, has filed an updated prospectus to list its shares in Hong Kong
• The company differs from larger rival Pizza Hut in China due to its bigger focus on delivery, and also due to its earlier stage of development

By Doug Young

Making a good meal is one thing, but serving it up is quite another.

That’s the message coming from a group of fast-growing Chinese restaurant operators that filed for Hong Kong IPOs in the first half of the year, but have yet to serve up any shares for local stock buyers. One of those was DPC Dash Ltd., operator of the Domino’s Pizza chain in China, which filed an updated version of its prospectus last week, showing it’s still pursuing a listing despite less-than-savory market conditions.

The company’s latest filing comes after its initial IPO prospectus from March expired, and contains new data from the first half of this year. That update shows that, like most consumer-facing companies in China, DPC hit a big speed bump in the first part of the year as the nation rolled out a new wave of strict Covid-control measures to combat the highly contagious Omicron variant.

Unlike many other companies whose same-store sales contracted during the period, however, DPC managed to keep growing, though at slower levels than the previous year. Part of its ability to grow in such a difficult environment owes to its aggressive expansion, combined with its heavy emphasis on takeout dining that was less affected by Covid disruptions than in-store dining.

On that note, we’ll move ahead by reviewing some of the bigger-picture information about this company, along with the new information from the updated prospectus.

The company is currently China’s third largest pizza chain. The clear market leader is Pizza Hut, owned by Yum Brands YUM, which also owns the KFC and Taco Bell chains. Both Yum and Domino’s DPZ use a similar business model when it comes to their China operations, giving master franchise rights to a separate company for the massive market. Yum’s China master franchisee is the U.S.- and Hong Kong-listed Yum China YUMC.

Domino’s owns about 15.7% of DPC’s shares, though that stake may go down if and when the company finally succeeds in making its Hong Kong listing.

While it’s easy to find similarities between Domino’s and Pizza Hut in China, there are also some key differences. As we said previously, DPC uses a model that focuses more heavily on delivery than in-store dining for its China operations, compared with a Pizza Hut operation that is far more reliant on in-store dining.

DPC said delivery orders have accounted for about 70% of its business for the last three years, with the amount reaching 71.5% for the first six months of this year. By comparison, delivery sales accounted for just about half of an overall China pizza market that was worth about 36.4 billion yuan ($5 billion) last year, according to third-party data cited in the prospectus.

The prospectus points out that the delivery business is expected to grow faster than the overall pizza market, accounting for about 64% of sales by 2026. From our position in Shanghai, we can confidently say that prediction looks relatively safe due to increasing popularity of online ordering for takeout food on popular apps like Meituan (3690.HK) and Ele.me. That should position DPC well for future growth.

Online orders

As part of its takeout emphasis, DPC and Domino’s in China also use a system that relies far more heavily on online orders than Pizza Hut and traditional dine-in chains. DPC said a whopping 95% of its orders came from online channels in 2021 and the first half of 2022, far higher than the industry average of less than 70%.

The other place where DPC and Domino’s differ from the larger Pizza Hut is their stage of development, which is still relatively early. The company first acquired franchise rights for China as early as 2010, compared with a much earlier China entry for Yum, which was the first major western fast-food operator in the market when it opened its first KFC in Beijing in 1987.

Yum China’s much earlier entry means its stores are better represented in China’s smaller cities that offer some of the best growth potential as living standards rise and top-tier cities like Beijing and Shanghai become saturated. By comparison, it’s still early days for DPC, which is still quite heavily focused on top-tier cities. The company’s prospectus shows that of the 508 stores it operated at the end of June, 394 – or more than three-quarters – were in the top-tier cities of Beijing, Shanghai, Guangzhou and Shenzhen.

One other key difference between Yum China and DPC is that the former is profitable, whereas the latter is profitable at the store level but still losing money overall. DPC reported a net loss of 95.5 million yuan in the first six months of the year, narrowing by about half from the 205 million yuan loss from a year earlier.

DPC expects to keep losing money as it opens stores at an aggressive clip, including 300 planned new stores in 2022 and 2023, which would bring its total China store count to 768 by the end of 2023. By comparison, Yum China already had 2,711 Pizza Huts in China at the end of June alone, showing DPC still has lots of distance to catch up to its much larger rival.

We’ll close with some of DPC’s latest financials that show how its growth slowed in the first half of the year, even though such a slowdown should be temporary as the effects of the pandemic start to fade.

The company’s revenue rose 18.6% in the first half of this year to 908.8 million yuan, which looks good on the surface, but was actually sharply slower than the 46% revenue growth the company reported last year. Its same-store sales growth reached 13.9%, which again looks good until one considers the company reported 18.7% same-store sales growth in 2021.

We previously wrote that DPC could get a valuation of about $500 million if it can match Yum China’s price-to-sales (P/S) ratio of about 2.1. That estimate still looks valid, and it’s quite possible DPC could even be valued a little higher based on its lower cost structure and better growth potential stemming from its bigger focus on online ordering and deliveries, as well as its earlier stage of development.