Hot Pot Dining Boom Helps Jiumaojiu Serve Up Profit Feast

Key Takeaways:

• Jiumaojiu’s revenues surged more than 50% in the first half from the same period a year earlier as Chinese diners crowded back into restaurants
• The company’s Song Hot Pot brand became the latest growth engine for the restaurant group after its revenues quadrupled

By Fai Pui

The customers are back in droves after nearly two years of dining restrictions, relishing the taste of Chinese cuisine and delivering a much-needed boost to the restaurant industry.

Many Chinese eateries struggled to stay in business during the pandemic, but profits have been rolling back in since strict Covid controls were lifted late last year, judging from the latest earnings report from restaurant chain Jiumaojiu International Holdings Ltd. (9922.HK).

In the first six months of the year, the company was busy catering to pent-up demand for its signature dish of fish with Sichuan pickles, and various types of hot pot. Last Tuesday the catering group announced that revenue jumped nearly 52% in the first half to 2.88 billion yuan ($395 million) from the same period last year, and net profit soared 290% to 222 million yuan.

While diners have been savoring the dishes on the menu, investors were not quite salivating over the earnings numbers. The restaurant chain’s shares fell 4.6% the day after the results, as high expectations had already been baked into the stock price. The shares did rebound 7.5% the following day, but the price is still languishing near 52-week lows, signaling limited optimism about the outlook.

Analysts pointed out that the company had already issued an upbeat profit forecast back in July. The results came in close to the estimate and lacked any strong upside surprise for the market, said UOB Kay Hian analyst Curtis Yeung.

But he predicted that an expansion of the company’s sauerkraut fish restaurants, under the Tai Er logo, should gather speed in the second half if the company wants to achieve its stated goal of adding 133 outlets a year to the brand, after the growth pace lagged in the first six months of the year.

Jiumaojiu has been rushing to scale up to meet the post-pandemic appetite for restaurant dining, adding 67 new eateries across its multiple brands in the first half. Of those, 46 were Tai Er outlets, 16 belonged to the Song Hot Pot chain, one was a Jiu Mao Jiu Northwest Cuisine restaurant, and four opened under newer brands such as Lai Mei Li Grilled Fish. As of June 30, the company’s network comprised 621 dining outlets, with 80 percent of those in the Tai Er chain selling the signature fish in a spicy or sour broth. After Tai Er’s 496 outlets, Jiu Mao Jiu has 75, Song Hot Pot 43 and other brands account for seven restaurants.

Tai Er’s first-half revenue rose 47% to 2.19 billion yuan, but the smaller Song Hot Pot chain punched above its weight in the earnings. The hot pot brand’s revenues soared 331% to nearly 352 million yuan, overtaking Jiu Mao Jiu’s 318 million yuan to become the second biggest revenue earner after Tai Er. Table turnover rates rose at all three major brands, led by Tai Er, where the figure increased to 4.3 from 3.8, while Song Hot Pot rose to 3.9 from 3.4, and Jiu Mao Jiu edged up to 2.8 from 2.6.

With hot pot dishes flying out of the kitchen, the company is planning to invest more money in that chain while also expanding its core network of fish restaurants, a strategy that makes sense to industry analysts. “Song Hot Pot is important to the company going forward as it has higher average spending per customer than Tai Er, which helps increase its contribution to overall revenue and gross margin,” said Kenny Wen, KGI Asia’s head of investment strategy.

Price Cuts Eat Into Spending

China’s hot pot craze has generated a crowded and competitive market, where Jiumaojiu’s Song brand is locked in a fierce battle with other major chains such as Haidilao (6862.HK), Xiabuxiabu (0520.HK) and Shu Daxia. For that reason, the Song Hot Pot restaurants cut their menu prices in the first half to attract diners on middle to low incomes. Average spending per hot pot customer fell 6.9% to 121 yuan from 130 yuan in the same period a year earlier. Over at the Tai Er restaurants, the average outlay per customer also slipped to 75 yuan from 78 yuan in the period. The company was upfront about the price pressure, citing market conditions and industry competition.

Jiumaojiu was founded in 2005 by Guan Yihong and by 2010 was transformed into the Jiu Mao Jiu chain specializing in Northwest Chinese cuisine. By 2015, the company had added the Tai Er brand targeting a youth market, which went on to become the main money spinner with its fish and pickles menu. Wary of becoming too reliant on one type of cuisine, Guan has been pursuing a multi-brand strategy since 2019, launching the sub-brands such as Uncle Chef, Song Hot Pot and Lai Mei Li Grilled Fish in the past three years.

After rapidly expanding its fish dish chain over eight years, the company switched to a steady growth strategy for Tai Er and opened overseas outlets, as the menu’s appeal risked fading with China’s trendy young diners. Based on the latest earnings, hot pot may have taken over from Tai Er’s fish with picked vegetables as the company’s growth engine.

Jiumaojiu’s latest forward price-to-earnings (P/E) ratio is about 31.6 times, close to the 31.4 times for the hot pot market leader Haidilao, but far higher than the smaller Xiabuxiabu’s 15.2 times. Investors appear to favor the prospects for bigger chains that can benefit from scale effects.

Jiumaojiu is also outpacing the broader industry in terms of revenue growth, with a nearly 52% jump in the first half. Overall, the Chinese restaurant industry’s revenue grew 21.4% in the half-year period to 2.43 trillion yuan, according to figures from China’s National Bureau of Statistics. The performance has prompted several major banks to recommend the Jiumaojiu stock as a “buy”, but some have trimmed their price targets.

Goldman Sachs rates Jiuimaojiu’s fundamentals as sound but predicts same-store sales of the core Tai Er brand can only achieve 85% of pre-pandemic levels in the second half of this year and 90% next year. It has maintained a “buy” rating but lowered the price target from HK$18 to HK$17.6, giving a potential upside of about 30%.

BOCOM International also rates the Jiumaojiu stock a “buy”, with a target price of HK$20.5, citing a bullish outlook for Song Hot Pot and prospects for overseas expansion.

The stock has also gained a “buy” recommendation from Jefferies, although with a price target drop from HK$18 to HK$17.1, mainly due to a weaker than expected recovery in consumption in the first half and China’s uncertain economic outlook for the rest of the year. But Jefferies still considers Jiumaojiu to be a competitive player in the industry, with plans to expand its stores and improve operational efficiency.