Weak Economy Pushes China's Xiabuxiabu Deeper In Red

The personal hotpot restaurant chain warned its revenue fell and its losses grew last year as increasingly cautious Chinese consumers cut back their spending

Key Takeaways:

• Xiabuxiabu said it expects to report its revenue slid by 20% last year, while its net loss doubled
• The restaurant operator's weak performance accelerated in the second half of the year, after its revenue slid 15.9% and it fell into the red in the first half 

"Hot" may be part of its core product, but personal hotpot restaurant operator Xiabuxiabu Catering Management (China) Holdings Co. Ltd. (0520.HK) has been anything but that lately.

When the company warned of rapidly sinking revenue and widening losses last week, its shares fell by 7% the next trading day. But that was just the latest course in a recent meal the company would probably rather forget, since its stock was already down 47% over the last year after it reported similarly downbeat results in the first half of 2024.

The latest profit warning shows Xiabuxiabu's slide continued into the second half of the year, and even accelerated. The company warned that its revenue dropped by 20% to 4.8 billion yuan ($666 million) last year, and that it would record an annual net loss between 390 million yuan and 410 million yuan, more than double its 190 million loss in 2023.

Some calculations using the company's first-half data show its revenue declines accelerated from 15.9% drop in the first six months of 2024 to a 21.7% decrease in the second half, when the figure totaled 2.4 billion yuan. The company was still profitable in the first half of 2023, but has been losing money since then, including a roughly 127 million yuan loss in the second half of last year, based on the midpoint of the forecast range from its latest announcement.

Xiabuxiabu has been working feverishly to close inefficient restaurants, offer discounts and reduce prices to cater to China's increasingly cautious consumers, who have become fond of searching for the latest "poor man's dining" promotions. But it faces bigger headwinds due to its relatively small size and positioning as a mid-end chain with average spending of about 60 yuan per customer.

According to China's National Statistics Bureau, the catering industry's revenue rose by 5.3% last year to 5.6 trillion yuan. But on a monthly basis, the growth rate fell steadily to just 2.7% by December last year from 30% in December 2023. That rapid slowdown reflects the uneasy feeling among Chinese consumers that they need to spend less, not more, as the country's real estate slump and rising unemployment erodes their income and assets.

Fitch Ratings Shanghai said the Chinese restaurant sector's slow growth last year contrasted with higher rates averaging 9.4% in the years before the pandemic. The ratings agency also observed declines in average spending of as much as 20% in the first six months of 2024. Retail sales also declined in other discretionary retail categories such as clothing, cosmetics, and gold and silver jewelry, the ratings agency observed.

Chinese social media posts on the consumer pullback, known locally as a "consumption downgrade," increased by five times between 2023 and 2024, as shoppers turned to discount brands and affordable alternatives to brand names, according to research published in January by the Hong Kong University and the Hakuhodo Institute of Life and Living in Shanghai.

Pain all around

Xiabuxiabu is hardly alone in feeling the pain of the consumption downgrade. Just days after issuing its warning, rival Jiumaojiu (9922.HK) warned of a steep profit decline from 453.5 million yuan in 2023 to 50 million yuan last year, sparking a 3% drop in its shares. The company's revenue fared better, rising slightly for the year to 6 billion yuan from 5.9 billion yuan in 2023. Like Xiabuxiabu, Jiumaojiu's shares are down by 46% over the last year.

One notable exception to those slumping stocks is leading hotpot chain Haidilao International (6862.HK), whose shares are up slightly over the last year, partly on the strength of its offshore subsidiary, Super Hi International (9658.HK, HDL.US).

Super Hi has followed a recent trend by Chinese consumer companies of trying to escape the overheated domestic market by venturing abroad, with 121 self-operated restaurants in 12 countries by the end of last September, complementing Haidilao's 1,343 domestic restaurants midway through last year. Last August, Fitch noted that while other restaurant operators faced heightened competition and pricing pressure, Haidilao should be less vulnerable due to its higher service quality and strong supply-chain management. 

But for operators like Xiabuxiabu and Jiumaojiu, which tapped into enthusiasm for eating out after the end of lockdowns and other restrictions during the pandemic, the future seems less bright. Xiabuxiabu also has an international footprint, though it's much smaller than Haidilao's, with 21 restaurants in Hong Kong, Taiwan, Macao and Singapore as of last June, on top of its 1,051 domestic restaurants. Jiumaojiu is similar, with 15 restaurants in Singapore, Canada, Malaysia, Thailand and the U.S. complementing its 751 domestic restaurants.

Reflecting their heavier reliance on the domestic market, both Xiabuxiabu and Jiumaojiu blamed their weak earnings last year on intense domestic competition and overall weak appetite for discretionary spending.

So, what are they doing to improve their situations? In Xiabuxiabu's case, the company is closing underperforming restaurants, resulting in 203 million yuan in write-downs during the first half of last year. It has also lowered prices, partly by introducing set meals, and using more centralized procurement. On the marketing side, it has worked with popular social media for brand positioning, launched new delivery products, and promoted its membership business.

Still, its overall seat turnover rate declined year-on-year from 2.4 times daily in the first half of 2023 to 2.3 times in the first half of last year. Same-store sales tumbled 35% from 1.27 billion yuan in the first six months of 2023 to 827 million yuan in the same period of 2024.

Jiumaojiu reported similar trends, with its seat turnover rate falling from 3.1 times daily in the first half of 2023 to 2.7 times for its flagship Tai Er brand last year, and average spending per customer down from 75 yuan to 71 yuan over that time. The company opened 59 new restaurants in the first half of last year but pulled back on expanding its Tai Er and Song Hot Pot brands.

The steep decline for Xiabuxiabu's stock has watered down its price-to-sales (P/S) ratio to just 0.17. Jiumaojiu, which is four times larger in terms of market cap, trades at a higher but still weak P/S ratio of 0.72. Haidilao is far larger than both of those, and its relatively high P/S of 1.98 may show that investors think it's the best positioned to survive a market bloodbath that's likely to continue through this year and possibly longer.