Domino's China Partner Serves Up Profits, New Milestone In Rapid Growth Story

Key Takeaways:

  • DPC Dash said it’s on track to open 180 new Domino’s stores in China this year – and plans to more than double its total store count to 1,500 by the end of 2026
  • The company’s stock has risen by nearly 70% since late August after it posted its first-ever profit and became accessible to Mainland China-based traders

By Doug Young

There’s nothing like a little extra trading volume to add a bit of leavening to your stock price. There’s also nothing like the taste of some first-ever profits.

Those two factors seem to be pushing up shares of DPC Dash Ltd. (1405.HK), operator of the Domino’s DPZ pizza chain in China, which has also just announced a new milestone with the opening of its 700th store. DPC Dash’s shares mostly languished around their IPO price of HK$46 ($5.88) following their listing in late March.

But then, investors suddenly developed a taste for the stock around the end of August, sending the shares up by 67% since then to their latest close of HK$76 last Friday.

There are quite a few slices to the story of this sudden surge, which comes even as China’s economy slows sharply and Hong Kong-listed China stocks have performed miserably this year. But one of the biggest elements appears to be the company’s reporting of its first-ever profit in its interim results released on Aug. 29.

Just a week later on Sept. 5, the company announced its stock was included in the Shanghai- and Shenzhen-Hong Kong Stock Connect programs, which allow Mainland Chinese investors to buy Hong Kong-listed shares of specific companies. This particular program seems especially helpful for consumer brands like Domino’s, since China is still dominated by less sophisticated smaller retail investors who like to buy stocks of companies with familiar names they see in daily life.

Since the interim results and Stock Connect announcements, DPC’s stock has recorded daily trading volume of more than 100,000 shares on nine days in just over a month. By comparison, it recorded similar trading volume on just seven days for the entire previous period beginning a week after the company’s Hong Kong IPO at the end of March.

Following the stock run-up, the company’s shares now trade at a price-to-sales (P/S) ratio of about 5, or nearly double the 2.8 for the U.S.-listed Domino’s. The figure is also well ahead of the 2.2 for Yum China YUMC, whose Chinese Pizza Hut operations are the country’s largest pizza chain. It’s also ahead of the P/S of 4.4 for the red-hot coffee chain operator Luckin LKNCY, which is China’s largest food and beverage chain operator.

So, clearly investors are starting to notice this company and seem to like its story, which combines China’s growing taste for pizza with its similarly fast-growing love for takeout delivery and online ordering. That combination has given DPC the confidence to step up its pace of store openings to reach the 700-store mark last month.

“This important milestone in our growth demonstrates our success as we continue executing tailored localization strategies, and implementing our actionable store expansion plan,” said CEO Aileen Wang. “We remain focused on a delivery-centric business model, and on strengthening our development capabilities in regards to both menu and technology.”

The company added it has continued to rapidly open new stores, and the total stood at 716 in 21 Chinese cities at the end of last month. The company opened 128 new stores this year through the end of September, and said it is on track to meet its previously stated goal of opening 180 stores for the whole year.

Secret Sauce

We’ll spend the second half of this review looking more closely at the “secret sauce” that has attracted investors to DPC’s growth story.

The company is opening new stores at a rapid clip, but it’s also taking care to keep its margins high, meaning it isn’t only seeking growth for the sake of growth. It’s doing that by scaling up its model that relies heavily on deliveries from stores that are smaller and cheaper to operate than traditional eat-in restaurants. It is also using centralized kitchens to prepare many of its products.

The company’s history of working with Domino’s in China dates back to 2010, and includes an extension of its initial master franchising agreement with the U.S. chain’s parent in 2017. After years of honing its operations, mostly in the megacities of Shanghai and then Beijing, it’s only in the last few years that the company has begun to expand aggressively into other areas.

The company had 588 stores in China at the end of last year, and plans to accelerate its new openings from the 180 this year to another 240 in 2024. It would then open another 250 to 300 restaurants in both 2025 and 2026, bringing its total to its goal of 1,500 by the end of 2026.

That’s still just about half of the 3,072 Pizza Huts in China at the end of June, though Yum China has been in the market far longer than DPC, opening its first Mainland store in 1990 in Beijing.

DPC’s metrics for the first half of the year look quite strong overall. Its revenue rose 51% year-on-year in the six-month period to 1.38 billion yuan ($189 million), easily outpacing a 32% increase in its store count over that period as it operated more efficiently by gaining economies of scale. As a result, the company boosted its store-level operating profit margin to 13.5% from 9.2% a year earlier. That lifted it into the black to the tune of an 8.75 million yuan profit in the latest six-month period, reversing a 95.4 million yuan loss a year earlier.

The one slightly negative element in the report was a slowdown in its same-store sales growth, which fell to 8.8% from 13.9% a year earlier. That could owe to several factors, including sales that may have been artificially high last year as people ordered delivery food more often during China’s strict Covid-control measures.

In another significant milestone, DPC said its store count in cities outside Beijing and Shanghai surpassed its combined count in those two megacities in the first half of the year, showing the company is aggressively courting consumers who are less familiar with Western food like pizza in China’s smaller cities.

Pizza Hut has also moved aggressively into such smaller markets, which are a key element for any major restaurant operator in China to maintain rapid growth. The 20 cities where DPC operated at the end of June was up from 12 such cities a year earlier, and we expect that number will continue to grow quickly as the company keeps up its rapid expansion.

Market News and Data brought to you by Benzinga APIs
Comments
Loading...
Posted In: AsiaRestaurantsMarketsGeneralChinacontributorsdomino's pizzaDPC Dash
Benzinga simplifies the market for smarter investing

Trade confidently with insights and alerts from analyst ratings, free reports and breaking news that affects the stocks you care about.

Join Now: Free!