China's Consumption Downgrade Claims Yet Another Victim - Ajisen

The once-dominant ramen house's business has slumped on a mix of intensifying competition and lower consumer spending

Key Takeaways:

• Ajisen said it lost up to 40 million yuan in 2024, reversing a profit of 180 million yuan in the previous year
• The former ramen noodle king's store count sank to 575 in the first half of 2024 from a peak of 799 in 2019

Chinese diners are notoriously fickle, with today's hot restaurant often ending as yesterday's leftovers in as little as a year. The country's latest "consumption downgrade" as consumers rein in their spending in favor of cheap eats is only making matters worse, especially for choices considered higher end.

One such chain falling victim to such trends is Ajisen (China) Holdings Ltd. (0538.HK), once hailed as a pioneer of Japanese-style ramen in China. On March 5, the restaurant operator warned that it floated into the red last year with a loss of up to 40 million yuan ($5.51 million), reversing a profit of 180 million yuan in 2023. It blamed its sinking fortunes on revaluation losses on investment properties and lower profitability in the restaurant business.

The revaluation losses related to the weak property market in Hong Kong and on the Chinese Mainland, its two main markets. It said the broader restaurant business is being adversely affected by intensified competition and changes in consumer behavior. It said revenue from its traditional dine-in business has decreased. At the same time, rising demand for takeaway services has increased operating costs, leading to a decline in overall profitability.

Ajisen first sank into the red in the first half of 2024. Its midyear report showed its revenue fell 6.6% year-on-year in the first six months of 2024 to 820 million yuan. It reported a loss of 7.16 million yuan for the period, reversing a profit of 130 million yuan in the same period of 2023. Its shares have taken a bath as its performance slipped, slumping around 25% over the past year to hover around the HK$0.80 level.

Erratic bottom line

The move into the red isn't new for Ajisen, whose profitability has been erratic in the last five years. The company recorded a profit of 160 million yuan in 2019, only to report a loss of 78 million yuan the next year. It returned to the black with a profit of 21 million yuan in 2021, followed by a loss of 140 million yuan in 2022 and finally a profit of 180 million yuan again in 2023.

The chain's ability to keep clawing its way back to profits may owe partly to its continuous cost reduction and improved efficiency. Its ingredient costs as a percentage of revenue dropped to 24.4% in 2023 from 26.2% in 2022, while labor costs decreased from 29.8% to 26.2% over that time, and other operating costs fell from 26.3% to 25%.

But will such cost-cutting and efficiency improvements be enough to counter the longer-term headwinds?

Originally from Japan, Ajisen was first introduced to Hong Kong in 1996 by local entrepreneur Poon Wei. After succeeding in the city, she opened the first Ajisen on the Chinese Mainland in 1998 in Shenzhen, and then expanded rapidly across the country. In 2007, the company made a Hong Kong IPO, achieving a market capitalization of more than HK$20 billion ($2.57 billion), earning Poon the nickname of "Ramen Queen".

At its peak in 2010, Ajisen floated a plan to have 1,000 stores in Mainland China within five years. But then the company got mired in a "Bone Broth" scandal in 2011, as people discovered its famous broth that it claimed was the product of 20 hours of simmering was actually made from a concentrate. That greatly tarnished Ajisen's image, taking it years to recover.

Rise of new Chinese-style noodle houses

That incident marked a turning point for the company, following its years on the rise. Starting in 2010, other ramen brands such as Ichiran, Kagetsu Arashi and Butao started coming to China, giving consumers more choices. As they provided more options, the once dominant Ajisen's stagnating brand began to look stale.

Targeting the mid- to high-end of the market, with bowls of noodles costing more than 40 yuan, Ajisen carved out a place mainly serving white-collar workers in shopping centers and office buildings. But people gradually came to feel its dining experience and meal quality didn't seem to merit its relatively high prices. "It looks like fast food but isn't cheap" some netizens commented.

Following the initial influx of new ramen chains, a number of new Chinese noodle houses stirred up the competition even more starting around 2020. Higher-end brands, such as Hefu, Majiyong, Chenxianggui and Zhanglala debuted and immediately became favorites of both diners and investors. Hefu completed six funding rounds, and at one time was rumored to be planning a Hong Kong IPO. Such new challengers further squeezed Ajisen's market share.

These newcomers are also suffering under the latest "consumption downgrade" in China's slowing economy. White-collar office workers no longer want to spend more money on high-end noodles, leaving such eateries high and dry. According to business registry Qichacha, China registered 31,000 new noodle houses in the first five months of last year, while 29,000 were de-registered after closing. That net growth was lower than in previous years, showing growing pressure on the group.

Meantime, Ajisen never reached its grand plan for 1,000 stores. Its count peaked at 799 in 2019 and has been falling ever since, down to 562 by 2023. Things stabilized last year and the count grew slightly to 575 in the first half of 2024. But the chain is still far from its peak in 2019, and the earlier 1,000-store target now seems like a distant dream.

Despite its stock declines, Ajisen's shares still trade at a relatively savory price-to-earnings (P/E) ratio of about 20 times, higher than the 14 for Jiumaojiu (9922.HK) and 13.5 of Tai Hing Group (6811.HK). That means investors may still see value in the stock, even if such a ratio doesn't appear to match the company's performance, leaving it at risk of appearing overvalued.

At the end of the day, the future for this pioneer and former superstar of China's restaurant scene looks increasingly cloudy. In the face of challenges from brand stagnation, intensifying competition and consumer caution, cost controls seem inadequate to revive its fortunes, and a bigger overhaul, including a rebranding, looks necessary. But whether this former "Ramen Queen" can revive her fortunes remains to be seen.