Yang Guofu tempts investors with Hong Kong’s Spicy Hotpot IPO

Key points to remember:

• Leading Sichuan-style hotpot chain Yang Guofu has filed for an IPO in Hong Kong, extending a recent round of restaurant listing applications

• The business has grown rapidly using a franchise model, but poses a risk to investors due to its family-owned nature

By Jose Qian

A couple of new restaurant IPOs in Hong Kong are literally “warming up” the market for a style of spicy stews that are the latest culinary craze in China.

First specialist in spicy seafood fondue QiXinTian applied for registration in January, and now Shanghai Yang Guofu Enterprise Management (Group) Co. Ltd.which specializes in a spicy and numbing Sichuan combination called Malatang, followed suit with its own application. Both companies are hoping to wow investors with recent rapid expansions that they hope will not only inflate their store counts, but also their valuations.

QiXinTian, ​​China’s No. 3 Chinese hotpot chain, has doubled the number of its restaurants in less than two years, according to its Subscription request at the beginning of the year. Yang Guofu is also growing rapidly, adding an average of three new restaurants every day for the past three years, according to Canyan Data. As of last September, Yang Guofu had 5,783 stores, including 18 in Australia, Canada, South Korea, the United States, Japan and Singapore.

There is no clear market valuation yet for Yang Guofu, as the company has never turned to large private investors for funding. But earlier unsourced reports said the company had recently scared off private investors with its hopes for a 20 billion yuan ($3.1 billion) valuation.

China’s malatang market was worth 133.7 billion yuan in 2021 and is expected to reach 197.3 billion yuan in 2025, an annual growth rate of 11.5 percent over this period, according to Yang Guofu. IPO prospectus filed at the end of last month. The company sees potential in introducing its standardized format to the industry, citing third-party data showing that the market share held by these channels is expected to grow from 22.5% in 2021 to 26% in 2025.

While smaller chains like Shenzhen-based FOOOK and Shanghai-based Xiaomanjiao are also sucking up investor money, Yang Guofu’s main rival in the spicy world of malatang is a chain called Zhang Liang. As of mid-2021, Zhang Liang had 5,800 stores in 299 cities around the world, making it the only rival with over 1,000 stores.

Both brands have grown rapidly using a franchise model focused on China’s second- and third-tier cities. Yang Guofu relies heavily on managing an external supply chain, while Zhang Liang mainly produces in-house. This means that Yang Guofu is more profitable, but at the cost of some product and quality control.

According to his prospectus, Yang Guofu’s income fell from 1.18 billion yuan in 2019 to 1.11 billion yuan in 2020, likely due to the effects of the Chinese pandemic when many restaurants were closed for months. But the figure rebounded to 1.16 billion yuan in the first nine months of last year as business returned to more normal levels. Its profit followed a similar trend, rising from 181 million yuan in 2019 to 169 million yuan in 2020, before rebounding to 202 million yuan in the first nine months of last year.

Yang Guofu’s average order per customer totaled 29.3 yuan in the first nine months of last year, according to its prospectus. By comparison, the figure for top-tier cities like Shanghai and Shenzhen is around 40 yuan, according to takeout platform Meituan.

bitter times

The past two years have not been kind for the wider hotpot industry, largely due to pandemic-related restrictions, but also partly due to overly aggressive expansions that have led some chains to open less profitable stores in their rush to expand. In the first half of 2021, Xiabuxiabu (0520.HK) lost more than 40 million yuan and industry leader Haidilao (6862.HK) is expected to register a huge net loss of 3.8 billion yuan to 4.5 billion yuan for 2021.

Company founder Yang Guofu once said in an interview that the success of the chain bearing his name was due in part to opportunistic store openings during the pandemic. He said that during this time, the company actively sought out high-quality stores that were previously unavailable, allowing it to quickly open new stores in prime locations.

Malatang is originally from Sichuan, but Yang Guofu has his roots in northeast China. Founder Yang dabbled in sheep herding and garbage collection before starting his culinary career selling street food with his wife in 2003 in Bin County, a satellite city of Harbin. He modified his malatang with touches to suit local palates, and his business quickly boomed. His first group of franchisees were relatives and friends from his hometown.

The company moved its headquarters to Shanghai in 2015 and opened its first overseas franchise in Vancouver two years later, followed by stores in Melbourne and Tokyo in 2018. Despite its rapid expansion, Yang Guofu never never turned to high-level private financings before, in part because its asset-light franchise model required less cash.

In addition to in-store consumption, Yang Guofu, like many top Chinese restaurateurs, has discovered a lot of cash in takeout during the pandemic. China’s malatang takeout market has grown from around 5.5 billion yuan in 2016 to around 34.8 billion yuan in 2020, and is expected to reach 70 billion yuan in 2025. Malatang is well suited for this type of catering, as its preparation time is short and the packaging of ingredients like soup base and seasonings are generally simple and standard.

Although the franchise model has helped Yang Guofu control costs and grow rapidly, it also comes with its own inherent risks. Inspectors from China’s market regulator visited more than 3,000 of the company’s stores nationwide last July amid a series of food safety scandals surrounding the wider food industry. fondue. As a result, more than 800 Yang Guofu stores were ordered to make “rectifications”, while five were notified and 24 were placed on file for investigation.

As a typical family business, Yang Guofu is a relatively high-risk venture, experts say, citing issues such as insider control that may worry investors. Before the IPO, Yang and his wife each owned 38.79% of the company, and their son owns most of the rest with a 19.39% stake. The main management positions in the company are also all held by members of the Yang family. Yang told financial publication Caijing that the company will sell about 15% of its shares to investors in the IPO.

Yang Guofu’s listing comes as competition in China’s restaurant industry intensifies. As the case of Haidilao has shown, rapid expansion can be risky. Haidilao was once an investor favorite, helping it raise $963 million when it went public in Hong Kong in 2018. The company’s revenue jumped 59.5% in its first year as a listed company to reach nearly 17 billion yuan, fueling an appetite for expansion that has seen it open up. more than 500 stores in the following two years.

But his choice of new locations would later prove dubious, and he closed 300 restaurants in November last year in a bid to focus on quality over quantity. Rival Xiabuxiabu also closed 200 restaurants last year, admitting it had also expanded too aggressively.

This article was submitted by an external contributor and may not represent the views and opinions of Benzinga.

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