9869.HK
Helens reboots franchising mode

The Hong Kong-listed bar operator has found a way back to profit after launching a new franchise model last year 

Key Takeaways:

  • Helens said it is on track to swing from a loss of 1.6 billion yuan in 2022 to a profit of at least 160 millionyuan for last year 
  • The bar chain launched a revised franchise scheme in the middle of last year and stopped taking a cut of partner profits  

  

By Li Shih Ta

A leading Chinese bar chain that struggled during the dark days of Covid is toasting a return to profit, in a sign of renewed life in the nighttime economy. 

In China, crowds of evening revelers have traditionally been viewed as a symbol of economic prosperity, celebrated in a famous poem from the Tang Dynasty that describes the myriad lights of a bustling night market.

The lights are clearly back on in the country’s bars and the drinks are flowing more freely there, judging from the latest annual earnings guidance from Helens International Holdings Co. Ltd (9869.HK), a hospitality chain popular with a young clientele.

The company expects to land back in the black for 2023, citing a gradual recovery in custom after the pandemic as well as business efficiencies, although annual revenues are set to shrink.

Certainly, customers have been rediscovering a party atmosphere in China’s taverns and bars since Covid controls were lifted early last year, including tourists checking out the night life. A study published last October by China’s tourism agency found that the volume of nighttime tourism in the eight months to August had exceeded the level in the same period of 2019, the year before the pandemic struck. Tourists made 3.27 nighttime outings per month on average, and 95% of those surveyed expressed a willingness to sample what the leisure and dining sectors had to offer after dark.

The report found that 70% of the visitors spent more money on evening entertainments than they did in 2019, pushing China’s nighttime tourism market to 1.57 trillion yuan ($220 billion) in 2023.

Helens has experienced the ups and downs of the hospitality industry since it was launched in 2009 as a hangout for students and other young patrons who were attracted by beer priced at 10 yuan a bottle. The company grew to encompass hundreds of outlets, becoming the first bar chain to list on the Hong Kong stock market in 2021. But Helens decided to downsize its franchise network to focus on directly managed bars, aiming to strengthen control of supply chains, staff, products and services.

The pandemic delivered a heavy blow, pushing the bar operator from profit into deep losses. A return to the black is now on the cards, as the company predicted profit attributable to shareholders would range from 160 million yuan to 210 million yuan in 2023, a big turnaround from a loss of more than 1.6 billion yuan the year before.

But the revenue situation was not a source of good cheer. The company’s projected revenue of between 1.17 billion yuan and 1.22 billion yuan for last year would mark a year-on-year decline of 21.8% to 25%, a prospect that dampened the spirits of investors.

In the three trading days after the earnings alert, the Helens share price fell about 7% to hover around HK$3.01.

Reverting to slimmer franchise mode 

While the company has undoubtedly benefited from a post-Covid recovery, the renewed profit is also down to a makeover of its business model. Before 2023 the hospitality chain rapidly expanded its network of directly owned bars, adding 451 in 2021 alone. In an ambitious grab for market share, the number of self-operated outlets was pushed to a peak of 846 by June 2022. 

Once Covid spread, the bloated number of bars put pressure on the business. In 2021 and 2022, the company’s losses amounted to 1.83 billion yuan. Therefore, the chain began to slim down, with the aim of reverting to a franchise model as a platform-based company.

The number of directly owned bars had more than halved to 409 by Sept. 20, 2023. That June, Helens introduced a “HiBeer Partnership” program that has now grown into a franchise network of 180 partner bars in 133 major and smaller cities, with the expansion due to speed up in 2024.

The company is promoting its franchise model as a money-making opportunity for its partners. Originally, Helens charged commission on the gross profit made by its franchisees. But from December last year it let partners keep all their takings and returned previous commissions. The company has also offered renovation subsides and sales incentives to boost business confidence among franchisees.

Helens can sacrifice some of the income stream because the alcohol supply chain is the real revenue driver in the pub business.

Heady alcohol margins

In its earnings for the first half of 2023, product revenue amounted to 540 million yuan, more than three quarters of the total turnover of 710 million yuan. Among own-brand products, revenue from alcoholic drinks reached 300 million yuan, rising to just over 42% of the total from 37% in the same period of 2022. Meanwhile, revenue from licensed partnerships was only 390 million yuan, or 5.5% of the total revenue.

Helens sells own-brand beers in a range of flavors for around 10 yuan a bottle, making the chain popular with young customers. In addition, third-party branded alcoholic drinks are all priced at around 10 yuan to 20 yuan,a more affordable option than the 70 to 80 yuan charged by other bars.

In the period to June 30 last year, the gross profit from Helens branded alcoholic drinks stood at 320 million yuan, with a lofty gross margin of 79.4%. The company’s overall gross margin rose six percentage points to 72.3% from the same period a year earlier.

During this year’s Spring Festival, more than 150 partner bars generated revenue exceeding 15 million yuan, according to figures released on the Helens WeChat account at the end of February. The bars took more than 210,000 orders and sold 650,000 bottles of beer during the holiday period, the report said. For nearly 37% of the bars, business peaked on the fifth day of the festival, which coincided with Valentine’s Day, as they earned over 5.2 million yuan on that day alone.

The company shifted to an “asset light” model in the second half of last year to contain costs and boost efficiency. The strategy bolsters profitability but a reduced store network weighs on revenues. Helens is expected to keep focusing on the franchise structure, promoting smaller bars with more efficient use of space to respond to a changing economic environment.

Investment bank Guotai Junan maintains a “hold” rating on the company, which would generate earnings of 0.16 per share and a price-to-earnings (P/E) ratio of about 18 times, if its 2023 profit hits the higher end of its projected range at 210 million yuan.

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