Xiaocaiyuan wants bigger slice of Chinese cuisine market

The ambitious restaurant chain with roots in Anhui province has filed for a Hong Kong IPO to fund its expansion plans, hoping to tempt investors with its strong revenue growth

Key Takeaways:

• Xiaocaiyuan wants to use the IPO proceeds to double the number of its restaurants in two years
• The company has built a supply chain network around a central factory to control costs as it battles stiff competition from other restaurants offering Chinese cuisine

By Fai Pui

It takes 10 years to sharpen a sword, according to a Chinese saying about the need for persistent effort. In the case of catering entrepreneur Wang Shugao, you could substitute a chef’s knife for the proverbial blade.

After starting in the kitchen as a chef, Wang spent a decade building up his own restaurant chain offering dishes from China’s Anhui province on a mass scale. Now with more than 500 restaurants, Xiaocaiyuan International Holding Ltd. wants to double the number of its outlets and is inviting investors to bankroll its ambitions through an IPO.

Wang, 52, is not short of aspiration. Born into a farming family in Anhui province, he dropped out of school to earn a living as a chef and went on to open the first of a series of hotels with his wife. But an attempt to move the hotel business to Jiangsu province failed in the face of fierce local competition. After some market research, he pivoted to the catering trade with the aim of serving affordable Anhui cuisine with a modern twist. The family’s first restaurant opened on his home turf of Tongling, Anhui, in April 2013. With meals costing just 50 to 70 yuan per person, the venture was a hit with diners.

Promising good quality food at a reasonable price, Xiaocaiyuan gradually expanded to cities such as Wuhu and Suzhou, before raising its profile with branches in Beijing and Shanghai in 2016. By the start of this year, the chain had grown to 548 directly operated outlets in 119 cities across 12 provinces, according to the preliminary prospectus for the company’s proposed listing on the Hong Kong Stock Exchange.

The rapid expansion drove up revenues from 2.65 billion yuan ($376 million) in 2021 to 3.21 billion yuan in 2022. That figure was overtaken in just nine months last year, when revenue for the three quarters came in at 3.43 billion yuan. The business even managed to turn a profit in the pandemic years. A net profit of 227 million yuan was reported in 2021 and 238 million yuan was logged the following year. In the first three quarters of last year profits doubled to 430 million yuan from the equivalent period a year before.

By the end of last September, cities in the third tier and below generated 43.4% of total revenue. The next biggest revenue chunk came from new first-tier cities such as Changsha, Chengdu, Chongqing and Hangzhou, which contributed 28.3% of turnover. In revenue terms, Xiaocaiyuan ranked first among restaurant companies selling Chinese cuisine for 50 to 100 yuan per person, according to data from the research firm Frost & Sullivan.

The prospectus also described accelerating returns on investment. The cash investment payback period for Xiaocaiyuan restaurants was 15.2 months in 2021, shortening to 10.3 months in 2022 and 7.3 months at the end of last September, below the industry average of 18 months. The company’s decision to build its own supply chain has helped to streamline operations and keep a lid on costs. 

Supply and cost control

Xiaocaiyuan’s supply system draws on a central factory and 11 warehouses across the country, along with a self-operated fleet of more than 200 vehicles. The structure allows the brand to buy ingredients at a competitive price, helping to contain overall costs. The central factory processes food and prepares sauces that are distributed to restaurants, easing the load on frontline workers.

The scale effects intensify as the restaurant chain grows. The company wants to use the IPO funds to expand the chain to more than 1,100 restaurants in two years. Some of the money raised would also be spent on further strengthening the supply chain to reap the cost benefits. The plan includes expanding its logistical and warehousing network and upgrading smart equipment or digital systems.

Takeout food is another key dimension to the business. The filing outlined a three-pronged strategy, with a main focus on in-house dining supplemented by two sidelines – takeout meals and offline retailing. The takeout income stream has grown in recent years, rising from 15.5% of total revenue in 2021 to 31.5% for the first three quarters of last year.

With its restaurant and supply structure in place, the company is now looking to sell food ingredients under its own brand for home cooks. The company has long expressed the hope of turning its 20,000-plus workforce into salespeople and its more than 500 restaurants into retail outlets.

Up until now, Xiaocaiyuan has had only one investor, Harvest Capital, to fund its ambitions. Harvest Capital invested 500 million yuan between 2022 and 2023 in exchange for a 7.01% stake, valuing the company at 7.13 billion yuan. The company’s ownership structure notably includes members of the workforce. Under its partnership model, 129 staff own a combined 41.71% stake through an employee shareholding scheme. The founder, as a former chef, is keen for the team to share in the fruits of their labors.

However, the catering business is fiercely competitive in China. New entrants keep piling into the market, bringing an array of cuisines, dining experiences and business models. Xiaocaiyuan admitted as much in its filing, saying that “intense competition in China’s catering industry could prevent us from increasing or sustaining our revenue and profitability”. Moreover, the company has rolled out cheaper dishes priced between five and 30 yuan to retain custom as China’s sluggish economic recovery curbs household spending.

The company needs a wad of new cash to keep expanding. By the end of November last year, its cash and cash equivalents had fallen to just 353 million yuan, underlining the case for an IPO.

For valuation purposes, catering brand Jiumaojiu (9922.HK) provides a useful reference point, with its similar business portfolio. Jiumaojiu’s share price has fallen more than 75% in the past year, pushing its valuation down to just HK$7 billion ($897 million), with a forward price-to-earnings (P/E) ratio of 12 times. Applying the same ratio to Xiaocaiyuan, on annualized revenue of 570 million yuan based on its nine-month figures, the restaurant chain could expect an IPO valuation of 6.8 billion yuan or about HK$7.4 billion, in the same ballpark as Jiumaojiu. For any advance on that, the company’s expansion plans would need to get a resounding vote of confidence from investors.

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