QiXinTian Serves Up Spicy Hong Kong IPO, Defying Pandemic with Major Expansion

The seafood hotpot chain has achieved remarkable revenue and profit growth despite pandemic disruptions

Key takeaways:

• QiXinTian, China’s No. 3 hotpot restaurant chain, has filed for a Hong Kong IPO that could value it at more than $2 billion
• The company has doubled its restaurant count in less than two years, a move probably aimed at boosting its IPO valuation

By Fai Pui

A Chinese saying goes that eating is the “first order business for ordinary people.” In a country of highly diversified cuisines and where dining is an integral part of the culture, food cooked at your table in hotpots is one of the oldest forms, with a history of 1,700 years.

Those same boiling cauldrons have become all the rage in recent years, spawning a new generation of restaurants catering to a wide range of tastes, serving up food at just about any time of day. Big names include veteran Dong Lai Shun, as well as the newer Haidilao (6862.HK) and Xiabuxiabu (0520.HK), which are listed in Hong Kong. Haidilao has become synonymous with hotpot in China these days, with explosive growth that has heated its value to more than 100 billion yuan ($15.7 billion).

The pair of listed names may soon be joined by QiXinTian International Holding Ltd., a newcomer known for its spicy crab hotpot, which filed for a Hong Kong IPO last week. The chain, which combines fried crab, seafood and hotpot, has 256 stores across China, with a presence in many major coastal provinces, including Zhejiang, Jiangsu and Shanghai in the Yangtze delta area, and Fujian and Guangdong in the south. An average meal costs 131 yuan ($20.64), providing affordable fare for middle-income Chinese and above.

Another chain, Cantonese hotpot specialist Supreme Pot, also applied for a Hong Kong IPO last September. But that deal is still on hold, as it has yet to pass an expert review.

QiXinTian, whose name means “seven enjoyable days,” is just one of the many names that have harnessed the recent hotpot craze to post steady growth. According to its prospectus, annual income for all hotpot restaurants in China rose from 395.5 billion yuan in 2016 to 438 billion yuan in 2020, representing a compound growth rate of 2.6%. As momentum builds, the growth rate is expected to accelerate to 14.2% between 2020 and 2025, according to third-party data cited in the prospectus.

Competitive, fragmented marketplace

China’s restaurant sector is known for its cutthroat competition, especially in popular areas like hotpot. The country had 500,000 to 600,000 hotpot restaurants by 2020, though the industry remained highly fragmented. Measured by revenue, the top five only accounted for 7.9% of the market. Some 5.8% of that belonged to undisputed leader Haidilao, while the second-largest took up just 1.2%, followed by QiXinTian at No. 3 with 0.3%.

Despite its relatively small overall share, QiXinTian is still a leader in the space for hotpots in the crab and seafood category. Its revenue in 2020 totaled around 1.41 billion yuan, accounting for 1.2% of its market segment.

The past two years have been challenging, to say the least, for most restaurants in China and throughout the world. Haidilao has had to close some restaurants amid the fallout, and many mom-and-pop outfits have shut down completely. But QiXinTian has bucked the trend and actually expanded during the troubled times. Its restaurant count more than doubled from 115 in Jan. 2019 to 250 at the end of Sept. 2021, and revenue grew from 1.29 billion yuan in 2019 to the 1.41 billion yuan for 2020.

The growth even accelerated last year, with revenue climbing 49.5% year-on-year in the first nine months of 2021 to 1.48 billion yuan, mostly due to China’s success in containing the pandemic and its growing store count. The company has also pumped up its takeaway business, whose share of total revenue grew from 11.2% in 2019 to 16.4% by the end of September last year. Actual revenue for that part of the business, which has thrived on China’s recent takeout dining craze, shot up by 48.3% to 243 million yuan in the first nine months of last year.

The company is also quite profitable, with profits doubling from only 81.15 million yuan in 2019 to 172 million yuan in 2020, and rising further still to 259 million yuan in the first nine months of 2021. It has achieved that growth on the back of soaring net profit margins, which rose from 6.3% in 2019 to 17.5% in the first nine months of last year. Those numbers suggest a relentlessly expansion despite the pandemic, probably to secure a better valuation for the IPO. Haidilao took a similar approach before its 2018 IPO.

In terms of table turnover rate, QiXinTian is a relative laggard compared with its peers. It averaged 2.2 times per day by the end of last September, compared with 2.4 times, 3.4 times and 2.6 times for Supreme Pot, Haidilao and Xiabuxiabu by the end of June last year, according to its prospectus.

But the company’s revenue growth rate per restaurant was the highest in the industry at 31.9% year-on-year in the first nine months of last year. By comparison, Xiabuxiabu, Haidilao and Supreme Pot posted revenue growth ranging between 14.7% to 29.8%, showing QiXinTian has both its strengths and weaknesses.

Hot valuations

Hotpot stocks themselves have blown hot and cold during the pandemic as they dealt with repeated business disruptions. Shares of “blue chip” Haidilao plummeted 70% in a year but were still trading at a relatively hot price-to-earnings (P/E) ratio of 57 times by the end of last year. Xiabuxiabu, whose shares followed a similar trajectory, had a P/E ratio of around 21.3 times at the end of the year. Shares of fish hotpot specialist Jiumaojiu (9922.HK) fell by around 40%, but even now the stock trades at a P/E ratio of 44.4 times.

QiXinTian has yet to announce its IPO price and fundraising target. But using an average P/E ratio of about 40 times from the three stocks mentioned above, and assuming steady profit performance that would yield a 346 million yuan profit for 2021, the company may get a market valuation of around 13.84 billion yuan when it goes public, making it three times bigger than Xiabuxiabu. That would value each of its restaurant at around 54 million yuan, on par with Haidilao.

The company will use most of the money from the listing to expand its network, mirroring the similar rapid expansions by Haidilao and Xiaobuxiabu. It plans to open another 40 restaurants in eastern China in 2022, then 230 ones in other parts of China in 2023 and 2024.

But as Haidilao’s case has shown, such rapid expansion can be risky. Following such a breakneck addition of new stores, Haidilao closed 300 restaurants in November last year and made a major shift in its strategy to focus on quality over quantity. Similarly, Xiabuxiabu had to shutter 200 restaurants last year, conceding that its overly aggressive expansion had put immense pressure on its profit margin.

Whether QiXinTian will follow down a similar boom-bust path remains a big question as it forges ahead with its listing. But given the lukewarm sentiment in Hong Kong right now, it may have difficulty justifying a high valuation to investors who were burned by the previous boom and bust of Haidilao.

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