‘Sauerkraut Fish’ king flies back from Covid, as trendy tresses show signs of fading

Jiumaojiu’s revenue jumped more than 50% in the first half of the year, as its business returned to normal and it continued its rapid expansion  

Key Takeaways:

• Jiumoajiu’s revenue rose to 2.88 billion yuan or more in the first half of 2023, up 51.7% from the previous year and also well above the level for 2021
• The restaurant operator’s core Tai Er brand performed weakly last year, hinting that the trendy chain may be starting to fade  

By Doug Young

A new upside profit alert from Jiumaojiu International Holdings Ltd. (9922.HK) continues a recent trend among Chinese restaurants that are bouncing back strongly from a huge blow during some of China’s strictest-ever pandemic controls last year. But the rebound has been far from even for consumer-facing companies throughout China.

Nearly all such companies bounced back nicely in the first two months of the year, as Chinese consumers embarked on a wave of “revenge spending” with the end of the country’s strict “zero Covid” policy at the end of 2022. But a dichotomy has emerged since then, reflecting growing caution by Chinese consumers amid the country’s economic slowdown.

Companies at the top of the consumer food chain, such as property developers, car manufacturers and even smartphone makers, saw sales soften sharply starting around March after the initial wave of euphoria. Meanwhile, companies further down the food chain, including ordinary restaurants, supermarkets and sellers of everyday goods, have continued to do relatively well.

Jiumaojiu, whose core brand is the trendy Tai Er chain specializing in “sauerkraut fish,” falls into the latter category, with average spending of about $10 per customer. Such “little luxuries” probably still seem affordable to China’s increasingly budget-conscious consumers, even as those consumers rein in their spending on more expensive purchases like cars and smartphones.

As its business avoids most fallout from the post-March slowdown, Jiumaojiu said it expects to report 2.88 billion yuan ($403 million) or more in revenue for the first half of 2023, up a healthy 51.7% from the year-ago period. The latest figure is also notably higher than the 2 billion yuan the company reported in the first half of 2021 when Covid in China was still relatively under control and restaurants were mostly allowed to operate normally.

By comparison, Jiumaojiu’s average restaurant was forced to close or limit service for 38 days last year, or more than 10% of the time, as local governments made a last-ditch effort to try and contain the highly contagious Covid-19 Omicron variant.

Jiumaojiu said its profit attributable to shareholders of the company also nearly quadrupled to 220 million yuan or more in the first half of 2023 from 57.7 million yuan in the year-ago period. The latest half-year profit was also up notably from the 186 million yuan the company reported in the first half of 2021.

Jiumaojiu attributed the strong performance to a resumption of normal business in the first half of the year. It also credited its ongoing aggressive expansion that saw its store count rise to 621 restaurants by the end of June, up 31% from the 475 restaurants it operated a year earlier. The company is set to issue more detailed interim results next month.

The early taste of success was more than enough to whet investor appetite for Jiumaojiu’s stock. The shares jumped 6.8% on Wednesday after the report’s release, though they are down around 20% over the last 52 weeks. Still, the stock has done quite well since its 2020 IPO, roughly doubling to HK$13.92 at its latest close from its IPO price of HK$6.60.

Souring on sauerkraut?

While the latest trends look solid, it’s far from clear whether or not the current consumer caution will continue to creep down the food chain to potentially affect even providers of smaller luxuries like Jiumaojiu.

At the same time, the company is also showing slightly worrisome signs that its core Tai Er chain, which has become its main breadwinner over the last few years, may be losing its luster among the trendy set. Such a development path is all too common among up-and-coming chains in China’s fast-moving restaurant scene, and previously clobbered the trendy Haidilao (6862.HK) hotpot chain, which tumbled from grace after a breakneck expansion.

Tai Er is following a similar trajectory in terms of expansion, though obviously only time will tell if the brand falls out of favor with diners. The chain accounted for more than 80% of Jiumaojiu’s total of 556 restaurants at the end of last year. Of the 120 new restaurants the company opened for the year, 102 were Tai Er.

But last year the brand appeared to suffer more than Jiumaojiu’s original namesake brand, Jiu Mao Jiu, hinting at Tai Er’s waning popularity. Same-store sales for Tai Er during the year plunged 22.3%, or roughly double the milder 11% decline for Jiu Mao Jiu stores. Tai Er was already showing signs of underperforming the previous year, with same-store sales up just 5.7% in 2021, again well behind the 24.5% growth for the older Jiu Mao Jiu brand.

At the same time, the seat turnover rate – the number of times each seat is filled each day – also fell sharply for Tai Er last year to just 2.6 times from 3.4 times in 2021. As the chain’s metrics declined, its store-level operating profit margin fell to 14.3% last year, down more than 7 percentage points from the 21.8% in 2021. By comparison, the margin for Jiu Mao Jiu restaurants did much better, remaining flat last year 12.9% despite the challenging business environment.

Investors haven’t lost hope on Tai Er and Jiumaojiu just yet. The company commands a forward price-to-earnings (P/E) ratio of 27, which is the same as Haidilao and the much larger Yum China (YUMC.US; 9987.HK), operator of KFC and Pizza Hut restaurants in China. All of those trade well ahead of the 11 for smaller hotpot company Xiabuxiaobu (0520.HK), reflecting how larger operators command a premium to their smaller counterparts.

Jiumaojiu isn’t putting all its eggs in the Tai Er basket either, and has recently begun aggressively expanding its newer Song Hot Pot chain, whose share of the company’s total stores more than doubled to 5% at the end of last year from 2% at the end of 2021. The company’s more detailed interim results should provide more color on what’s happening at the Tai Er chain, and whether it may have peaked and be falling out of favor. In the meantime, investors appear to be focused more on the company’s broader rebound in the post-Covid period.

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