Xiabuxiabu Catering: Leading Hotpot Restaurant Operator In China (OTCMKTS:XIAXF)


Elevator Pitch

I assign a Bullish rating to Hong Kong-listed Chinese hotpot restaurant operator Xiabuxiabu Catering Management ((China)) Holdings Co., Ltd (OTCPK:XIAXF) [520:HK]. Xiabuxiabu Catering trades at 22.9 times consensus forward FY 2021 P/E, and it offers a consensus forward FY 2021 dividend yield of 2.2%.

Readers have the option of trading in Xiabuxiabu Catering shares listed either on the Over-The-Counter Bulletin Board/OTCBB as ADRs with the ticker XIAXF on the Hong Kong Stock Exchange with the ticker 520:HK. For those shares listed as ADRs on the OTCBB, note that liquidity is low, and bid/ask spreads are wide.

The flagship Xiabuxiabu brand could potentially be a beneficiary of changing consumption trends such as an increase in hygiene awareness and a tightening of purse strings in the short term due to COVID-19, while an upgrading of restaurants to the new 2.0 store format and potential franchising are the medium term growth drivers. The new high-end Coucou brand has significant potential for new store openings and margin expansion, making it a key growth driver for the company in the future.

For those shares listed in Hong Kong, there are limited risks associated with buying or selling the shares in terms of trade execution given that the Hong Kong Stock Exchange is one of the major stock exchanges that is internationally recognized, and there’s sufficient trading liquidity. Average daily trading value for the past three months exceeds $9 million, and market capitalization is above $1.7 billion, which is comparable to the majority of stocks traded on the US stock exchanges.

Institutional investors which own Xiabuxiabu Catering shares listed in Hong Kong include Dimensional Fund Advisors, The Vanguard Group, Lazard Asset Management, Aberdeen Standard Investments, and BlackRock, among others. Investors can invest in key Asian stock markets either using U.S. brokers with international coverage such as Interactive Brokers and Fidelity, or international brokers with Asian coverage like Hong Kong’s Monex Boom Securities and Singapore’s OCBC Securities.

Company Description

Started in 1998 and listed on the Hong Kong Stock Exchange in 2014, Xiabuxiabu Catering is one of the leading hotpot restaurant operators in China with two key brands, Xiabuxiabu and Coucou. A May 18, 2016 Euromonitor article titled “Defying Trends: Hot Pot in China” defines hotpot as “a single pot of boiling broth, seasoned with chili oil and a variety of spices” with diners “dipping all manner of raw meats and vegetables in the simmering broth to cook” and subsequently eating “the cooked ingredients” with “a variety of dipping sauces.”

As of end-1H 2020, Xiabuxiabu Catering has 1,010 Xiabuxiabu restaurants and 107 Coucou restaurants in China, all of which are directly operated by the company. The Xiabuxiabu and Coucou brands contributed 65% and 31% of Xiabuxiabu Catering’s revenue in the first half of this year, respectively. The sale of condiment products and other goods accounted for the remaining 4% of the company’s 1H 2020 top line.

Flagship Xiabuxiabu Brand

Xiabuxiabu is Xiabuxiabu Catering’s flagship brand, and the fast-casual dining brand still accounts for the majority of the company’s revenue as highlighted above. In the May 18, 2016, Euromonitor article I referred to above, the Xiabuxiabu brand is referred to as offering the “traditional hot pot format in a quick-service setting” where “diners sit in individual place settings along a bar,” which makes the brand “more accessible to solo diners or smaller groups.” Another differentiating factor for the Xiabuxiabu brand as compared with traditional hotpot restaurants is Xiabuxiabu Catering’s focus on food quality. The company sources its beef and mutton from Oceania and the Americas, while other less common food ingredients such as pangasius also are available in Xiabuxiabu restaurants.

Xiabuxiabu is seen as a relatively more mature brand for Xiabuxiabu Catering, as compared to the new Coucou brand which was established in 2016. The flagship Xiabuxiabu brand already has a presence in 139 cities and 24 provinces in China as of June 30, 2020, but there are a number of growth drivers in the short to medium term.

In the near term, Xiabuxiabu Xiabuxiabu brand could be a beneficiary of an increase in hygiene awareness and a tightening of purse strings due to COVID-19. The Xiabuxiabu brand of restaurants has traditionally catered to solo diners who wish to eat alone without the need to share food with friends or family, and this could become a preferred dining choice in the current pandemic. Furthermore, the Xiabuxiabu brand of restaurant also is a value-for-money options for consumers who do not want to cook at home, but do not want to burn a hole in their pockets. The average spending per customer for the Xiabuxiabu brand was only RMB63.3 or around $9.5 in 1H 2020.

In the medium term, the continued upgrading of Xiabuxiabu Catering’s Xiabuxiabu restaurants to the new 2.0 store format is the key to reigniting growth for its flagship brand. The company disclosed at its 1H 2020 results briefing (audio recording and transcript not publicly available) on Aug. 27, 2020. that over 700 or close to 70% of its Xiabuxiabu restaurants already have been upgraded to the new 2.0 format. The new 2.0 store format for Xiabuxiabu restaurants involves more dining tables which can seat multiple diners as opposed to the brand’s traditional bar setting focused on solo diners, a beverage/milk tea bar which encourages greater consumption of high-margin beverage products, and an increase in the average selling price of menu items with more premium food offerings.

Old Xiabuxiabu 1.0 Store Format Versus New Xiabuxiabu 2.0 Store Format

Source: DBS Vickers Research Report Dated July 16, 2019

New Xiabuxiabu 2.0 Store Format With More Multi-Seat Dining Tables And Beverage/Milk Tea Bar

Source: SWS Research Report Dated March 22, 2017

Also, franchising could potentially be a key growth driver for the brand in time to come. At its recent 1H 2020 results briefing, Xiabxiabu Catering revealed that it has “not yet introduced franchising” for its Xiabuxiabu brand of restaurants, but changes to its “internal systems” to accommodate franchised restaurants are “already in progress.” If and when Xiabxiabu Catering allows for franchised restaurants for its flagship Xiabuxiabu brand, this could be a new asset-light means of store expansion for the brand.

New Coucou Brand

Xiabuxiabu Catering’s new Coucou brand was first launched in 2016, and this brand of restaurants have a much higher average spending per customer of RMB105 in 1H 2020 as compared to RMB63.3 for the flagship Xiabuxiabu brand. In the company’s 1H 2020 results announcement, Xiabuxiabu Catering refers to the Coucou brand as a “high-end brand” focusing on “family and business dining occasions” which offers “Taiwanese-style dining experiences with specialty dishes, service, ambience.”

One Of The Coucou Restaurants In Hong Kong

Source: Coucou Hong Kong’s Facebook Page

There’s significant new store expansion potential for the Coucou brand, as Xiabuxiabu Catering currently only operates 107 Coucou restaurants in 27 cities spread across 20 provinces in China. In contrast, the flagship Xiabuxiabu brand already has 1,010 restaurants in 139 cities and 24 provinces. The company’s target new store openings for Coucou is 40-50 for full-year 2020. It only opened five new Coucou restaurants in 1H 2020 due to COVID-19 disruptions. Xiabuxiabu Catering also highlighted at the recent 1H 2020 results briefing that there will be a “significant increase in new store openings for the Coucou brand” in 2021.

The Coucou brand also is unique in the sense that it has greater potential for overseas expansion due to its Taiwanese-style dining experience and high-end focus. Xiabuxiabu Catering already opened three Coucou restaurants in Hong Kong, and the company has plans to further expand the Coucou brand to other overseas markets outside Mainland China. In comparison, all of Xiabuxiabu restaurants are located in Mainland China.

The aggressive expansion plans for the Coucou brand are likely to improve Xiabuxiabu’s overall profitability. Apart from higher average spending per customer, the Coucou brand could have higher profit margins than the Xiabuxiabu brand on a normalized basis (assume all restaurants are already mature) in future because of Coucou’s brand equity. Xiabuxiabu Catering noted in its 1H 2020 results announcement that Coucou is “a favorite brand of commercial real estate owners” and it can negotiate for “better rental arrangements” for the Coucou brand. Xiabuxiabu Catering disclosed at its 1H 2020 results briefing that rent as a proportion of total costs for the Coucou brand has continued to decline steadily over time.

1H 2020 Results And Outlook For 2H 2020

Xiabuxiabu Catering reported the company’s 1H 2020 financial results on Aug. 27, 2020, and its financial performance was poor as expected. The company’s revenue decreased by -29.1% YoY from RMB2,712 million in 1H 2019 to RMB1,922 million in 1H 2020, and the company reported a headline net loss attributable to shareholders of -RMB255 million in the first half of the year.

Similar to other Chinese restaurant operators, Xiabuxiabu Catering was hurt by lock-down measures put in place in many parts of Mainland China in the early part of the year due to COVID-19. In particular, Xiabuxiabu Catering has a significant number of restaurants located in place such as Beijing, Hubei and Northeast China, which were regions relatively more impacted by the coronavirus pandemic.

Looking ahead, the market expects Xiabuxiabu Catering’s revenue to be flat year-over-year for full-year 2020, and for the company to be marginally profitable this year. This implies a significant turnaround for the company in the second half of the year. This is supported by the fact that Xiabuxiabu Catering noted at the company’s 1H 2020 results briefing on Aug. 27, 2020, that the Coucou brand of restaurants had become profitable again since April 2020, and its sales in most regions, except those which experienced second waves of COVID-19, have recovered to the prior year’s levels by July and August 2020.

Separately, Xiabuxiabu Catering only opened 31 new Xiabuxiabu restaurants and five new Coucou restaurants in 1H 2020, which was disappointing. Going forward, Xiabxiabu Catering has guided for “new store openings in 2021 to be not lower than that for 2020.”

Valuation And Dividends

Xiabuxiabu Catering trades at 22.9 times consensus forward FY 2021 P/E and 18.3 times consensus forward FY 2022 P/E based on its share price of HK$12.54 as of Oct. 23, 2020. As a comparison, the stock’s three-year and five-year mean consensus forward next twelve months’ P/E multiples were 21.2 times and 18.6 times, respectively.

Market consensus expects the company to deliver ROEs of 19.7% and 20.9% for FY 2021 and FY 2022, respectively.

The stock offers consensus forward FY 2021 and FY 2022 dividend yields of 2.2% and 2.9%, respectively.

Among restaurant operators with significant business operations in Mainland China, Xiabuxiabu Catering is the cheapest stock with the most attractive forward P/E multiples and forward dividend yields. Specifically, Xiabuxiabu Catering trades at a discount to its peers Yum China Holdings, Inc. (YUMC) and Jiumaojiu International Holdings Limited (OTCPK:JIUMF) [9922:HK], despite the fact that they have similar forward ROEs.

Peer Valuation Comparison For Xiabuxiabu Catering

Stock Consensus Forward One-Year P/E Consensus Forward Two-Year P/E Consensus Forward One-Year Dividend Yield Consensus Forward Two-Year Dividend Yield Consensus Forward One-Year ROE Consensus Forward Two-Year ROE
Yum China Holdings, Inc. 27.2 23.5 0.9% 1.1% 19.5% 19.0%
Jiumaojiu International Holdings Limited 48.9 32.3 0.5% 0.6% 18.4% 22.8%
Haidilao International Holding Ltd. (OTC:HDALF) [6862:HK] 54.1 40.9 0.5% 0.5% 33.4% 33.8%

Source: Author

Risk Factors

The key risk factors for Xiabuxiabu Catering are a slower-than-expected pace of new store openings, the growth of the new Coucou brand of restaurants falling short of market expectations, and a second or third wave of COVID-19 infections in parts of Mainland China where the company has significant business operations.

Note that readers who choose to trade in Xiabuxiabu Catering shares listed as ADRs on the OTCBB (rather than shares listed in Hong Kong) could potentially suffer from lower liquidity and wider bid/ask spreads.

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Disclosure: I am/we are long XIABUXIABU CATERING MANAGEMENT [520:HK]. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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