Increasing investment in North American hot pot brand JIUMAOJIU adds fuel to overseas expansion

Catering operator JIUMAOJIU will invest $43 million to increase its stake in the North American hot pot chain brand Big Way Group's newly issued shares and existing shares, raising its ownership to 49%. Key Points: After investing in the North American hot pot chain brand, JIUMAOJIU's overseas store count will roughly double to about 50. In the context of fierce competition in the Chinese catering market and increasingly cautious consumers, JIUMAOJIU and its peers are actively seeking overseas expansion. Yang Ge "If you can't stand the heat, stay out of the kitchen." This old saying has recently become a fitting description of Chinese consumer brands. Amidst intense domestic market competition and increasingly conservative consumers, more and more companies are choosing to seek breathing space overseas. The situation in the catering industry is particularly evident, as "affordable dining" becomes mainstream, Chinese catering brands find themselves in a price-cutting competition. To escape the chaotic domestic market, JIUMAOJIU International Holdings Limited (9922.HK), once regarded as a star stock, announced an important overseas investment this week, acquiring approximately 49% of a small but rapidly growing North American hot pot chain brand. According to the company's announcement on December 29, JIUMAOJIU will invest $43 million in the operator of the North American hot pot brand Big Way Hot Pot, Big Way Group Inc.. According to the transaction arrangement, JIUMAOJIU will acquire shares from existing shareholders for $15 million and subscribe to newly issued shares for another $28 million. The company had already purchased 10% of Big Way's equity last July, and after completing the latest transaction, its total stake will rise to 49%. However, JIUMAOJIU's voting rights in Big Way are only about 10.8%, indicating that the company is still firmly controlled by its founders, Yao Xinzhong and Luo Xiaofang. Currently, Big Way operates 21 Big Way Hot Pot restaurants in Vancouver, Toronto, and California, which is still relatively limited compared to the 686 stores owned by JIUMAOJIU as of the end of September last year. However, Big Way seems to be entering a phase of rapid profit growth, with profits expected to rise to $984,000 in 2024, far exceeding the $210,000 in 2023. As it is only a minority equity investment, JIUMAOJIU will not consolidate Big Way's performance into its own financial statements, which may partly explain the market's muted reaction to the news. The day after the announcement, JIUMAOJIU's stock price fell by 2.8%, but then recovered all losses over the next two trading days. This back-and-forth fluctuation may be partly related to the thin trading during the year-end holidays. As the market gradually digests the news, a mild rebound in stock prices over the coming weeks would not be surprising. Ultimately, like most of its peers, JIUMAOJIU is facing operational pressures in the Chinese market and is even lagging behind many competitors. Analysts have a conservative outlook on the company, with 12 out of 23 analysts surveyed by Yahoo Finance (more than half) giving it a "hold" or "sell" rating In contrast, hot pot leader Haidilao (6862.HK) has received "Buy" or "Strong Buy" ratings from 26 out of 32 analysts. To some extent, JIUMAOJIU can be considered a "one-hit wonder" company, rapidly rising to fame with its signature dish, sauerkraut fish, at the Tai Er restaurant. However, over time, consumers have gradually lost interest, and the situation worsened when it was discovered that many fish products were actually pre-processed in a central kitchen. To turn the situation around, JIUMAOJIU launched a new strategy last March, switching to freshly killing and preparing fish in-store, which has shown initial positive effects. Better Business in Overseas Markets A key fact for JIUMAOJIU and its peers is that the performance of overseas stores often significantly outperforms the domestic market. Haidilao exemplifies this trend, as it has independently split its overseas business into the listed company Tehai International (9658.HK; HDL.US). As of the end of September last year, Tehai International's 107 restaurants achieved an average table turnover rate of 4.0 times in the third quarter, higher than Haidilao's 3.8 times recorded in the first half of last year; at the same time, Tehai International's gross profit margin in the third quarter was 34.3%, significantly higher than Haidilao's 27.8% in the first half of last year. Recognizing the development potential of overseas markets, JIUMAOJIU began accelerating its international expansion in 2021. Currently, the company operates Tai Er restaurants in Canada, Indonesia, Malaysia, Singapore, Thailand, and the United States, and has a Lai Mei Li brand store in Singapore. The company did not disclose the specific number of overseas stores in its latest interim and annual reports, but estimates based on its various official websites suggest there are about twenty stores, with approximately half concentrated in Malaysia and Singapore. Therefore, with the inclusion of Big Way into its portfolio, JIUMAOJIU's number of overseas stores is expected to roughly double, while also introducing a second brand and different dining formats for its global layout. JIUMAOJIU noted that as a North American local brand, Big Way has achieved full localization in the United States and Canada and is now entering an expansion phase, successfully attracting a large number of non-Chinese customers based on its existing experience. JIUMAOJIU stated that it will bring its experience into the next growth phase of Big Way. "The Group has systematic professional capabilities in standardized operations of chain restaurants, store model replication, management system construction, and organizational and talent development," the company said. Overall, the outlook for this collaboration is relatively optimistic, with the key being Big Way's highly localized operations, which can complement JIUMAOJIU's experience as a large chain restaurant operator. Since JIUMAOJIU first acquired a 10% stake last July, a certain foundation for cooperation has been established. If the collaboration continues to progress smoothly, it is not impossible for JIUMAOJIU to further seek control or even a full acquisition of Big Way in the future. Currently, JIUMAOJIU indeed needs a larger scale of global business to boost its performance. In the first half of last year, the company's revenue and profit fell by 10% and 16%, respectively, with several core operational indicators weakening, while it continues to close underperforming stores