Company Reports

We incorrectly believed that consumer downtrading would significantly benefit Xiabuxiabu’s namesake chain, and continued difficulties at Coucou further obscured the prospects for near-term profitability. As a result, we are lowering the group’s fair value estimate by 57% to HKD 2.0 per share. Despite this downward revision, we still view the valuation as attractive, partly due to the firm’s net cash position (including financial assets) that amounts to about one third of its current market capitalization. While individual performance matters, restaurant operators are heavily dependent on the macroeconomic outlook. Going into 2024, our base case assumes that the operating environment will be slightly better than that of late 2023, and therefore the company should still record positive revenue growth and a slight improvement in operating margin. That said, given the lack of visibility in Coucou’s turnaround efforts, our preferred picks in the Chinese restaurant space are Yum China and Jiumaojiu.

Xiabuxiabu’s multiconcept portfolio, operating its namesake and Coucou brand, represents the second-largest hot pot restaurant chain in China. Despite having more than 1,000 locations, we still see unit growth and cost reduction possibilities, as well as the potential to add more brands to its portfolio over time.

Following the recent market correction, Chinese restaurant operators are trading at attractive valuations and offer prime buying opportunities for long-term investors. Apart from Haidilao, our coverage—Yum China, Jiumaojiu, and Xiabuxiabu—now sits comfortably in five-star territory. Wide-moat Yum China is our top pick in the sector, which is trading at a considerable 50% discount to our $80 fair value estimate.

We trimmed our fair value estimate for no-moat Xiabuxiabu to $4.7 per share from $4.9, after management lowered full-year 2023 guidance. While softening macroeconomic conditions are certainly a factor, the business' underperformance in same-store sales in China is concerning. With Xiabuxiabu being the only restaurant operator under our coverage that lowered unit opening guidance for 2023, the business seems to be facing more challenges than its peers. We still think Xiabuxiabu's shares are undervalued, but we believe continued profitability concerns could create a more attractive entry point. We recommend investors wait until ongoing macroeconomic weakness is fully priced before buying Xiabuxiabu.

Xiabuxiabu’s multiconcept portfolio, operating its namesake and Coucou brand, represents the second-largest hot pot restaurant chain in China. Despite having more than 1,000 locations, we still see unit growth and cost reduction possibilities, as well as the potential to add more brands to its portfolio over time.

Xiabuxiabu’s multiconcept portfolio, operating its namesake and Coucou brand, represents the second-largest hot pot restaurant chain in China. Despite having more than 1,000 locations, we still see unit growth and cost reduction possibilities, as well as the potential to add more brands to its portfolio over time.

We initiate coverage of three China restaurant operators, Haidilao International, Jiumaojiu International, and Xiabuxiabu Catering Management, all with no-moat and Standard Capital Allocation ratings. While we take a positive view of these firms’ recovery trajectories, we struggle to identify meaningful long-term competitive advantages in their business models. Our top pick in the restaurant space remains wide-moat 5-star-rated Yum China, with its long-standing brand recognition and unrivaled supply chain capabilities.

Xiabuxiabu’s multiconcept portfolio, operating its namesake and Coucou brand, represents the second-largest hot pot restaurant chain in China. Despite having more than 1,000 locations, we still see unit growth and cost reduction possibilities, as well as the potential to add more brands to its portfolio over time.