Company Reports

We dive deeper into our view on Jiumaojiu following our original take on its 2023 results release. Although we cut our operating profit forecasts by an average 8.2% for 2024-32, the impact to our fair value estimate is offset by increased free cash flow due to reduced working capital needs and the pushing back of expected expansion to 2026. Hence, our fair value estimate remains at HKD 13.70, which implies a 2024 price-to-earnings ratio of 30 times, valuing the company at a premium compared with peers. We believe the firm deserves this premium due to its stronger brand image, better unit economics, and compelling unit expansion potential.

There were few surprises in Jiumaojiu’s 2023 results because the company had already issued a profit alert with revenue and bottom-line numbers in January. We slightly lower our near-term forecasts to factor in more-aggressive promotions and thinner crowds. We would still treat volatility in the stock as opportunistic entry points, although we acknowledge that further macroeconomic weakness could lead to downward revisions in forecasts. That said, our base case assumes that the operating environment for restaurants in 2024 will be slightly better than that in late 2023, and Jiumaojiu should record positive same-store sales growth for the full year, translating to a slight improvement in margins. We maintain our HKD 13.70 fair value estimate. With the shares trading at about 13 times estimated 2024 earnings, we consider no-moat Jiumaojiu to be very undervalued.

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.

No-moat Jiumaojiu’s first-half earnings were in line with the positive profit alert issued in July. Management inched up its 2023 unit opening target that is in line with our estimates. As there were no major surprises, we are maintaining our HKD 13.70 fair value estimate, and we continue to believe the shares are fairly valued.

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.

We believe Jiumaojiu’s multibrand strategy positions it well to meet the changing demands of its customers. Continued investments into brand development, product innovation, and supply chain capabilities represent a few of the efforts likely to shore up the group’s competitive positions.