Huicai, one of the eight major cuisines, was turned into a tasty, inexpensive, and profitable “look” Xiaocaiyuan International Holdings Limited (hereinafter: Xiaocaiyuan) once again submitted a listing application to the main board of the Hong Kong Stock Exchange on July 16. The company plans to be listed on the main board, and Huatai International and UBS Group act as co-sponsors.

Positioned as “tasty and not expensive”, but the gross margin is close to 70%

According to Xiao Caiyuan's prospectus, the company is one of the well-known chain restaurants directly managed by the Chinese popular convenient Chinese restaurant market. The company's history can be traced back to 2013, when Wang Shugao, its founder, chairman and general manager, founded Xiaocaiyuan Restaurant and opened the first Xiaocaiyuan store in Anhui in the same year.

In recent years, Little Vegetable Garden has gradually established a network of stores spread across Anhui, Jiangsu, Shanghai, Zhejiang, Beijing, Hubei, Tianjin, Guangdong, Hebei, Henan, Shandong, Jiangxi and other regions of China, and has expanded its brand portfolio, including Little Vegetable Garden, Guandi, Fuxing House and Chef. As of the last practical date (July 8, 2024), a network of stores has been established, consisting of 623 direct-run stores spread across different regions of China. Among them, the number of Little Vegetable Garden stores was 618, accounting for 99.2%.

According to Frost & Sullivan's data, in terms of store revenue in 2023, Little Vegetable Garden ranked first among all brands in the Chinese popular convenience Chinese restaurant market with a customer unit price of between 50 yuan (RMB, same below) and 100 yuan, with a market share of 0.2%. Xiaocaiyuan stated in its prospectus that in order to ensure that consumers get a “tasty and not expensive” dining experience, the company sets reasonable food prices to achieve a customer unit price of 50 yuan to 70 yuan for dine-in customers at Xiaocaiyuan brand stores.

In 2021, the average consumption of dine-in customers in the Xiaocaiyuan store was 6.61 billion yuan, falling to 65.2 yuan in 2023, and further falling to 61 yuan in the first 4 months of 2024. It is worth noting that small vegetable gardens are “not expensive”, not at the expense of profitability.

In terms of performance, in 2021, 2022 and 2023, the revenue of small vegetable gardens was 2.646 billion yuan, 3.213 billion yuan, and 4.549 billion yuan, respectively. In the same period, the company's annual profit was 0.227 billion yuan, 0.238 billion yuan, and 0.532 billion yuan, respectively. For the corresponding period, the company's gross margins were 65.5%, 66.1%, and 68.5%, respectively, and net profit margins were 8.6%, 7.4%, and 11.7%, respectively; store-level operating margins were 15.9%, 14.2%, and 19.7%, respectively. For the four months ended April 30, 2024, the company's revenue and net profit were approximately 1.68 billion yuan and 0.194 billion yuan respectively, with a net profit margin of 11.5%.

Looking at a horizontal comparison, the average cash payback period for small vegetable garden stores that have recovered their cash investments from 2021 to April 30, 2024 is about 13.5 months. According to Frost & Sullivan's data, in the popular convenient Chinese restaurant market (customer unit price ranges from RMB 50 to RMB 100), the average cash payback period for stores opened during the same period usually exceeds 18 months.

Improve operational efficiency in multiple dimensions

Xiao Caiyuan stated in its prospectus that operating profit at the store level is an appropriate indicator reflecting the operating performance of the company's stores. The company's store-level operating margin increased from 14.2% in 2022 to 19.7% in 2023, mainly due to revenue growth faster than costs and expenses. The company has also achieved cost control over the raw materials and consumables used and expenses related to store-level leasing and property management.

For example, in terms of raw materials and consumables, the company has strong bargaining power and can purchase high-quality raw materials at competitive prices. As a result, the share of the company's raw materials and consumables in revenue fell from 33.9% in 2022 to 31.5% in 2023. Furthermore, the company's store-level leasing and property management-related expenses as a percentage of revenue decreased from 9.8% in 2022 to 7.9% in 2023.

In terms of ping efficiency, the daily ping efficiency of Xiaocaiyuan stores increased from 66.8 yuan in 2022 to 78.4 yuan in 2023; the daily ping efficiency of the same store increased from 66.4 yuan in 2022 to 77.4 yuan in 2023.

Pay big dividends when you use the money

With its “tasty and not expensive” position, the small vegetable garden has moved the taste buds of diners and has good profitability, and the small vegetable garden has followed the trend and began a rapid expansion cycle.

The company stated in the prospectus that it will expand the Xiaocaiyuan store to strengthen our market position and enhance our brand reputation

degrees. Based on a highly standardized and expandable store expansion model, it is planned to open about 160, 190 and 230 small vegetable garden stores in 2024, 2025 and 2026, respectively. By the end of 2026, it is expected that more than 1,100 small vegetable garden stores will be operated.

In addition, the company will also boost the community catering market. The company pointed out that the vast Chinese community catering market has great potential. It began exploring this market in October 2023 and launched a chef brand for the community catering business. The Little Vegetable Garden Program plans to open about 120 to 160 community restaurants from 2024 to 2026, focusing on the current geographical coverage of Little Vegetable Garden stores in terms of location selection. Specifically, the company plans to open about 10 new stores in 2024, 30 to 50 new stores in 2025, and 80 to 100 new stores in 2026, respectively.

This means that small vegetable gardens require large amounts of capital to support the capital expenses of store expansion. According to historical amounts, the investment cost of opening each new Little Vegetable Garden store is estimated to be 1.3 million yuan to 1.7 million yuan. It is estimated that the investment cost of opening a new restaurant is between 1 million yuan and 1.3 million yuan per store.

During the past performance period, Little Vegetable Garden's capital expenses included payments for the purchase of property, plant and equipment, which were mainly used to open new stores, purchase equipment for new stores, and refurbish existing stores. The company's capital expenditure for 2021, 2022, 2023 and the four months ended April 30, 2024 was approximately 0.17 billion yuan, 0.094 billion yuan, 0.309 billion yuan and 0.132 billion yuan, respectively.

The Zhitong Finance App noticed that Little Vegetable Garden also paid large dividends when it needed a large amount of capital to expand its business. In 2021, the company declared a dividend of 0.15 billion yuan; in 2023, it declared a dividend of about 0.135 billion yuan. For the four months ended April 30, 2024, the company declared a dividend of approximately $0.188 billion, accounting for about 96% of the current net profit.

The above dividends mainly go into the “pockets” of the actual controllers of the company. According to the prospectus, as of the last practical date, Wang Shugao controlled about 92.99% of Xiaocaiyuan's issued share capital through seven shareholding platforms including XCY Yongqing Limited.

What is intriguing is that in the face of rapid growth in performance, the debt scale of small vegetable gardens remains high. According to the prospectus, as of April 30, 2024, Xiaocaiyuan's total current liabilities were 0.613 billion yuan, total non-current liabilities were 1.233 billion yuan, and net assets were 0.606 billion yuan.

In this context, Xiaocaiyuan's large dividend before the IPO may raise market concerns about its financial health. The company's listing and fund-raising “supplements the blood” provides momentum for business expansion, but in the fiercely competitive environment of the restaurant market, whether its growth story can be realized with high quality also needs to be seen and seen.