Report summary

Company Overview

Little Vegetable Garden is a Chinese restaurant chain that focuses on cost performance. The customer unit price is less than 100 yuan. For the full year of 2022, 2023, and the first eight months of 2024, the company's revenue was RMB 3.21 billion, RMB 4.55 billion and RMB 3.54 billion, up 21.5%, and 15.3% year on year; net profit was 0.24 billion, 0.53 billion yuan, and 0.4 billion yuan respectively, up 4.6%, 124%, and 1.3% year on year. The company has maintained positive growth under pressure from the consumer environment.

The store layout is centered around Jiangsu and Anhui. The number of the company's stores has experienced rapid growth in the past few years. At the end of '21, the number of stores was 379. As of August '24, the number of stores reached 636, an increase of 67%, and all stores are directly managed. The company's first store is located in Anhui Province, so Anhui is its base. Of the 636 stores, 259 are in Jiangsu Province, 136 are in Anhui Province, and Shanghai and Zhejiang each have 69 and 62 stores.

Cost-effective strategy, rich SKU. The price of a small vegetable garden is relatively affordable, with a per capita consumption of 59.5 yuan in 2024. In 2021, per capita consumption was 66.1 yuan, a decrease of 10%. The store has a rich menu, offering 45-50 dishes every quarter, and the menu is designed according to seasonal and regional tastes.

Same-store revenue declined in '24. Same-store revenue increased by 20.8% from '22 to '23, mainly due to the rapid recovery in consumption after the pandemic.

Same-store revenue fell 11.4% in the first eight months of '24 compared to the same period in '23, mainly due to the impact of the high base in the first half of '23. The decline in customer traffic and the decline in customer unit prices all had an impact on same-store revenue. We believe that the performance of the same store is generally in line with the overall situation of the industry observed this year.

Takeout contributes significant revenue. Small vegetable gardens accounted for 36.8% of takeout revenue in the first eight months of '24, compared to only 15% in '21. Takeout will contribute more and more revenue to the company.

Status and prospects of the industry

China's catering industry is huge and has great potential for development. China's catering industry reached 5.2 percent in 2023, with a growth rate of over 9% before the pandemic, but growth recovery was weak after the pandemic. The compound annual growth rate from 18 to 23 was 4.4%. Growth is expected to recover in the future with stable revenue expectations and a recovery in consumer confidence. About 88% of the Chinese food market is a mass convenience market (customer unit price of less than 100 yuan), and the market size is huge. The degree of linkage is high, accounting for 19.2%, and the penetration rate will continue to increase in the future.

The competitive landscape is fragmented. The entry threshold for catering is extremely low, so the industry is naturally highly fragmented. In the mass Chinese food market with a customer order of 50-100 yuan, the small vegetable garden market ranked first, accounting for 0.2%.

Advantages and opportunities

Very cost-effective brand positioning. The company's pricing is relatively affordable, and the food and dining environment are very comfortable. It has created a “tasty and not expensive” brand mentality for consumers, which is a core advantage in attracting consumers.

Standardized operating model and management system. The company has accumulated extensive experience in standardization of dishes, standardization of services, standardization of training, and standardization of food safety. At the same time, it has also established a professional team and standardized processes in restaurant site selection.

The company has rich management experience and makes full use of equity incentives, remuneration incentives, and growth incentives to drive the enthusiasm of frontline employees.

Strong supply chain management. The company has built its own full-cold chain warehousing and logistics supply chain system, which has achieved a standardized centralized procurement mechanism for high-quality healthy ingredients, efficient industrial processing, accurate daily delivery to all departmental stores, safe and secure quality control, and strong cost control.

The financial situation is sound. The ratio of the company's interest-bearing debt to net assets as of the end of August '24 was 3.7%.Liquidity ratio1.8.

Weaknesses and risks

The industry threshold is low, competition is fierce, and there are high requirements for the company's ability to operate continuously and efficiently.

Consumers have a strong desire to try it out, users are not very sticky, and the requirements for iterating the company's dishes and the iteration of the store environment are higher.

Store performance is highly dependent on location selection, and there is a certain probability of wrong selection.

Investment advice

There are no cornerstone investors in this listing. The sponsors are Huatai International and UBS, which are strong.

The company's current IPO price was HK$8.5, and the total market value after issuance was about HK$10 billion (excluding overallotment). Based on net profit for August 23 and 24 years ago, PE-TTM was 18.6x, which is similar to the current market valuation, but historically it is at a relatively underestimated level. Recently, there has been a high level of enthusiasm for new developments in the Hong Kong stock market. Based on comprehensive considerations, we gave the IPO a special rating of “5.7.”