Key points of investment:

Focus on the three driving points to enable brand expansion in multiple dimensions. Xiabu Group was officially established in November 1998 and listed on the main board of the Hong Kong Stock Exchange in 2014. It is known in the industry as the “first restaurant chain stock”. After its listing, Xiabu Group deepened its industry advantages and laid out the restaurant market with multiple brands. Relying on the experience of the original brand, Xiabu Xiabu, founded the high-end hot pot brand Minato in 2016, continuing its brand advantages and forming two core hot pot brand matrices. In 2022, through eight years of continuous refinement of the single-store model, Xiabu Group launched its first shiyaki happy yakiniku restaurant. Entering the yakiniku market from the hot pot market, the Xiabu Group brand has achieved full coverage of the low, middle and high-end markets, empowering the brand to expand in depth and breadth.

After the epidemic, the catering industry bottomed out and rebounded, and the development of chains and digitalization accelerated. Under the impact of the three-year epidemic, catering companies have been in an abnormal state of operation for a long period of time and still have to bear costs such as labor costs and rent. As a result, some catering companies have limited cash flow, and a large number of stores have gone out of business.

At the end of 2020-2022, the number of restaurants nationwide was 978/863/7.75 million, respectively. The domestic economy gradually recovered in 2023, and the food and beverage consumption performance was impressive. With the development of information technology and the increase in the number of young consumers, the size of the takeout market will further increase, and digitalization will continue to expand users' dining scenarios. In the future, the Chinese restaurant chain process will continue to advance, and the catering system will continue to be transformed and upgraded.

Accurate consumer targeting, with equal emphasis on marketing and product service. The Xiabu Group focuses on attracting young consumers, creating a cost-effective small hot pot with an average price of 50-60 yuan in Xiabuxiabu, while incorporating a stylish restaurant design to create a rich “must red” series of products; Minato Minato launched a series of pot bases, snacks, and tea drinks based on young people's tastes, providing a comfortable social space for young people; using “joy” as a starting point to capture the current young consumer community focusing on consumer experience and pursuing the quality and flavor of ingredients, creating a diverse and enjoyable one-stop dining scene.

Profit forecast and investment advice: The company's net profit is expected to reach $129/4.15/561 million yuan in 2023-2025, up 137%/221%/35% year-on-year respectively. Based on the strong recovery of the restaurant industry after the pandemic, superimposing the company's new brand “Burn It” is expected to bring a new growth curve to the company. Therefore, the company was given 11 times PE in 2024, corresponding to a target price of HK$4.62 per share. For the first time, coverage gave the company a “buy” rating.

Risk warning: The company's store expansion rate falls short of expectations; the recovery of demand in the restaurant industry falls short of expectations; operating costs cannot be controlled as expected; there is a risk that poor performance will have a negative impact on the company's valuation premium.