Jiumaojiu, which was listed at the beginning of the year, hit an all-time high today, with a market capitalization of nearly HK $20 billion. Looking back on the past trend, we can find that the COVID-19 epidemic did not have a serious impact on 99 share prices, and has shown a steady upward trend since the end of April.

The continuous record highs of stock prices directly reflect the strong bullish attitude of the market, and the price-to-earnings ratio of 99 Mao is more than 100 times. Why can Chinese fast fashion catering chain leaders get such a high valuation?

Jiumaojiu: multi-brand Chinese fast fashion catering chain leader

Jiumaojiu is a leading Chinese fast fashion catering brand management and operation company in China. At present, there are five brands, namely, "Jiumaojiu", "Taier", "2 eggs", "pussy" and "Uncle Nawei". Among them, 99 Maojiu and Taier are the current core brands, contributing most of their revenue and profits.

As of December 31, 2019, the company managed 292 directly operated restaurants and 44 franchised restaurants, covering 16 provinces, 4 municipalities and 40 cities. In 2018, the revenue scale of the company ranks third in the country among Chinese fast fashion catering enterprises and the first in South China.

From the perspective of financial data, the growth rate of 99 cents is astonishing. In 2019, the total operating income of Jiumaojiu reached 2.69 billion yuan, an increase of 42.0% over the same period last year, with a compound growth rate of 21.1% in the past five years.

The rapid growth of the company's revenue is mainly divided into two stages. From 2013 to 2015, the rapid growth of the company's revenue mainly depends on 99%; from 2016 to 2019 is the period of the rapid development of Taier. In 2019, the two major brands accounted for 98.6% of the company's total revenue.

General situation of the industry: the scale of the catering industry is large, and the Chinese food market is dominant.

The scale of China's catering industry is huge, with total market revenue reaching 4.3 trillion yuan in 2018, with a compound growth rate of 10.2% in the past four years. Moreover, the revenue growth of restaurant chains has been leading the industry, with a compound growth rate of 11.2% in the past four years.

The northwest food market to which Jiumaojiu Restaurant belongs is relatively large. In 2018, the revenue of China's northwest vegetable market reached 168.2 billion yuan, with a compound growth rate of 10.2% in the past four years. At present, the market share of the top three cities is only 4.3%, and 99 Mao Jiu is in second place.

Taier Boiled Fish with Pickled Cabbage and Chili belongs to classic Sichuan cuisine and has a wide consumption base all over the country.

In 2018, Boiled Fish with Pickled Cabbage and Chili's market income reached 12.3 billion yuan, with a compound growth rate of 32.4% in the past four years, which is much higher than the overall growth rate of Chinese catering and northwest cuisine. Taier achieved revenue of 540.2 million yuan in 2018, with a market share of 4.4%. Ranked first among all Boiled Fish with Pickled Cabbage and Chili restaurants in the country.

How to overcome the difficulty of Chinese food standardization?

The standardization of products and services has always been a difficult problem for Chinese catering chains.

When the scale expands, the catering management often faces the exponential growth of the management difficulty needed to maintain the standardization of products and services, leading to the internal vulnerability of the scale expansion.

Generally speaking, careful selection of subcategories and control menu (SKU) length and matching with the central kitchen scheme is the main means to solve the problem of product standardization as the scale expands.

At present, major chain Chinese food enterprises have two routes to choose from:

1. The assembly line management, starting from the store model determined by the background, pursues extremely standard service, which is the same as the western chain catering style.

2. Driven by corporate culture, decentralization to stores to implement fault-tolerant front desk management, a typical representative of this way is Haidilao International Holding.

Through years of business experience, Jiujiu has established a business model that adapts to rapid expansion, mainly reflected in streamlined food choices, central kitchens, standardized operating procedures and staff training.

The establishment of a central kitchen has two main advantages:

1. To improve the degree of product standardization and speed up the iteration of product renewal, the unified production of the central kitchen reduces the interference of the store to the product quality. at the same time, the equipment of the central kitchen is more professional than the back kitchen of the store, which is more conducive to the research and development of new products.

2. Effectively reduce the cost of food procurement, manpower and rent, scale effect brings the improvement of purchasing bargaining power, while the standardized production of the central kitchen weakens the dependence on chefs and kitchen staff, and reduces the production pressure of the kitchen in the store.

Jiumaojiu has also built an organizational structure that is clear and flexible and suitable for brand incubation management.

The company entrusts its five brands to five brand managers for supervision, and grants a certain proportion of equity to the brand manager and its management team; a rotating general manager is set up at the headquarters, which is responsible for integrating the administrative service platform; six managers report their duties directly to the executive director.

Under this management mechanism, the creativity and enthusiasm of each brand team are fully mobilized, and the headquarters has the ability to continuously develop and expand new brands.

Growth potential: Taier single store has excellent performance and more space to open a store.

In 2019, the reshuffle rates of the company's dual-core brands Jiumaojiu and Taier reached 2.3 and 4.8 respectively, of which the reversal rate of Taier increased obviously in recent years, while 99 remained relatively stable.

The high turnover rate is mainly due to three points:

1. Unique and interesting marketing techniques quickly form brand memories for consumers through attractive store images, labels and unexpected slogans.

2. Among the carefully selected dishes and prices, except for the main course Boiled Fish with Pickled Cabbage and Chili, Tai er offers no more than 23 dishes, and Boiled Fish with Pickled Cabbage and Chili's spiciness is fixed, and ordering, serving and dining are all very efficient.

3. In the carefully selected consumption scene, the restaurant has only two seats and four seats, and does not accept extra seats, making it focus on consumption scenes such as friends' gatherings and small family dinners, reducing the complexity of the service.

At the same time, 99 Mao double core brand customer unit price continues to rise, in 2019, 99 Mao customer unit price reached 58 yuan, Taiji 75 yuan.

There is a large space for opening stores in the future, which can support the growth of 99 cents in the next 3-5 years.

According to Frost Sullivan, China has about 5800 shopping malls in 2018 and is expected to maintain a compound annual growth rate of 8.8 per cent from 2018 to 2024. According to its calculations, China will have about 9600 shopping malls in 2024.

By the end of 2019, the company had a total of 271 restaurants, including 99 restaurants, Taier restaurants, counseling restaurants and Uncle Nawei's chef restaurants, with a penetration rate of less than 3%. It is estimated that there are about 1900 head shopping malls, which is enough to support more than 99 years of development.

Compared with Haidilao International Holding, he made nine efforts to diversify catering.

99 cents parallel management structure pays more attention to the horizontal development of multi-track. From a historical point of view, in addition to the five subdivided catering tracks included in the current brand matrix, Jiumaojiu has also opened fearless brisket, coconut language hall and grin restaurants, and the group is constantly trying to incubate new brands to cover more tracks and consumer groups.

Haidilao International Holding once focused on the hot pot industry chain and recently began to expand to noodle restaurants.

In the comparison of operating indicators, due to different positioning and operation modes, the area of Taier Restaurant and Jiumaojiu Restaurant is smaller than that of Haidilao International Holding, the business hours are lower than Haidilao International Holding, and the guest unit price is lower than Haidilao International Holding. From the point of view of the turning rate and the turning rate, 99 Mao uses the turning rate and Haidilao International Holding uses the turning rate. Generally speaking, the index of the turning rate used by the same restaurant will be lower than the turning rate.

In terms of financial indicators, 99 Mao has a relatively low labor cost rate, but due to different models, the rent expenditure rate of 99 Mao is relatively high.

Optimistic about the growth prospect of brand matrix, the target price is 17.5 yuan.

The main mainland catering companies in Hong Kong stocks are Haidilao International Holding and Jiayu. According to their historical valuations, generally speaking, the valuations change in the same direction as the growth expectations.

Nine Maojiu company has established a set of methodology that can overcome the management pressure caused by the scale expansion of the catering industry, and can achieve large-scale expansion; it is optimistic about the growth prospect of the company's brand matrix, and the Boiled Fish with Pickled Cabbage and Chili brand has the growth power beyond the growth cycle of the industry. At the same time, the company is expected to incubate a third brand.

It is estimated that the compound growth rate of net profit from 2020 to 2022 is about 55%, and its valuation is about 37 times PE in 2021, which is attractive given the growth. Taking into account the valuation of the industry and the impact of the epidemic on the performance of the catering industry in 2020, the valuation level of the company should be given a premium of 50 times the reasonable PE level in 2021, corresponding to the reasonable value of 17.50HKD per share.

Risk Tips:The expansion of the new restaurant is not as expected; the impact of the epidemic; and increases in food, labor and rents may affect the profitability of the company.