This is an English adaptation of a FoodBud historical article originally published on September 2, 2021.
Laowang, described in its Hong Kong Stock Exchange filing as China’s largest Cantonese hotpot chain, submitted a Hong Kong listing application on September 1, 2021. The company planned to raise US$200 million and list on the Main Board, with CICC and Huatai International as joint sponsors. If completed, Laowang would become another Hong Kong-listed hotpot brand after Haidilao and Xiabuxiabu.
CICC had become a Laowang shareholder in June 2021. It was also an investor behind Helens, another company then heading toward a Hong Kong listing.
China’s hotpot restaurant market was highly fragmented, with more than 400,000 hotpot restaurants operating in 2020. Competition centered on food quality and consistency, value for money, environment and service, location, reliable ingredient supply, and trained staff.
By 2020 revenue, the top five players in China’s hotpot restaurant market accounted for only 7.9% of total market share. The Cantonese hotpot segment was similarly fragmented: the top five players held about 5.0% of the market by 2020 revenue.
Laowang ranked first in China’s Cantonese hotpot restaurant market by 2020 revenue, with a 1.7% share. It was also the largest operator focused on pepper pork-tripe chicken hotpot. In 2020, Laowang recorded annual customer traffic of about 7.8 million visits.
Revenue was:
Net profit was:
As of June 30, 2021, Laowang held RMB89.44 million in cash and cash equivalents, down from RMB138 million as of December 31, 2020.
Laowang began working with third-party delivery platforms in 2018. In September 2020, it launched a retail business selling ready-to-eat pepper pork-tripe chicken through local and international supermarkets.
The company positioned retail as another core growth driver. Its channel plan included partnerships with premium supermarkets serving white-collar consumers, large convenience-store chains, and in-restaurant sales of ready-to-eat products nationwide.
On the product side, Laowang planned to launch green Sichuan pepper pickled-cabbage soup base and slow-stewed lamb pot by the fourth quarter of 2021. It also planned to increase brand visibility through frozen meatballs, egg dumplings, packaged yuba, Laowang XO sauce, Laowang mushroom products, and other dipping sauces.
Laowang’s membership system had more than 8.6 million registered members. About 1.3 million had provided age-group information, and 78.4% of those were aged 18 to 35.
Members generated more than 60% of revenue during the track record period. As of the six months ended June 30, 2021, membership was growing by about 100,000 new registered members per month. The repeat dining rate within 90 days after a member’s first order was 13.6%.
As of the latest practicable date in the filing, Laowang operated 135 self-operated chain restaurants across 25 cities in mainland China, plus one restaurant in Taipei.
The company had three self-developed brands:
A typical Laowang Hotpot Cuisine restaurant measured 300 to 700 square meters, had about 30 tables, and could seat about 140 customers.
Average spend per customer was RMB120.3 in 2018 and RMB123.7 in 2019, then rose to RMB128.1 in 2020, mainly because COVID-19 social-distancing measures led to higher customer spending. As COVID-19 controls eased and group dining resumed, average spend declined from RMB130.1 to RMB123.9 for the six months ended June 30, 2020 and June 30, 2021.
Raw materials and consumables included externally purchased ingredients, transportation costs, and restaurant consumables such as packaging materials. Costs were RMB300 million in 2018, RMB380 million in 2019, RMB420 million in 2020, and RMB160 million for the six months ended June 30, 2021. These represented 34.4%, 34.9%, 36.9%, 37.2%, and 36.2% of revenue for the relevant periods as disclosed.
Staff costs were RMB270 million in 2018, RMB320 million in 2019, RMB320 million in 2020, and RMB140 million for the six months ended June 30, 2021. These represented 31.0%, 29.3%, 28.3%, 31.8%, and 29.8% of revenue for the relevant periods as disclosed.
Before adopting IFRS 16, Laowang’s 2018 rent and related expenses were RMB111.1 million, or 12.8% of annual revenue. After adopting IFRS 16 from January 1, 2019, rent and related expenses were RMB52.4 million in 2019, RMB52.1 million in 2020, RMB19.2 million for the six months ended June 30, 2020, and RMB39.5 million for the six months ended June 30, 2021. These represented 4.8%, 4.6%, 4.4%, and 6.1% of revenue.
Laowang’s leases were generally five years or longer, usually with a four-month rent-free period from lease commencement. Some leases included renewal options subject to agreement with landlords. During the track record period and up to the latest practicable date, Laowang reported no material difficulty renewing leases on time. Many restaurant leases used hybrid rent arrangements combining variable and fixed payments; some included minimum-rent clauses requiring payment of the higher of minimum rent or variable rent. Other leases used fixed-rent arrangements.
Utilities, including electricity, gas, and water, were RMB31.3 million in 2018, RMB37.7 million in 2019, RMB37.0 million in 2020, and RMB14.9 million for the six months ended June 30, 2021. These represented 3.6%, 3.4%, 3.3%, 3.4%, and 3.3% of revenue for the relevant periods as disclosed.
Laowang had 105, 98, 140, and 130 authorized suppliers as of 2018, 2019, 2020, and June 30, 2021, respectively.
Its largest supplier accounted for 12.8%, 14.6%, 18.2%, and 17.9% of total purchases for 2018, 2019, 2020, and the six months ended June 30, 2021. Its top five suppliers accounted for 50.4%, 39.1%, 44.4%, and 52.2% of total purchases over the same periods.
Major ingredients included pork tripe, chicken, beef, pork, and vegetables. Prices were affected by import policies, domestic supply and demand, seasonality, weather, and natural disasters. Overall, average market prices for Laowang’s main raw materials were stable from 2016 to 2020, although pork tripe and pork prices fluctuated slightly due to supply shortages.
Laowang said in its prospectus that net IPO proceeds would mainly fund construction of Central Factory No. 2, new restaurant openings in China and globally, working capital, and general corporate purposes.
The company planned to open about 49 restaurants in 2022, 75 in 2023, and 103 in 2024, mainly in new first-tier cities, second-tier cities, and other cities.
Opening a new Laowang Hotpot Cuisine restaurant mainly involved interior design, renovation, equipment, and maintenance costs. During the track record period, the average cost to open a new Laowang Hotpot Cuisine restaurant was about RMB8,000 to RMB9,000 per square meter.
Laowang Xinling Duji Soup restaurants used a pale-yellow and white palette, generally measured 190 to 300 square meters, had about 15 to 30 tables, and could seat about 100 customers. During the track record period, the average opening cost for a new Guoji restaurant was about RMB5,000 to RMB7,000 per square meter, while a new Laowang Xinling Duji Soup restaurant cost about RMB10,000 to RMB14,000 per square meter.
Laowang operated a central factory in Suzhou, Jiangsu, to support food quality and flavor consistency. It also outsourced selected production processes to third-party suppliers with higher capacity and advanced food-processing technology.
The company had industrialized parts of its food-processing workflow while retaining some manual procedures to avoid sacrificing taste through over-industrialization. Many menu items and ingredients were developed at the central factory or outsourced to third-party suppliers, while some manual preparation still took place in restaurant kitchens.
For example, hotpot soup bases such as Laowang Xinling Duji Soup base and Taiwanese spicy soup base used seasoning powders and sauces prepared at the central factory and shipped to restaurants. Kitchen staff could then prepare soup bases more easily while maintaining consistent quality and flavor.
The central factory began operations on January 30, 2015. It developed recipes and supplied raw materials and other required items for Laowang Hotpot Cuisine and other restaurants.
According to the company, the Suzhou central factory had semi-automated intelligent production. Production staff only needed to handle simple steps such as producing dipping sauces, seasonings, and sauces, while other steps were completed by automated equipment. As of the latest practicable date, its capacity could meet soup-base demand for more than 300 stores.
Laowang’s logistics system coordinated warehousing and distribution across the restaurant network. It included the central factory and eight third-party warehouses in cities including Shanghai, Suzhou, Hangzhou, Chongqing, Beijing, Shenzhen, Xiamen, and Nanjing. Each warehouse had frozen storage.
The company engaged large third-party transport companies with cold-chain food distribution capabilities. Suppliers also delivered raw materials and supplies to third-party warehouses or directly to restaurants. Domestic transportation risks were borne by third-party transport companies or suppliers, with transportation insurance purchased.
Short-shelf-life ingredients such as fresh farm vegetables, fruit, fresh meat, and seafood were arranged for next-day delivery directly from suppliers to restaurants. For processed foods and other supplies such as pork bones, pork skin, and pork tripe, Shanghai restaurants submitted requests directly to headquarters, while other restaurants submitted requests to the central factory. Headquarters or the central factory then placed supplier orders. Within 7 to 10 days after ordering, suppliers delivered ingredients and supplies to third-party warehouses before onward delivery to restaurants.
Before the IPO, Li Yucheng held 29.92%, Chen Xiang held 7.51%, Huang Yaling held 1.33%, Zhao Hongze held 4.26%, Wang Yongshi held 2%, Chen Xilun held 6.06%, and Liao Zhiwei held 4.44%.
Huang Yaling was Chen Xiang’s wife, and Wang Yongshi was Zhao Hongze’s wife.
From an expansion perspective, Laowang’s core advantages were described in three areas.
First was centralized ingredient procurement and automated production. The Suzhou central factory handled R&D and production of soup bases for all stores, and its capacity supported more than 300 stores’ soup-base needs as of the latest practicable date.
Second was tighter supply-chain control. To ensure consistent ingredient flavor and quality, Laowang used suppliers’ industrialized production processes to standardize food processing. Store employees only needed to carry out simple preparation before serving, reducing labor requirements at the restaurant level.
Third was systematic human-resources management. Laowang used standardized store operating procedures covering all parts of restaurant operations. It provided customized online training for different employee levels and had a pipeline of more than 200 store-manager candidates. It also developed a store-inspection system to monitor restaurants and assess whether operations met standardized procedures.
Note: IPO fundraising, shareholding, expansion targets, and other forward-looking figures are historical disclosures from 2021.