This is an English adaptation of a FoodBud historical article originally published on January 28, 2024.
Xiao Cai Yuan, a Chinese full-service restaurant chain, recently filed a prospectus with the Hong Kong Stock Exchange. In the filing, the company positions itself in the Chinese restaurant segment with per-customer spending of RMB 50-100, where it ranked first for the first three quarters ended September 30, 2023.
For dine-in, average spending per guest was RMB 66.1 in 2021, RMB 65.8 in 2022, and RMB 65.2 for the first nine months of 2023.
Comparable brand revenue as of the end of September 2023 included Tai Er Sauerkraut Fish at RMB 3.3 billion, Green Tea Restaurant at RMB 2.7 billion, Xiabu Xiabu at RMB 2.2 billion, and Grandma’s Home at RMB 1.9 billion.
As of January 11, 2024, Xiao Cai Yuan operated 548 directly owned stores across 119 cities in 12 provincial-level administrative regions in China. These included 542 Xiao Cai Yuan stores and six stores under other sub-brands. Its brands include Xiao Cai Yuan, Guandi, Fuxinglou, and Caishou.
The core brand is Xiao Cai Yuan. Its stores contributed 98.7% of revenue in 2021, 98.8% in 2022, 98.7% for the nine months ended September 30, 2022, and 99.1% for the nine months ended September 30, 2023.
Revenue reached RMB 3.21 billion in 2022, up 21.5% year on year. Net profit was RMB 240 million, up 4.6%.
For the first three quarters ended September 30, 2023, revenue was RMB 3.43 billion, up 41.6% year on year. Net profit was RMB 430 million, up 107.6%.
Delivery service expenses were RMB 73.7 million in 2021, RMB 185 million in 2022, RMB 130 million for the first nine months of 2022, and RMB 188 million for the first nine months of 2023. These represented 2.8%, 5.8%, 5.3%, and 5.5% of revenue for the respective periods. For comparison, delivery revenue in the first three quarters of 2023 was RMB 1.08 billion, with delivery service expenses of RMB 188 million.
The directly operated restaurant-chain model generates strong cash flow. Trade receivables increased from RMB 17.3 million as of December 31, 2021 to RMB 27.1 million as of December 31, 2022, then to RMB 30.3 million as of September 30, 2023. The increase was mainly related to bills settled through third-party payment platforms such as Alipay and WeChat Pay, and delivery orders settled through online food-delivery platforms.
Cash flow is also supported by contract liabilities from prepaid cards and member points. As of September 30, 2023, total contract liabilities were RMB 68.528 million.
For the first three quarters ended September 30, 2023, food ingredient costs accounted for 31.4% of revenue, rent costs 7.3%, and employee costs 29.4%.
From the beginning of 2021 to the latest practicable date, total members increased from 1.5 million to more than 4.4 million.
During the reporting period, Xiao Cai Yuan sold 9.65 million portions of farmhouse braised pork, 9.15 million portions of clay-pot soup, 7.73 million portions of ground-pot young chicken, and 3.97 million portions of Huizhou stinky mandarin fish. A typical Xiao Cai Yuan store offers about 45-50 dishes each season.
The standard store model is about 300 square meters, with roughly 30 tables and capacity for about 110 diners at the same time. From site selection to opening, the process usually takes about two to three months. Each store is managed by a store manager, deputy store manager, chef, and deputy head chef, with about 28 employees in total.
Initial store-level breakeven usually takes about one to two months. For stores opened in 2021, 2022, and the nine months ended September 30, 2023, the average cash investment payback period was 15.2 months, 10.3 months, and 7.3 months, respectively. In 2021 and 2022, the average cash payback period for Chinese restaurant stores with per-customer spending of RMB 50-100 was usually more than 18 months.
By city tier, Xiao Cai Yuan is concentrated mainly in third-tier-and-below cities and new first-tier cities.
For the first three quarters ended September 30, 2023, stores in second-tier cities contributed 28.3% of total revenue, while stores in third-tier-and-below cities contributed 43.4%.
As of the end of September 2023, average daily sales per store were RMB 28,194.6. First-tier-city stores had the highest average daily sales per store at RMB 31,977.3.
For the first three quarters ended September 30, 2023, average daily dine-in sales per store were RMB 19,269.8, with a table turnover rate of 3.3. Turnover was 3.5 in first-tier and new first-tier cities, 3.6 in second-tier cities, and 3.2 in third-tier-and-below cities.
Delivery sales for the first three quarters ended September 30, 2023 totaled RMB 1.08 billion. Average delivery order value was RMB 80.6.
As of the end of September 2023, Xiao Cai Yuan had 307 same stores, a proxy for more mature units. Same-store average daily sales were RMB 28,367.9, and same-store table turnover was 3.4.
The company planned to open about 160, 190, and 230 new stores in 2024, 2025, and 2026, respectively. By the end of 2026, it expected to operate more than 1,100 Xiao Cai Yuan stores. Upfront spending for each new Xiao Cai Yuan store was expected to be RMB 1.3 million to RMB 1.7 million. Planned investment costs for new stores were expected to be RMB 210-270 million by the end of 2024, RMB 250-320 million by the end of 2025, and RMB 300-390 million by the end of 2026.
Xiao Cai Yuan also planned to expand into Chinese community dining and had opened its first Caishou-branded store.
The community dining model targets sites near residential neighborhoods, usually covering residents of different age groups within a three-kilometer radius. Stores are about 150-200 square meters, with 30-40 tables and capacity for 60-80 diners at once. The model emphasizes value for money, high turnover, and repeat purchase. Each dish is priced at RMB 5-30, with customers expected to order two to three dishes and spend RMB 20-40 per person. A self-service format is used, with average dining time of about 25 minutes from entry to meal completion to increase table turnover.
Xiao Cai Yuan planned to open about 200-400 community dining stores from 2024 to 2026.
A China-market comparison cited in the original article was Nanchengxiang in Beijing. Its founder Wang Guoyu is also from Anhui. Nanchengxiang stated at the beginning of the year that 2023 sales reached RMB 1.5 billion while still focused only on Beijing. According to Zhaimen Canyan data cited in the article, Nanchengxiang had 175 existing stores.
Xiao Cai Yuan’s supply chain consisted of one central factory and 11 warehouses nationwide, supported by a self-operated transport fleet of more than 200 vehicles. As of December 31, 2021, December 31, 2022, and September 30, 2023, the company had 90, 138, and 185 vehicles, and 107, 137, and 311 drivers, respectively.
The company had 305 suppliers as of December 31, 2021, 349 as of December 31, 2022, and 318 as of September 30, 2023. As of September 30, 2023, Xiao Cai Yuan had maintained business relationships of more than three years with its major suppliers.
Purchases from the top five suppliers were RMB 200 million in 2021, RMB 240 million in 2022, and RMB 200 million for the nine months ended September 30, 2023. These represented 24.9%, 19.5%, and 16.1% of total purchases for the respective periods. Purchases from the largest supplier represented 7.8%, 5.4%, and 4.6% over the same periods.
As of September 30, 2023, Xiao Cai Yuan had 11,641 full-time employees.
Inventory turnover days increased from 18.9 days in 2021 to 24.0 days in 2022, mainly because expanded centralized ingredient procurement increased raw materials and consumables stored in warehouses. The company also expanded warehouse service radius with support from its transport fleet, increasing storage volume. Inventory turnover days remained relatively stable at 24.0 days in 2022 and 25.2 days for the nine months ended September 30, 2023.
Cash and cash equivalents were RMB 20.371 million, RMB 63.001 million, and RMB 353 million for 2021, 2022, and November 30, 2023, respectively.
According to the prospectus, Xiao Cai Yuan paid dividends of RMB 150 million in 2022 and RMB 135 million in the first nine months of 2023, equal to 63.03% and 31.40% of net profit for the respective periods.
Based on the pre-listing shareholding structure, founder, executive director, and general manager Wang Shugao controlled 92.99% of voting rights through seven British Virgin Islands special purpose vehicles, making him the company’s actual controller.
Excluding XCY Huiming Limited, whose specific shareholding ratio was not disclosed, Wang Shugao indirectly held at least 27.37% of the company through the other six offshore entities. On a simple estimate, of the RMB 285 million in cumulative dividends paid during the reporting period, RMB 78 million flowed to Wang Shugao personally. Individual shareholders Li Daoqing, Tian Chunyong, Zhou Bin, Tao Xuan, Ye Hongli, Fang Zhiguo, Wang Weifang, and Chen Haiyan, who had signed an acting-in-concert agreement, received a combined RMB 80.56 million.
The prospectus showed that Jiahua Capital first subscribed to convertible bonds issued by Xiao Cai Yuan with U.S.-dollar consideration equivalent to RMB 150 million and RMB 250 million. On December 1, 2023, it then signed two rounds of preferred-share agreements: the first used the two earlier convertible bonds to subscribe for Series A preferred shares, and the second subscribed for additional preferred shares using U.S.-dollar consideration equivalent to RMB 100 million. After completion, Jiahua Capital held 7.01% of the company.
Looking at the financing process, the first preferred-share financing, settled on December 18, 2023, was priced at RMB 6.19 per share. Jiahua Capital paid RMB 400 million for 6.01% of the company, implying a post-money valuation of about RMB 6.656 billion. Three weeks later, the second preferred-share financing price rose 50.24% to RMB 9.30 per share, implying a post-money valuation of RMB 10 billion.
If Xiao Cai Yuan’s market capitalization after listing was below 130% of the post-money valuation, or RMB 13 billion, Jiahua Capital had the right to require Xiao Cai Yuan to issue new shares for free or at the lowest legally permitted price, transfer shares for free, or provide cash compensation.
The question for a Hong Kong listing was pricing. The prospectus’s third-party comparables included Tai Er Sauerkraut Fish under Jiumaojiu and Xiabu Xiabu. At the time cited in the article, Jiumaojiu’s market capitalization was HKD 7.255 billion, about RMB 6.6 billion, while Xiabu Xiabu’s was HKD 2.346 billion, about RMB 2.1 billion. Against the then-current domestic market environment and Hong Kong’s valuation of restaurant-chain companies, Xiao Cai Yuan faced significant pressure.
Note: IPO, valuation, store-opening, investment-cost, and forward-plan figures are historical figures from the January 28, 2024 article and related filing context.