Investors Lose Appetite for High-End Restaurants in China

Aug 6, 2013

Investors Lose Appetite for High-End Restaurants in China

By Chao Deng

Private-equity firms are looking to satisfy the appetites of China’s growing middle class as the economy slows and high-end restaurants lose favor following recent government curbs on lavish spending by officials. Five years ago these firms were piling into China’s luxury retail sectors, including dining. But more recently they have begun to shun high-end restaurants in favor of such names as Dairy Queen and Chinese hot-pot chain Xiabu Xiabu, reflecting a desire to offer Chinese consumers more affordable menus and capture strong growth in fast-food sales.The curb on officials using public funds on expensive banquets, announced in December, has made investing in upscale restaurants in China “especially risky in the short run,” said William Liang, director of European firm EQT Partners.

“Private-equity investors in high-end restaurants are now trying to reposition their restaurants to target mass-market customers, either by acquiring smaller midmarket businesses or by downsizing and reformatting their existing stores,” Mr. Liang said.

Fast-food and midrange restaurants, on the other hand, offer strong growth prospects. Fast-food sales have surged in recent years, reaching $106 billion last year from $47 billion in 2007, according to Euromonitor.

This has attracted the attention of investors. EQT Partners, for example, is considering buying a minority stake in RCS Group Co., which owns franchise rights for Dairy Queen and Papa John’s Pizza in some provinces in China, from Warburg Pincus LLC, a person with knowledge of the matter said late last month. The likely size of the deal was unclear.

Also, U.S. private-equity firm General Atlantic bought Actis Capital’s majority stake in Xiabu Xiabu in December for an undisclosed amount.

“There’s only one KFC for every 328,000  people in China, compared to one for every 67,000 people in the U.S.,” said Chris Tay, chief executive of Shanghai-based restaurant chain YPX Cayman Holdings Co., which is backed by private-equity firms including Qiming Venture Partners. “China is the only country where you can still invest in a chain store as if it were an Internet company.”

Rising share prices of companies targeting the middle of the market are surely adding to the attraction. Private-equity firms Capital Today and Prax Capital paid around $20 million for a combined 5.1% stake in Tsui Wah Holdings Ltd., operator of a leading chain of midrange Cantonese restaurants, during its initial public offering in November. The stock has soared 65.2% since its listing. Capital Today and Prax Capital currently hold a combined stake of around 5.4%.

The sweet spot in China’s restaurant market appears to be offering meals for 30 yuan to 120 yuan ($4.90 to $19.59) a person, said Miranda Tang, managing director at CLSA Capital Partners. “Even through economic cycles, demand at this range is less elastic and restaurants can gain market share more easily,” she said.

CLSA Capital Partners got into the game of catering to the middle class early with a 2004 investment in a catering company that it sold in 2007 for an undisclosed profit.

Investments in higher-end restaurants appear less appealing. On the Shenzhen stock exchange, for example, shares in Beijing Xiangeqiang Co. Ltd., a chain that serves Guangdong, Hunan and Hebei cuisines, have fallen 24% this year. The Shenzen benchmark has lost 14% during the same period.

Shares of Shenzhen-listed China Quanjude (Group) Co., which operates a chain of restaurants specializing in Beijing duck, are down 5.6% this year. China Quanjude said in April that it expects an up to 40% drop in net profit for the first half of the year, due in part to a decrease in corporate banquets and high-end services.

Most private-equity backers in China hold minority stakes, meaning it is difficult to influence strategy. Still, some chains that once focused only on upscale customers are trying to adapt.

Xiao Nan Guo Restaurants Holdings Ltd.3666.HK +3.39%, operator of a chain of high-end restaurants serving Shanghai cuisine, opened its first Shanghai-style dim sum outlet  in June of 2012 to target midrange customers spending 60 to 80 yuan per meal. The company reported higher profits for last year, but said it faced headwinds in the high-end sector due to government curbs on official spending.

China-focused private-equity firm Milestone Capital invested in Xiao Nan Guo during its initial public offering in July last year and held a 7.7% stake at the end of the year. Xiao Nan Guo’s shares are down 9% since listing.

Milestone couldn’t be reached for comment.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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