Zhou Hei Ya aims high on IPO valuation

The Chinese fast-food retailer hopes its unique business model will help secure a valuation premium to its peers when it lists in Hong Kong next month.

Chinese fast-food restaurant chain Zhou Hei Ya International launched a bigger-than-expected initial public offering this week, targeting HK$3.3 billion ($427 million) and a valuation premium to its industry peers.

Sources familiar with the situation said the company has pitched a deal of about $300 million during pre-deal investor education that commenced last week. This means that the company has ended up launching a deal that is over one-third larger than it previously targeted.

Zhou Hei Ya is also fairly aggressive on securing a high valuation. Indicative terms show that the 424 million-share deal is being offered at HK$5.8 to HK$7.8 per share, giving the company an estimated market value of $1.7 billion to $2.3 billion.

That is equivalent to 14.3 times to 19.3 times 2017 earnings on syndicate consensus, according to a source familiar with the situation.

The top end of such valuation range will put Zhou Hei Ya at a significant premium to other Chinese restaurant operators listed in Hong Kong.

Chinese fast food hot pot restaurant chain Xiabuxiabu and Japanese fast food chain Ajisen China trades at 16 times and 12.9 times earnings respectively on a rolling twelve-month basis, or at least 17% cheaper compared to the top end of Zhou Hei Ya’s guidance.

Value proposition

Zhou Hei Ya’s valuation premium could be justified by its different business model compared to its peers, a source familiar with the situation told FinanceAsia.

The company, which claims to be the second-biggest braised food retailer, incurs relatively lower capital expenditures because it operates small stores that cater to takeaway customers, such as with its vacuum-packed spicy duck wings. This distinguishes it from other restaurant chains that mainly serve dine-in customers.

This strategy results in stronger cash flow and quicker investment returns. According to its listing prospectus, the company is generally able to break even on a new store opening within two months, and recover the investment within six months.

This model is very successful profit-wise. Between 2013 and 2015, the company’s net profit grew to Rmb552 million ($81 million) from Rmb260 million, representing a compound annual growth rate of 45.8%.

Such rapid earnings growth was largely a result of rapid store openings. Zhou Hei Ya has more than doubled the number of stores in less than three years. As of the end of September, Zhou Hei Ya operates 757 stores across 40 cities in 12 Chinese provinces, up from 389 stores at the end of 2013. As a result, overall earnings were able to grow quickly despite same store growth slowing to 11.8% last year from 25.5% in 2013.

Direct sales

Its business is also very effective when compared with that of Jue Wei Food, the largest company in China’s casual braised food industry.

Jue Wei Food, which has filed for an initial public offering in Shanghai, operated 7,172 stores across 28 provinces in China. This means it is about ten times bigger than Zhou Ya Hei in terms of retail network.

Yet despite booking total revenue of about 20% larger than Zhou Ya Hei, Jue Wei Food’s net profit was only roughly one-third of its competitor’s.

Analysts said that was largely because Zhou Ya Hei adopted a direct sales model and did not rely on franchise partners to operate its stores. Such a strategy requires higher management expenses but allows the company to retain most of the profits, instead of sharing them among the partners.

According to Zhou Hei Ya’s prospects, sales from franchise distributors accounted for 4.6% of the total revenue last year, down from 5.7% a year earlier.

Meanwhile, it has expanded online sales to 7.1% of total revenue from 6.1% in 2014. The company's vacuum packaged products could be stored for months, making them also sellable through e-commerce channels.


Zhou Hei Ya’s share sale is equivalent to 18.3% of its enlarged share capital post-listing, according to a termsheet seen by FinanceAsia. The deal features a 15% over-allotment option.

Institutional investors will be allocated 90% and retail investors 10% subject to clawback, according to the deal terms.

Pre-IPO investors Tiantu Capital and IDG Capital Partners, which own 9.65% and 5.46% of Zhou Hei Ya before the IPO, will be subject to a six-month lockup on their shares.

The IPO is expected to be priced on November 4 and trading is set for November 11.

Morgan Stanley and Credit Suisse are joint sponsors of the IPO.

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