【Company Research】Jiumaojiu (9922 HK) – Excellence and minimalism to unlock scalability
- Jiu Mao Jiu/ Tai Er are the No. 2/ 1 restaurant brand in the Northwestern Chinese/ Sauerkraut fish cuisine. Jiumaojiu International (“JMJ Int”) has 147/ 65/ 29 Jiu Mao Jiu/ Tai Er/ other restaurants (241 in total) in FY18. Jiu Mao Jiu/ Tai Er brand have 0.8%/ 4.4% market shares in the Northwestern Chinese/ Sauerkraut fish cuisine industry in 2018, by Frost & Sullivan. Noted that impressive sales/ NP att. CAGR of 34%/ 20% were achieved in FY13-18.
- Active pursuit of excellence: food, service and dining ambience. We believe Tai Er’s dedication on 1) quality supply chain, 2) customer experience and 3) unique dining ambience are reasons for its superior popularity. Its seat turnover was 4.9x (vs peers’ avg. of 3.9x) and its customer rating on Dianping.com was 4.6 (out of 5, peers’ avg. of 4.0). Numbers are stunning if we adjust for shorter opening hours and no delivery/ takeaway allowed.
- Advanced SKU optimization can drive efficiency and scalability. Competition for minimal SKUs restaurant is intense, and is hard to differentiate from other brands. However, once the brand has become successful, its first mover advantage and highly standardized nature could fuel exponential growth and induce remarkable profit margin. We estimate the potential market size for Tai Er restaurants to be ~810 in FY19E, referencing to five different parameters. We forecast Tai Er stores to reach 314 by FY21E.
- Open, innovative and co-wining culture to unlock staff potential. We believe JMJ Int’l can maintain its competitiveness, thanks to 1) its corporate structure that maximizes focus on consumer trends (free up brand divisions’ energy by setting up headquarters’ functional departments), 2) emphasis on restaurant staff quality and 3) clear equity incentives for its top management (management ownership for Jiu Mao Jiu/ Tai Er are 15%/ 15%).
- 15/ 30/ 45 days of restaurants’ suspension may lead to 17%/ 28%/ 41% cut in FY20E NP, due to the coronavirus. According to our scenario analysis, 15/ 30/ 45 days of suspension could lead to 4%/ 7%/ 10% cut in FY20E sales and 17%/ 28%/ 41% cut in FY20E NP. We used a 30-day case in our model.
- We forecast 44%/ 94% sales/ net profit att. CAGR in FY18-21E. We project 44% sales CAGR to be driven by: 8% Jiu Mao Jiu sales CAGR (1% sales per store and 7% number of restaurants) and 91% Tai Er sales CAGR (13% sales per store and 69% number of restaurants) and 127% other brands’ sales CAGR. We also expect net profit to grow at 94% CAGR, due to 1) greater sales from higher OP margin Tai Er brand and 2) ramp up of Tai Er’s store productivity and 3) absence of one-off inventory losses in FY18.
- Initiate BUY with TP of HK$ 10.82. We valued JMJ Int’l using the STOP method. We applied 17x for Jiu Mao Jiu (~25% discounts to peers) and a 0.65x 3 years PEG for Tai Er (leaders’ median of 1.8x, equal to 71.1x FY20E P/E) to derive the TP, which also implied a 55x FY20E P/E and a 0.84x 3-year PEG for the group. JMJ Int’l is now trading at 46x FY20E P/E and 0.70x PEG. We believe premium (in P/E) for Tai Er can be justified by :1) leading position in Sauerkraut fish and superior popularity, 2) huge growth potential (both sales and profit margin) and 3) much faster than peers’ sales/ net profit growth.
