IPOs: how restaurant chains raise cash
Xiao Nan Guo, with 62 outlets here and on the mainland, listed on Hong Kong's exchange last year. So did Tsui Wah, the cha chaan teng chain. Its share price has since risen by more than half - market reports attribute this to the mainland's growth potential. Chinese operations South Beauty and Golden Hans, and Cantonese chain Tai Hing Roast, are all expected to launch initial public offerings this year.
Edmond Chan, from PricewaterhouseCoopers' Capital Market Services Group, says the primary reason restaurants list is to get more funds for expansion. An IPO is a more "viable" option than traditional methods of raising money. You can usually raise more money from an IPO than from business partners. The appeal of what is seen as a low margin business with high failure rates lies in potential growth in China, Chan adds.
The arduous listing process is a hurdle confronting Dining Concepts. With 22 venues, including celebrity-backed ventures such as Mario Batali's Lupa in Hong Kong, the company generated revenue of HK$65 million in 2012.
It has grown rapidly in recent years and founder Sandeep Sekhri wants to maintain the momentum. He plans to list the company in a few years.
"I would list for expansions into other markets - I would love to expand my business to China," he says.
"The downside is the amount of paperwork and reporting. The question is: do we want to go through that process?
"We used to pay 10 to 12 per cent to rentals from our gross sales. Now, at our prime properties, about 15 per cent of sales go towards the rent and that's rising."
Rising labour and food costs have also added pressure to the bottom line, meaning any increased profits will have to come from expansion not cost-cutting.
"If a good brand wants to expand in China to capture the rising spending power, this is an attractive investment story for the investor," explains Chan.
Xiao Nan Guo raised HK$512 million from its IPO; most will be used to open mainland branches. Almost half of the proceeds of Tsui Wah's listing (HK$692 million) will be for the mainland, including about 35 per cent for new outposts.
Many observers forecast the IPO trend to continue, a view shared by Scott Rothbort, investment adviser and founder of LakeView Asset Management. "Two of the fastest-growing companies in China are McDonald's and Yum Brands [Pizza Hut, KFC and Taco Bell]. Clearly, this industry is growing rapidly in China."
Scares over the safety of Chinese-reared chicken may make a temporary dent on Yum Brands' plans says Rothbort, "But the chicken problem will be transitory, much like the mad cow scare was for McDonald's nearly a decade ago and Taco Bell a few years ago." He believes the restaurant industry will grow in China and will require further access to the capital markets.
Rothbort, who covers dining stocks, says competition to become the homegrown McDonald's or KFC will heat up. "There will be a need to access the capital markets by smaller restaurant chains in the region."