Hop Hing Group shares almost doubled after resuming trading in Hong Kong yesterday following news that it will buy the mainland operations of fast-food chain Yoshinoya from its chairman for HK$3.48 billion.
While analysts generally believe the deal is expensive, they are positive the acquisition would help expand Hop Hing's portfolio and strengthen its financial position.
The group, which produces 'Lion and Globe' cooking oil, jumped 95.4 per cent to 86 HK cents at its highest, and closed 59.1 per cent higher at 70 HK cents.
Other local fast-food chains, such as Cafe de Coral and Fairwood, have seen their profit margins squeezed by rising food costs, rents and wages.
But Alex Wong Kwok-ying of Ample Capital group said that Yoshinoya's market positioning was better.
'Cafe de Coral is not really so cheap any more for fast-food goers,' Wong said. 'Yoshinoya on the other hand not only has a simpler menu but is also cheaper.'
Patrick Yiu Ho-yin, of Cash Asset Management, said the acquisition provided Hop Hing with a new element for growth.
'Hop Hing has always been a steady company making a few million dollars of profit every year,' Yiu said. 'The new business injects the concept of domestic consumption into the company and provides it with new growth momentum.'
The acquisition values the beef rice chain at 25.9 times last year's earnings, compared with the median of 15.54 times net income of 13 similar food-catering deals, according to Bloomberg.
Hop Hing had a market capitalisation of almost HK$200 million before the acquisition. It has proposed raising the authorised share capital to HK$1.48 billion from HK$80 million, creating 14 billion shares to settle the payment.
Hop Hing chairman Peter Hung is selling only Yoshinoya's mainland operations, held by a company called Summerfield Profits. The chain's business in Hong Kong, which is partially owned by the Hung family, is not included in the transaction.
Yoshinoya has more than 300 shops on the mainland, although most of the business is concentrated in the northern region, including Beijing, Tianjin and Heilongjiang.
Yiu said the company had probably done its research and found that the cuisine would be better received in certain areas.
Summerfield's earnings grew 48.4 per cent to HK$120.4 million last year, from HK$81.1 million in 2009.Topics: Fairwood Yoshinoya Café De Coral Café De Coral Business Café De Coral