Restaurant chain South Beauty may relaunch IPO next year

A cool response from Hong Kong investors to South Beauty, a Beijing-based restaurant operator, likely arose because of the erratic revenues reported by the upscale restaurant chain, say analysts, but the company plans to come back for a second bite at a stock market listing.

And like many other restaurant operators, the high rental expenses declared by the listing candidate was a worry, since it holds no meaningful commercial property assets to hedge against rapidly rising property prices in the bigger cities on the mainland.

After scrapping its original bid to list on the local market because of poor investor interest, South Beauty may relaunch its Hong Kong initial public offering in the second quarter of next year, two sources familiar with the situation told the South China Morning Post. It wanted to raise as much as US$200 million in the third quarter of this year after the Hong Kong stock exchange approved its listing plan.

According to the sources, a handful of investors could not properly gauge the day-to-day operations and profit-and-loss structure of the restaurant chain business because the business model was not based on high volume traffic, such as that passing through fast-food outlets such as McDonald's and KFC.

But an analyst said lack of standardisation in China's food and services business had always been the biggest hurdle for listing hopefuls.

An exception to this rule was the float in 2008 by Chinese hotpot chain operator Little Sheep, which he described as a rare blockbuster because it sold standardised uncooked food to customers who then cooked their own meals. Therefore no kitchen was required.

Now, with expectations of a market recovery, South Beauty's offering could be relaunched early next year in Hong Kong, said a senior banker.

Founded in 2000, South Beauty owns three brands, the flagship South Beauty restaurant, LAN club and SUBU, and more than 50 operations across the major cities, including Shanghai, Beijing, Shenzhen and Suzhou.

The company's aim to "be the Louis Vuitton in China's restaurant industry", reflects its ambitions to capture a major share of the high-end dining market in China.

Much of the capital raised in Hong Kong so far this year came from block trades, or significant involvement by cornerstone investors willing to accept a six-month lock-up period for the shares they bought. Market participants expect the tepid response to offerings could persist, prompting companies to shift their attention to the mergers-and-acquisitions and debt capital markets.

Shortly after listing in Hong Kong, Little Sheep got a lucrative privatisation offer from the US-listed Yum Brands, the operator of more than 3,300 KFCs and 650 Pizza Hut eateries in China.

The privatisation saw its shares delisted in February and Yum Brands has valued the hotpot chain at HK$6.7 billion - much higher than the market capitalisation of HK$3 billion achieved at its listing.