Restaurant chain Tsui Wah plans big expansion on the mainland
Restaurant chain eyes growing wealth across border with plans for 24 more outlets and central kitchens in Shanghai and Guangdong
Restaurant chain operator Tsui Wah has unveiled ambitious expansion plans on the mainland as it attempts to tap rising affluence in Shanghai and Guangdong.
The company said it was on track to increase the number of outlets on the mainland by 24 to 28 by 2015 and aimed to build central kitchens in Shanghai and Guangdong to cater to increasing consumer demand.
The two new kitchens will be located within range of two-hour transportation and will be able to supply standardised food and beverage items to support demand for 60 restaurants.
The firm, co-founded by former cook and food delivery waiter Lee Yuen-hong, is aiming to raise HK$756.67 million through an initial public offering of 333.33 million shares, or 25 per cent of its share capital. The shares are priced between HK$1.89 and HK$2.27, equivalent to a price-earnings ratio of 16 and 19 times next year's earnings.
"The execution risk is probably the biggest concern in relation to Tsui Wah's bold expansion move on the mainland where consumers have a handful" of similar restaurants, said a fund manager who took part in an investor lunch.
Competitors such as Cafe de Coral and Fairwood have failed to penetrate the highly competitive mainland fast food market.
Despite an economic slowdown and fierce competition on the mainland, Tsui Wah will spend HK$331 million on network expansion and infrastructure. About 40 per cent of the net proceeds from the share sale will be spent on the mainland.
Company officials said the central kitchen model would allay investors' concern over food safety and quality issues but they declined to comment on the expected return from the mainland market.
Tsui Wah posted a gross margin of 69 per cent in the past financial year to March, against 69.4 per cent in the previous year. Return on equity rose to 39.3 per cent from 34.8 per cent, probably because of its higher turnover and the fact that a central kitchen boosted overall profitability. Net profit soared 60 per cent to HK$104 million.
According to a pre-deal report by Deutsche Bank, Tsui Wah is expected to post a compounded annual growth rate of 38.6 per cent in net profit and 38.9 per cent in sales from 2012 to 2015.
In Hong Kong, the company will add 10 more outlets in less wealthier areas and build another central kitchen as the current one is near capacity.
According to the prospectus, each customer in Hong Kong spends an average of HK$74 and the average number of receipts per table per day rose to 25 from 24 in the previous year. The average number of receipts per table per day is a metric of restaurant efficiency.
The Hong Kong market is likely to be driven by rising selling prices and delivery services.
Meanwhile, the company said it would not buy any property for the next 12 months in Hong Kong, where leases have been jacked up to record-high levels.
In a bid to prevent a failed share launch, Shanghai-based private-equity firm Capital Today and Prax Capital have each committed to subscribe to US$10 million worth of shares as cornerstone investors with a one-year lock-up period.
Tsui Wah was established in 1967. Eight of its 26 restaurants are open 24 hours.
