Stumbling Jiumaojiu spits big money for local mega-mall

Key points to remember: Jiumaojiu said he would pay up to $140 million for 26% of the company developing the Guangzhou IFC Mall project, which will become its new headquarters The move comes as the company's finances show signs of stress, including a 23.2% drop in same-store sales at its main restaurant chain Tai Er in the first half of the year.

By Doug Young

What do you do when your main restaurant business suffers from a slowing Chinese economy and frequent forced closures due to strict pandemic control measures?

You spend a lot of money on a trendy new headquarters. At least that's the answer if your name is Jiumaojiu International Holdings Ltd. (9922.HK), owner of the trendy Tai Er restaurant chain known for its "sauerkraut fish." This somewhat dodgy story has all the trappings of a company trying to curry favor with its local government, in this case in Guangzhou, capital of wealthy Guangdong province, in the south of China, where Jiumaojiu is based.

We'll come back soon to what Jiumaojiu's real motivation for this investment may be, and the longer-term implications for his newly announced investment of up to 1 billion yuan ($140 million). ) which could nullify much of its current cash. But let's look at the actual deal first, which involves a major new retail office project called Guangzhou IFC Mall Project being built in the city's Tianhe district.

According to Jiumaojiu's announcement released on Thursday evening, it will purchase 26% of the company developing the project, which will consist of approximately 30,000 square meters of commercial and office space. It will make the investment in several tranches, starting with a payment of 650 million, followed by several smaller ones. In the end, its maximum total investment would be around 1 billion yuan.

Jiumaojiu said he would move his headquarters to the project upon completion, which is expected in 2026. He said such a move would help "maintain and develop his culture basis of youth and trend". and would benefit the business from its proximity to the heart of Guangzhou's business, fashion and trade hub.

“Furthermore, the company also believes that through such a relocation, it will enable the group to attract more outstanding talent…to support the group’s expansion plans, which, at in turn, is conducive to the long-term development of the group and in maintaining its market position as a leading Chinese cuisine restaurant brand manager and operator,” he added.

That may sound great, but investors didn't seem to share Jiumaojiu's enthusiasm. The stock fell 14% in early trading on Friday, wiping out about $350 million in market value. Despite this, the stock is still up slightly this year, a rarity these days among Hong Kong-listed Chinese companies whose shares have mostly been down sharply since January. But Jiumaojiu may soon join those ranks if he continues to make these kinds of investment decisions.

The company is one of the few Chinese restaurateurs still profitable, as most of its rivals have fallen into the red lately due to lower consumer spending due to the downturn in the economy and frequent store closures caused by covid checks. Investors rewarded Jiumaojiu with a price-to-sales (P/S) ratio of 4.9, well ahead of former hot pot superstar Haidilao's (6862.HK) 1.87 and a modest 0.74. Xiaobuxiabu (0520.HK).

Fragile financial house

Jiumaojiu is making the big new investment as its own finances begin to show signs of stress due to China's economic malaise. More worryingly, the company's main Tai Er chain, which at the end of June represented about 80% of its 475 restaurants, is experiencing a sharp slowdown after several years of explosive growth, which is quite typical for this kind of trendy gastronomic mode.

The company's overall revenue fell 5.6% in the first half to 1.9 billion yuan, leading to a 69% drop in profit at 62.5 million yuan, according to its interim results released in late August. . Its cash position at the end of June stood at 1.8 billion yuan, meaning the new Guangzhou IFC Mall investment would gobble up more than half of that amount.