Stumbling Jiumaojiu Coughs Up Big Bucks for Local Mega-Mall

Key Takeaways:

• Jiumaojiu said it will 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 own finances show sign of stress, including a 23.2% drop in same-store sales for its core Tai Er restaurant chain in the first half of the year

By Doug Young

What do you do when your main restaurant business is hurting due to China’s slowing economy and frequent forced closures as a result of the country’s strict pandemic-control measures?

You splash out big money on a hip 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 fishy-smelling story has all the trappings of a company trying hard to curry favor with its local government, in this case in Guangzhou, capital of south China’s affluent Guangdong province where Jiumaojiu is based.

We’ll return to what might be Jiumaojiu’s true motivation for this investment shortly, and the longer-term implications for its newly announced investment of up to 1 billion yuan ($140 million) that could suck up a big chunk of its current cash holdings. But first let’s review the actual deal, which involves a major new retail-office project called the Guangzhou IFC Mall Project being built in the city’s Tianhe district.

According to Jiumaojiu’s announcement released late on Thursday, it will purchase 26% of the company developing the project, which will consist of about 30,000 square meters of commercial and office space. It will make the investment in several tranches, starting with a 650 million payment, followed by several smaller ones. When all is said and done, its total maximum investment would end up at about 1 billion yuan.

Jiumaojiu said it would relocate its headquarters to the project upon completion, which is expected in 2026. It said such a move would help to “maintain and develop its core culture of youth and trendiness,” and would benefit the company from its close proximity to the heart of Guangzhou’s business, fashion and commercial center.

“Besides, the company also believes that by such relocation, it will enable the group to attract more outstanding talents…to support the group’s expansion plans, which 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,” it added.

That may all sound fine and good, but investors didn’t seem to share Jiumaojiu’s enthusiasm. The stock tanked 14% in early trade on Friday, wiping out about $350 million in market value. Despite that, the stock is still up slightly this year, a rarity these days among Hong Kong-listed Chinese companies whose shares are mostly down sharply since January. But Jiumaojiu may soon join those ranks if it continues making this kind of investment decision.

The company is one of China’s few restaurant operators that is still profitable, as most of its rivals have fallen into the red lately on lower consumer spending due to the slowing economy and frequent store closures caused by Covid controls. Investors have rewarded Jiumaojiu by giving it a price-to-sales (P/S) ratio of 4.9, well ahead of the 1.87 for former hot pot superstar Haidilao (6862.HK) and the lowly 0.74 for Xiaobuxiabu (0520.HK).

Shaky financial house

Jiumaojiu is making the big new investment as its own finances start to show signs of stress from China’s economic malaise. Most worrisome, the company’s core Tai Er chain, which accounted for about 80% of its 475 restaurants at the end of June, is experiencing a sharp slowdown after several years of explosive growth, which is quite typical for this kind of trendy dining fad.

The company’s overall revenue fell 5.6% in the first half of the year to 1.9 billion yuan, leading to a 69% profit decline to 62.5 million yuan, according to its interim results published in late August. Its cash 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 if it chose to finance the project using its cash on hand.

A deeper dive into the results shows the Tai Er chain is rapidly aging, with same-store sales for the brand plunging 23.2% during the period. That drop reflected a similarly large decline in the chain’s seat turnover rate, which fell to 2.9 from 3.7 in the year-earlier period. At the same time, average spending per customer for the also dropped slightly to 78 yuan from 79 yuan a year earlier.

So, why is a company whose business is clearly under pressure spending such a large sum to buy a new headquarters that it could easily rent for far less?

To understand that, we should first look at the entities behind the Guangzhou IFC Mall’s developer. That list includes entities that appear to be mostly state-owned, as well as Country Garden (2007.HK), one of China’s leading developers that also happens to be based in Guangdong. China watchers will know that the country’s real estate market is currently going through an unprecedented slowdown, with private developers like Country Garden struggling under huge debt that has led some to default.

Accordingly, this move looks like the local Guangzhou government is calling on a local corporate champion that still has some cash to assist in providing funds to keep this particular project moving. Construction of the project has already begun, and the target completion date is 2026. But many such projects – most often residential – have seen construction grind to a halt as their developers ran out of cash and were unable to raise more due to their dire financial situation.

As that happened, many people who had purchased homes in such properties began refusing to pay their mortgages, further exacerbating the situation. We should note that this particular project is a commercial one, rather than residential, and so may not be under quite as much pressure as the many stalled residential developments around China.

But at the end of the day, Jiumaojiu’s investment decision looks more like a government relations exercise than a commercial one, aimed at helping a local project with lots of connections to the local economy. While such government relations investing is quite common in China, and even necessary, investors may not see it as the best use of funds for a company whose own business is also showing signs of strain.