Banu Ladles Up New Hotpot Choice For Hong Kong Investors

The restaurant chain's IPO application reveals a complex mix of market trends in the first quarter, including a big rise in customer numbers but lower spending per customer

Key Takeaways:

• Banu International has filed to list in Hong Kong, reporting strong revenue and profit growth in this year's first quarter
• The hotpot chain's listing application shows that Chinese consumers were dining out more often in the first quarter, but were spending less per meal

By Doug Young

A new Hong Kong IPO application by hotpot chain Banu International Holding Ltd. is offering a complex mix of the latest restaurant trends in China, suggesting consumers are becoming more frugal but also continue to enjoy dining out.

Banu is one of several restaurant operators lining up to list in Hong Kong, in what could be one of the larger such IPOs from that group, raising up to $100 million. The company positions itself at the premium end of the hotpot market, and, indeed, its average spend per customer is about 40% higher than leading chain Haidilao (6862.HK), which caters to more mainstream diners.

Whether its status as a premium brand will help the company in the current economic climate is an open question that could determine whether investors buy into its IPO. Most Chinese restaurant operators reported declining same-store sales last year, largely due to lower spending per customer as consumers became more cautious in China's slowing economy.

It's unclear if that trend has eased this year, since most restaurant operators are listed in Hong Kong, which only requires companies to report their financial results twice a year. Signals from other retailers suggest a return to revenue and same-store sales growth since the start of this year, fueled by growing government initiatives aimed at boosting consumer spending.

One of the few restaurant operators to report first-quarter results is Yum China (YUMC.US; 9987.HK), operator of the KFC chain in China, which said its first-quarter same-store sales growth stabilized and was flat year-on-year, after declining 3% in 2024. But the company reported that its average ticket, similar to average spending-per-customer at traditional sit-down restaurants, dropped 4% year-on-year in the first quarter.

Banu's listing application also suggests that more people resumed dining out in the first quarter, though they continued to spend cautiously. The company's revenue rose 26% year-on-year to 709 million yuan ($99 million) from 564 million yuan a year earlier, though much of that looks attributable to new store openings. The company had 145 restaurants across China at the end of March, up from 111 at the start of 2024.

A deeper dive into some of its metrics shows Banu's customer traffic rose sharply during the first quarter from a year earlier, which helped to offset lower spending per customer. Its number of customers served rose 40% to 5.41 million during the quarter from 3.87 million a year earlier, sharply driving up its table turnover rate to 3.7 times daily from 3.0 times over that period.

But as we've already noted, average spending per customer dropped 5.3% during the quarter to 138 yuan from 148 yuan a year earlier, continuing a downward trend. By comparison, Haidilao's average spending per customer was a far lower 97.5 yuan last year, but was down by a milder 1.6% from 99.1 yuan in 2023.

Restaurants and other retail businesses across China enjoyed a strong post-pandemic rebound in 2023, as consumers engaged in "revenge spending" after three years of frequent store closures and strict limits on their movements both within their hometowns and around China. But that rebound ran out of steam towards the end of 2023 as China's economy slowed and the job and property markets weakened, causing consumers to spend more cautiously.

Centralized kitchens

Banu's financials show it appears to be weathering the slowdown relatively well, despite the weak consumer environment. Like many of its peers, it suffered declining same-store sales last year, with that metric falling 9.9% for the year compared with 2023. But its same-store sales returned to growth in the first quarter, up 2.1% year-on-year.

Banu was founded in Central China's Henan province 2001, making it one of China's earlier chains to focus on the hotpot format that has come to be one of the most popular on the country's dining scene. Henan is still home to the company's largest concentration of restaurants, with 53, or more than a third, scattered around the province.

The company is also notable for its focus on China's smaller cities despite its premium dining status. Among its 145 restaurants, nearly 80% are located in second-tier and lower cities.

Banu cites third-party market data showing that it's China's third-largest hotpot chain, and the category's biggest premium chain with 3.1% of the market. But that market is also quite fragmented, with the top five brands controlling just 8.1% of the overall market. That suggests Banu could emerge as a major player if it can use its scale to keep expanding.

Surprisingly, the company is quite low-key in discussing future expansion plans in its listing document, which would normally be a big selling point for investors. But in such economically uncertain times, it may want to maintain some flexibility. That said, it has been steadily increasing its net store openings in recent year, with 35 new outlets opened last year, up from 25 in 2023 and 11 in 2022.

One of Banu's strengths appears to be its strong reliance on centralized kitchens, which not only lower costs but also provides a more consistent dining experience. The company operates five central kitchens, as well as a specialized ingredient-processing facility.

"We place great emphasis on lean store operations," it said in the listing document. "Supported by our central kitchens and cold chain infrastructure, we have implemented processing and small-batch packaging of ingredients, significantly reducing our restaurant reliance on in-store equipment and labor."

The company's growing scale and reliance on centralized kitchens has helped its profitability, with its restaurant operating margin moving steadily up from 21.3% in 2023 to 23.7% in the first quarter of this year. That improvement has helped the company to steadily increase its profits, including a 58% rise to 55.2 million yuan in the first quarter from 35 million yuan a year earlier.

Haidilao is the most obvious comparison for Banu when trying to calculate a market value, with the former currently trading at a price-to-earnings (P/E) ratio of 16 and price-to-sales (P/S) ratio of 1.74. Similar valuations would value Banu at between 2 billion and 4 billion yuan, providing a tasty new dining choice for Hong Kong investors.