Hotpot Brand Guoquan Serves Up IPO With Profit Appetizer - Dingdong (Cayman) (NYSE:DDL)

Key Takeaways:

China’s at-home dining brand Guoquan Food has built a network of more than 9,000 franchise outlets selling its meal ingredients
The company made it into the black for the first time last year, posting a net profit of 240 million yuan as it benefited from an expanded store network and bulk buying

By Emily Chan

The Covid crisis ripped through parts of the Chinese economy, but it was growth opportunity for companies catering to a community in lockdown. One food firm made its name during the pandemic by providing at-home diners with all the ingredients for a flavorsome hotpot.

Fresh from turning its first annual profit, pandemic beneficiary Guoquan Food (Shanghai) Co. Ltd. is now aiming to take its business to the next level with a listing on the Hong Kong Stock Exchange.

The company brands itself as a leading one-stop shop for “eat at home” meals, providing ingredients for hotpot and barbecue through a network of franchise stores. By the end of last year, it boasted 9,221 Chinese outlets and ranked 59th on a list of China’s top 100 unicorns in the new economy.

Guoquan’s cumulative revenue over the past three years reached 13.9 billion yuan ($2.02 billion), according to the preliminary prospectus filed last Monday. Last year alone revenue came in at 7.17 billion yuan, an 81% jump from a year earlier.

Still, the company did not manage to break even in 2020 and 2021, posting losses totaling 505 million for the two years as it expanded its workforce and spent on promotions for its franchisees. But Guoquan finally crossed the profit threshold last year, benefiting from an increase in stores, cost controls and scale effects on procurement. It logged a net profit of 240 million yuan, outperforming e-commerce titans that have been exploring similar markets in recent years, such as Dingdong (Cayman) Ltd. (NYSE:DDL), which posted a net loss of $121 million (830 million yuan) last year.

Guoquan’s founder, Yang Mingchao, started as a food stall owner in China’s eastern city of Zhengzhou. While opening a hotpot restaurant he saw the business potential of a supply chain for meal ingredients. His first supermarket aimed at hotpot lovers launched in Zhengzhou in 2017 but the store struggled at first. It was not until the Covid outbreak in 2020 that surging demand for home dining triggered explosive growth. The chain expanded rapidly, from 1,441 franchised outlets at the start of 2020 to 9,216 franchise stores and five self-operated outlets at the end of last year.

Franchise Base

It is worth noting that virtually all Guoquan’s stores operate under the franchise model. Sales of the company’s “Guoquan Shihui” products to franchisees generate most of the company’s revenues, rather than franchise fees.

Guoquan provides seasonings, thinly sliced meat, seasonal vegetables, seafood and other ingredients for a communal hotpot meal cooked in a flavorful broth, traditionally enjoyed in the winter months. However, the company has diversified beyond hotpot to reduce seasonal exposure and to add further revenue streams, developing eight major product lines in recent years including barbecue products, ready-to-cook meal kits, fresh food, beverages and snacks.

More than 95% of sales last year came from the Guoquan Shihui products. Hotpot remained the biggest earner, with annual revenue of 5.35 billion yuan, accounting for nearly 76% of the total. The share of revenue from barbecue products and other food products rose slightly to around 10% and 14% respectively.

Competition in China’s fresh food market is intense. Guoquan must contend with traditional supermarkets and wet markets as well as food e-commerce platforms such as Freshhema and Dingdong. Therefore, it has been forced to sacrifice gross margin to stay competitive. In 2021 its gross profit margin was just 9%. The margin increased to 17.4% last year, but it still lags Dingdong’s 30.9%.

To tackle the issue, Guoquan has been working on streamlining its supply chain and reinforcing its production base. The company works with more than 279 ingredient suppliers, including established names such as China Yurun Food (1068.HK), Sanquan Food (002216.SZ) and Guolian Aquatic Products (300094.SZ). It has established three production bases in Henan Province to produce and process some of its main products, such as beef, meatballs and hotpot soup base, to bolster operational efficiency and profitability.

In addition, Guoquan has built a pre-supply chain with its ingredient suppliers using a central kitchen and cold chain distribution model. It is also leveraging the integrated warehousing and distribution services of third-party logistics providers to speed up the product flow. The system links factories with 14 digital central warehouses from which products are distributed to retailers. With its enhanced supply chain, the company has extended its reach into third- and fourth-tier cities, with related revenue reaching 2.44 billion yuan last year, nearly 38% of total turnover.

Online Expansion

However, the company’s rapid growth may have hit a franchising bottleneck. Franchise growth slowed to around 34% last year, well below the pace of nearly 60% the year before. To fill the gap, the company has actively expanded its online sales channels such as the “Guoquan App”, WeChat mini-programs and popular social commerce platforms, as well as cooperating with third-party takeaway platforms such as Meituan and Ele.me to deliver food ingredients.

The online presence is helping the company to widen its customer reach. Aside from that, digital tools to manage inventory or in-store sales are also helping to track supply and demand for products in real time. However, it would take a major investment for Guoquan, which only just turned a profit, to shift from a traditional retail structure to a new retail model. It is unclear whether the online space will prove to be a money spinner or a money pit for the company.

However, the company is not short of capital, having attracted investors with its rapid growth. Guoquan completed seven rounds of financing between August 2019 and November 2022, raising about 3 billion yuan from investors including IDG Capital, Tiantu Capital, Maotai Investment Fund, CMB International and the hotpot company’s major supplier Sanquan Food. According to data from enterprise credit agency Qichacha, Guoquan’s valuation had reached 13 billion yuan before the company filed for a Hong Kong listing.

Media reports have indicated that Guoquan hopes to raise $300 million to $500 million in the IPO. Assuming a new share offering of 25% of the enlarged share capital, the company’s market value would reach a maximum of 13.7 billion yuan, close to the figure after the last financing round. On that basis, its price-to-earnings (P/E) ratio would be as high as 57 times, in contrast to only 30 times and 19 times for peers Yihai International (1579.HK) and Sanquan Food.

Unless Guoquan posts an appetizing increase in net profit this year, the high valuation may make investors think twice about putting their money into the pot.

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