US Stock New IPO Outlook | Facing setbacks in listing, is the IPO story of YiPin Chicken Hotpot "not very appealing"?

Recently, The Great Restaurant Development Holdings Limited (referred to as "A Yi Pin Chicken Hot Pot") from Hong Kong publicly disclosed its prospectus, intending to list on NASDAQ in the United States. Previously, the company had secretly submitted its application to the SEC on September 15, 2023.

The bumpy journey of A Yi Pin Chicken Hot Pot towards listing can be traced back to 2019, when it submitted a main board listing application to the Hong Kong Stock Exchange under the name "A Yi Pin Development." Since then, it has updated its prospectus several times but has never succeeded in listing in Hong Kong.

Now, this Hong Kong dining brand has chosen to list on the US stock market. Whether it can achieve its goal and attract investors to vote with real money remains to be seen.

Continuous Revenue Decline Raises Concerns About Ongoing Viability

Public information shows that A Yi Pin Chicken Hot Pot is a Chinese chain restaurant brand from Hong Kong, specializing in various signature chicken hot pots. Since opening its first hot pot restaurant in Tsuen Wan in 2011, the company currently operates seven restaurants in Hong Kong, covering commercial areas (such as Mong Kok and Causeway Bay) as well as residential areas (Tsuen Wan, Hung Hom, and To Kwa Wan).

In 2022, 2023, and the first half of 2024, the company's revenues were approximately $13.0087 million, $20.4834 million, and $8.3356 million, with corresponding net profits of approximately $476,000, $3.4165 million, and $443,900.

In the first half of 2024, the company's operating revenue declined by nearly 20% year-on-year, mainly due to: (i) economic instability affecting market sentiment, leading consumers to be more cautious in their daily spending; and (ii) customers opting for outbound travel, including (a) China, which offers economical restaurant choices; and (b) Japan, which has always been one of the favorite vacation destinations for Hong Kong citizens, especially during this period when the yen depreciated against the dollar.

At the same time, the company's gross profit margin also decreased from approximately 26.7% in the first half of 2023 to about 16.1% in the first half of 2024, primarily due to rising inflation affecting food prices and labor costs.

However, while revenue has "shrunk," the company's costs and expenses have generally increased. According to Zhitong Finance APP, in the same period last year and the first half of 2024, the company's sales and marketing expenses were approximately $22,000 and $42,000, accounting for about 0.2% and 0.5% of total revenue during the same period; general and administrative expenses were approximately $100,000 and $200,000, accounting for about 0.9% and 2.5% of total revenue during the same period.

In fact, the company had submitted its application to the Hong Kong Stock Exchange as early as 2019. According to the prospectus disclosed at that time, the company's revenues from 2016 to 2018 were approximately 146 million, 165 million, and 174 million. Based on the current exchange rate (approximately 7.27), the company's revenues for 2022 and 2023 were approximately 94.66 million and 149 million RMB, indicating that the company's revenue has not only failed to show significant growth in recent years but has also experienced a slight decline The company admitted in its prospectus that there are doubts about its ability to continue as a going concern due to operating losses. As of June 30, 2024, December 31, 2022, and 2023, the company's working capital deficits were USD 3.183 million, USD 3.92 million, and USD 2.201 million, respectively, while the positive cash flows from operating activities were USD 586,800, USD 1.6045 million, and USD 4.1462 million, respectively.

Hong Kong's Restaurant Market Performance Weak

According to the prospectus, the Hong Kong restaurant market has been severely impacted by factors such as the pandemic and social control measures, with the overall market size of the Hong Kong catering service industry declining by approximately 29.4% year-on-year from 2019 to 2020. Since 2023, local demand has rebounded, and the recovery of the tourism industry has driven the revival of Hong Kong's catering industry, with the market size expected to reach HKD 109.5 billion in 2023. Looking ahead, the overall market size of the Hong Kong catering service industry is projected to grow at a compound annual growth rate of approximately 4.3% from 2024 to 2028.

It can be seen that the growth rate of the local restaurant market in Hong Kong is slowing and approaching saturation, while the exceptionally high operating costs have also led local catering businesses to face the crisis of declining profits.

From the performance of the catering industry in 2024, although the impact of the pandemic has diminished, the local restaurant market in Hong Kong remains bleak. Three major factors have led to a general decline in the performance of local restaurant stocks: Hong Kong residents consuming in mainland China, local residents being cautious in their spending, and changes in the consumption patterns of visitors to Hong Kong.

According to the interim reports disclosed by several local listed catering companies in Hong Kong, the revenue of Café de Coral Group (00341) in the first half of the year decreased by 1.2% year-on-year, and the net profit attributable to shareholders fell sharply by 28.2%. This marks the first decline in interim revenue for Café de Coral Group since the mid-year of the 2021 fiscal year during the pandemic; the profit attributable to shareholders of Fairwood Holdings Limited (00052) decreased by 57.26% year-on-year, nearly halving; and the interim profit of Tam Jai International (02217) fell by 55.8% year-on-year to HKD 36.068 million.

In the face of difficult circumstances, many companies, out of necessity, have chosen to expand into mainland China. For example, Café de Coral Group has expanded its store network in the Greater Bay Area, and the number of its stores in mainland China has now surpassed that of its fast-food outlets in Hong Kong; Tsui Wah once had up to 43 restaurants in the mainland market; as of August 24, the Min Wah Ice Hall under the Tai Hing Group also has 28 stores in mainland China.

In contrast, Yipin Chicken Pot has not only refrained from expanding into mainland China but has also made no new progress in its store opening plans in Hong Kong. As early as 2020, the company stated that it planned to open five new restaurants in residential areas of Hong Kong over three years ending December 31, 2023, and to open six hot pot restaurants at a rate of one every six months in the future. However, as of the latest disclosure date, the number of restaurants under the company has not changed compared to 2018

Can abandoning Hong Kong for the U.S. fulfill the dream?

Due to various factors such as policies and systems, overseas markets like the U.S. stock market have become a popular choice for many companies to go public.

According to Zhitong Finance APP, the listing conditions for U.S. stocks are relatively lenient. The requirements for companies intending to list on the New York Stock Exchange and NASDAQ are not as strict as those for Hong Kong stocks or A-shares. Additionally, as an international market, it has a higher appeal for capital. For companies with financing needs or those looking to expand overseas, choosing to list abroad can help broaden financing channels and enhance the company's international competitiveness and brand influence.

Data shows that in the first half of this year, a total of 29 Chinese concept stocks went public in the U.S., including 24 IPOs that raised approximately $1.95 billion; 4 SPAC listings, and 1 transfer.

However, it is important to note that Yi Pin Ji Bao Hot Pot does not belong to the popular sectors favored by U.S. investors, such as the internet and technology. As a company whose business is limited to the Hong Kong local market, Yi Pin Ji Bao Hot Pot would naturally find it easier to gain recognition from local investors if it chose to list on the Hong Kong stock market. The decision to abandon Hong Kong for the U.S. may also be a reluctant move after several unsuccessful attempts to list on the Hong Kong stock market.

Nevertheless, going public in the U.S. is not necessarily a smooth path. According to statistics from Huayi Capital, the amount raised by Chinese concept stock IPOs in the first half of this year was relatively low, with an average fundraising amount of $81 million. Only 2 companies raised over $100 million, while 19 companies raised less than $10 million, accounting for as much as 79%. Furthermore, 3 companies raised only $5 million.

Looking at the financial situation a year before the listing, only 7 companies had revenues exceeding $10 million in the past year, while 8 companies had revenues below $1 million, accounting for 27.5%. Most companies had revenues concentrated between $10 million and $100 million.

At the same time, more than half of the Chinese concept stocks saw their stock prices decline on the first day of trading. For instance, the caviar supplier from Hong Kong, Fu Yuan Group (TWG.US), saw a drop of 51.50% on its first trading day, while the toner cartridge exporter and seller, Xing Tu International (YIBO.US), fell by 30.25%.

It can be seen that as the trend of Chinese concept stocks going public in the U.S. warms up, most of the listed companies are still low-revenue and small-scale enterprises, and their stock price performance after listing is not optimistic. With poor fundamental performance coupled with stagnant store expansion, Yi Pin Ji Bao Hot Pot's path to going public in the U.S. may not be so simple