Sunday, 25 November 2012

Placing Bets on HK Restaurant Chain


A cup of milk tea in its signature cup and saucer at Tsui Wah

This year hasn't been a good one for IPOs in Hong Kong.

And some companies that went public last year are fading fast.

A prime example is Milan Station, the second-hand luxury handbag dealer, that launched its IPO in May last year with a record 2,179 times subscribed and its shares rose 66 percent on the first day of trading.

But now the stock is worth two-thirds its offer price.

Where did it all go wrong?

The company took a beating from other competitors and there were questions about supply when it was revealed that over 46 percent of its handbags were actually brand new and not used, which sparked concerns of parallel importing. There were also worries about Milan Station's ambitions to open 24 stores between 2011 and 2014; the company website says its has expanded from 14 to 17 stores.

However, upscale cha chaan teng Tsui Wah has plans for an IPO to fund expansion on the mainland.

Pretty good fish balls with rice noodles in soup
It was started in 1967 and co-founded by Lee Yuen-hong, a former cook and delivery waiter. The outlets are generally brightly lit, the staff efficient and the menu has something for everyone, from fish ball noodles to boneless Hainan chicken rice, pork buns and baked spaghetti. It's also known for its lai cha or milk tea.

Tsui Wah has ambitious plans to expand in Shanghai and Guangdong by increasing the number of outlets by 24 to 28 by 2015 and build central kitchens in the two places to cater to increasing consumer demand.

The central kitchens will be within a two-hour range in transportation and be able to supply standardized food and beverage items to support 60 restaurants.

And so the company aims to raise HK$756.67 million through an IPO of 333.33 million shares, or 25 percent of its share capital. The shares are expected to be set at between HK$1.89 to HK$2.27.

"The execution risk is probably the biggest concern in relation to Tsui Wah's bold expansion move on the mainland where consumers have a handful" of similar restaurants, said a fund manger.

Also worth keeping in mind is that its competitors such as Cafe de Coral and Fairwood have failed to penetrate the mainland fast food market.

The signature dish of boneless Hainan chicken rice
Tsui Wah is also keen on expanding in Hong Kong by adding 10 more outlets and build another central kitchen.

Some other interesting facts about the restaurant chain that was published in its prospectus:

- Each customer in Hong Kong spends an average of HK$74.

- The average number of receipts per table per day rose to 25 from 24 in the previous year. This number is a metric of restaurant efficiency.

- The Hong Kong market is likely to be driven by rising selling prices and delivery services

- Eight of its 26 restaurants are open 24 hours.

We hope Tsui Wah does well on the mainland. It should succeed in Guangdong, where eating habits and tastes are similar, while Shanghai is always looking for something sophisticated.

It's about time Hong Kong fights back on China's efforts to sinicize the former British colony and does its part to influence the mainland -- through milk tea and fish ball noodles.

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