Zheshang Securities initiated coverage on XIAOCAIYUAN (00999) with an "Add" rating. XIAOCAIYUAN is a leading national chain of accessible and affordable Chinese cuisine. The firm forecasts XIAOCAIYUAN's revenue for 2025-2027 to reach RMB 5.5/6.7/8.0 billion, with net profit attributable to shareholders of RMB 730/880/1,060 million, corresponding to a PE ratio of approximately 14x/11x/9x. Considering the company's leading position in core markets, its supply chain and digital capabilities, and brand competitiveness, the firm believes the company deserves a valuation premium. Zheshang Securities' main views are as follows: As a leading national chain in the accessible Chinese dining sector, XIAOCAIYUAN is driven by steady expansion. The company focuses on providing consumers with high-quality, standardized Chinese dining experiences. By streamlining its SKUs, improving its supply chain system, investing in automation equipment, and optimizing store sizes, XIAOCAIYUAN is entering a phase of efficiency realization, with significant potential for nationwide expansion. From 2021 to 2024, the company's revenue grew from RMB 2.65 billion to RMB 5.21 billion, representing a CAGR of approximately 25%. Its gross margin improved from about 66% to around 68%, and its net profit margin increased from about 9% to approximately 11%, indicating steady improvements in profitability and capital returns. The Chinese dining market offers vast growth potential, characterized by a trillion-yuan scale and increasing industry consolidation. The mainland China catering market reached approximately RMB 5.5+ trillion in 2024, with a CAGR of about 9% from 2020-2024. The structure between Chinese and non-Chinese cuisine is distinct: in terms of growth rate, non-Chinese cuisine has outpaced Chinese cuisine, with CAGRs of about 7% and 4%, respectively, from 2018-2023. In terms of scale, Chinese cuisine is larger, with the market size for Chinese/non-Chinese cuisine reaching approximately RMB 4,000+ billion and RMB 1,200+ billion in 2023. Excluding the hot pot segment due to its high standardization and different service structure, the Chinese cuisine market size in 2024 was approximately RMB 3.6+ trillion and is projected to grow to RMB 5.3+ trillion by 2028. The CAGR from 2019-2024 was about 3%, with an average annual growth rate of around 10% expected from 2025-2028. The standardization and digitalization of Chinese cuisine are advancing, yet the chain rate is only 23.2%, significantly lower than that of the US (59.2%) and Japan (52.3%). The mass-market segment for Chinese meals under RMB 100 accounts for over 60% of the market, with a scale of about RMB 3 trillion, and is expected to achieve a CAGR of 9.4% from 2024-2028, making it the primary battleground for chain brands. While domestic market supply density is nearing saturation, shifting competition towards existing market share, overseas expansion has emerged as a potential growth engine. The international Chinese cuisine market is projected to grow from USD 233 billion in 2020 to USD 445.2 billion by 2027, with Southeast Asia, Europe, and America being the main targets for expansion. Leveraging cultural affinity and standardization capabilities, Chinese dining brands possess long-term international growth potential. With a proven model and a tiered expansion strategy, XIAOCAIYUAN is entering a period of efficiency realization. Backed by an operational model validated across different city tiers, a clear roadmap for gradual urban expansion, and a continuously optimized store efficiency system, XIAOCAIYUAN is embarking on a national expansion phase centered on predictability. The company's strategy focuses on "stabilizing same-store sales, expanding the store network, and improving efficiency." On one hand, same-store performance has been repeatedly verified across various city tiers, with short-term fluctuations not undermining the model's replicability. Concurrently, the delivery business is being structurally optimized, with the revenue mix shifting back towards dine-in. On the other hand, the company is advancing its expansion through a tiered approach: deepening penetration in Tier 1 and new Tier 1 cities, scaling up in Tier 2 cities, and steadily entering lower-tier markets. The number of stores is expected to increase from 788 by the end of 2025 to approximately 1,000 by the end of 2026, with an expansion pace well-aligned with the urban hierarchy. Operationally, by streamlining SKUs, investing in automation, and reducing store footprints, the company is continuously lowering the operational complexity per store, allowing the labor cost ratio to decline even during expansion. On the supply chain front, the RMB 1+ billion central facility in Ma'anshan is nearing completion; it is slated to become the supply chain hub supporting up to 3,000 stores in the future, further amplifying economies of scale and logistics efficiency. Overall, XIAOCAIYUAN has established a growth framework characterized by a "reliable model, clear expansion path, and realizable efficiency," laying a solid foundation for medium to long-term earnings growth. Risk warnings include store expansion and operational risks, fluctuations in raw material costs, and macroeconomic and policy risks.
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