Preview of US IPOs: consecutive setbacks in listing, is the IPO story of Yipin Chicken Hotpot "not too fragrant"?

In recent days, The Great Restaurant Development Holdings Limited from Hong Kong (referred to as "One Pot Chicken Hot Pot") has publicly disclosed its prospectus for an IPO on the NASDAQ in the United States. Previously, the company had filed confidentially with the SEC on September 15, 2023. The bumpy journey to the IPO of One Pot Chicken Hot Pot can be traced back to 2019 when it submitted an application for a main board listing on the Hong Kong Stock Exchange under the name "One Pot Development". Since then, it has updated its prospectus several times but has been unable to successfully list in Hong Kong. Now, this Hong Kong restaurant brand has chosen to list on the US stock market. Whether it will succeed in its goal and attract investors to vote with real money remains to be seen. Declining revenue raises doubts about continued operations According to public information, One Pot Chicken Hot Pot is a Hong Kong-based Chinese chain restaurant brand specializing in various types of chicken hot pot. Since opening its first hot pot restaurant in Tsuen Wan in 2011, the company currently operates 7 restaurants in Hong Kong, covering commercial areas (such as Mong Kok and Causeway Bay) and residential areas (Tsuen Wan, Hung Hom, and To Kwa Wan). In 2022, 2023, and the first half of 2024, the company's revenues were $13.0087 million, $20.4834 million, and $8.3356 million respectively, with corresponding net profits of $0.476 million, $3.4165 million, and $0.4439 million. In the first half of 2024, the company's operating income fell 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 choosing outbound tourism, including (a) China, which provided affordable dining options; (b) Japan has always been one of Hong Kong residents' favorite holiday destinations, 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, mainly due to rising inflation affecting food prices and labor costs. However, while revenue has shrunk, operating expenses have generally increased. It is understood that in the same period last year and in the first half of 2024, the company's sales and marketing expenses were approximately $22,000 and $42,000 respectively, accounting for 0.2% and 0.5% of total revenue; and general and administrative expenses were approximately $100,000 and $200,000 respectively, accounting for 0.9% and 2.5% of total revenue in the same period. In fact, the company had filed with the Hong Kong Stock Exchange as early as 2019. According to the prospectus disclosed at that time, the company's revenues for the years 2016 to 2018 were HK$146 million, HK$165 million, and HK$174 million respectively. Converted at the current exchange rate (approximately 7.27), the company's revenue in 2022 and 2023 were approximately 94.66 million yuan and 149 million yuan, indicating that in recent years, the company's revenue has not only not shown significant growth but has also experienced a slight decrease. The company admitted in the prospectus that due to operating losses, there are doubts about its continued operating capacity. As of June 30, 2024, December 31, 2022, and 2023, the company's operating capital deficits were $3.183 million, $3.92 million, and $2.201 million respectively, and the operating cash flows generated were -$0.5868 million, $1.6045 million, and $4.1462 million respectively. Weak performance of the Hong Kong catering market According to the prospectus, the Hong Kong catering market has been severely affected due to factors such as the pandemic and social distancing measures, with the overall market size of the catering industry in Hong Kong decreasing by about 29.4% from 2019 to 2020. Since 2023, local demand has rebounded, and the recovery of the tourism industry has driven the recovery of the catering industry in Hong Kong, with the market size expected to reach HK$109.5 billion in 2023. Looking ahead, the overall market size of the catering industry in Hong Kong is expected to increase 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 catering market in Hong Kong has slowed down and is approaching saturation, and the particularly high operating costs have also caused local catering enterprises in Hong Kong to face a crisis of declining profits. Looking at the performance of the catering industry in 2024, although the impact of the pandemic has subsided, the situation of the local catering market in Hong Kong remains bleak. Factors such as Hong Kong residents spending more on the mainland, local residents becoming more cautious in their spending, and changes in spending patterns of tourists to Hong Kong have led to a general decline in the performance of the local catering industry. According to the interim financial reports disclosed by several Hong Kong local catering listed companies, CAFE DE CORAL H (00341) saw a 1.2% year-on-year decrease in revenue in the first half of the year, while its net profit attributable to shareholders fell by a substantial 28.2%, marking the first decline in mid-year revenue since the 2021 fiscal year during the pandemic period; FAIRWOOD HOLD (00052) saw a decrease of 57.26% in profit attributable to shareholders, almost halving; TAM JAI INTL (02217) saw a 55.8% decline in interim profit, to HK$36.068 million. Under difficult circumstances, many companies have chosen to expand into the mainland out of necessity. CAFE DE CORAL H has expanded its network of stores in the Greater Bay Area, and the company now has more stores in mainland China than the fast-food restaurant chain in Hong Kong; Tsui Wah had up to 43 restaurants at one point in the mainland market; as of August 24, TAI HING GROUP's Caf de Coral Ice Room had 28 stores in mainland China. In contrast, One Pot Chicken Hot Pot has not expanded into the mainland, and there has been no progress in its plans to open new stores in Hong Kong. As early as 2020, the company stated that it planned to open five new restaurants in residential areas of Hong Kong in the three years ending December 31, 2023, and then open six hot pot restaurants every six months thereafter. However, as of the latest disclosure date, the number of restaurants under the company has remained unchanged from 2018. Can dreams come true by listing in the US after abandoning Hong Kong? Due to policy and institutional restrictions, it may be difficult for Hong Kong-listed catering companies to achieve sustainable growth. Migration to overseas markets, especially the US, may become a new strategic choice for these companies. With the rise of the Chinese economy and global capital markets, listing in the US may bring more possibilities for these catering companies to obtain new financing and development opportunities. The decision to list in the US by One Pot Chicken Hot Pot is also a strategic adjustment made in response to the difficult business environment in Hong Kong. Whether this move can help the company turn its fortunes around and attract investors remains uncertain. It will depend on how well the company can seize the opportunities in the US market, adapt to the local operating environment, and provide potential investors with confidence and growth prospects.Due to various factors, such as the US stock market and other overseas markets, have become the preferred choice for many companies to list.It is understood that the listing conditions for US stocks are relatively relaxed, and the requirements of the NYSE and Nasdaq for companies preparing to go public are not as strict as those of the Hong Kong stock exchange and A-shares. At the same time, as an international market, the US stock market also has higher appeal for funds. For some companies with financing needs or seeking to expand overseas business, choosing to list overseas 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 US, including 24 IPOs which raised a total of approximately $1.95 billion, and 4 SPAC listings, and 1 transfer listing. However, it should be noted that One Chicken Hot Pot does not belong to the favored industries of US stock investors such as the internet and technology, and as a business limited to Hong Kong, if One Chicken Hot Pot chooses to list in Hong Kong, it is naturally more likely to be accepted by local investors. Choosing to go to the US instead of Hong Kong may also be a last resort for the company after attempts to list in Hong Kong failed. However, going public in the US is not a smooth journey. According to data from Huayi Xin Capital, the average 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. There were only 2 companies that raised more than $100 million, while 19 companies raised less than $10 million, accounting for 79%. In addition, 3 companies raised only $5 million; Looking at the financial situation in the year before the listing, only 7 companies had revenue of over $100 million in the past year, while 8 companies had revenue lower than $10 million, accounting for 27.5%. Most companies had revenue concentrated between $10 million and $100 million. At the same time, more than half of the Chinese concept stocks experienced a drop in stock price on the first day of listing, such as the Hong Kong-based caviar supplier, Fu Yuan Group (TWG.US), which dropped 51.50% on the first day, and the carbon toner cartridge manufacturer and seller, StarMap International (YIBO.US), which dropped 30.25% on the first day. It can be seen that as Chinese concept stocks are listing in the US, most listed companies are still low in revenue and small in scale, and their stock price performance after listing is not optimistic. The combination of poor fundamentals and stagnant store expansion may make the path to listing in the US for One Chicken Hot Pot not so simple.