China Securities: The fast food industry is encountering a breakthrough moment for chain development, rating the sector as "recommended."

Zheshang released a research report stating a buy rating for the Chinese fast food industry. The favored order of tracks is rice fast meals > dry mixed noodles > retail model for pastries: rice fast meals have a large scale and a mature model, with the price war accelerating the concentration of market share towards strong supply chains; dry mixed noodles possess optimal standardization genes and significant room for increased concentration; retailing of pastries is a correct direction but relies heavily on trust assets. The current market lacks differentiation in pricing between high-quality and mediocre companies, and in the next round of recovery, high-quality companies will regain valuation premiums. Chinese fast food is one of the tracks illustrating this framework, with the industry currently experiencing a price war and a cleansing phase, providing opportunities for leading companies with supply chain advantages to expand their market share. In the medium term, Chinese fast food is expected to replicate the systematic pricing trajectory seen in the beverage sector. The main points from Huachuang Securities are as follows: Fast food is a core asset in restaurant investment that has been repeatedly validated by global capital markets. Almost all large-cap restaurant companies overseas are fast food businesses, while Chinas 8 trillion yuan Chinese fast food market has a low level of securitization and concentration, with the leading CR5 market share at only 3.6% in 2024, representing a significant blank space among major economies that is category-specific but brandless. Compared to earlier periods, XIAOCAIYUAN, Green Tea, and XIAO NOODLES have successively gone public from 2024 to date, while Lao Xiang Ji and Yuan Ji Foods are gradually submitting applications, indicating that the industry is entering a capitalized phase. Reasons for the past dispersion of Chinese fast food: Developed and open wholesale supply chains have provided small restaurants with quasi-private label operational capabilities, while high-density population clusters support the long-term survival of single stores. Since 2020, supply chains have become re-monopolized, with leading companies building deep processing capabilities, standardizing traffic entry, utilizing shopping malls plus delivery, and maturing tools for franchise and digital store management. The efficiency advantages of chain models have begun to systematically outpace single stores, with market share shifting from small restaurants to branded stores at an annual chainification rate of 1-2 percentage points. This beta does not rely on the growth rate of the restaurant sector and may even accelerate during industry cleansing periods. Category genes determine the fate of chainification. Using high-frequency, essential needs standardizable supply chains regionally adaptable taste standards for selection: rice fast meals and dry mixed noodles are clearly in the first tier, followed by pastries. On the level of key companies: XIAO NOODLES is the validator of the standardized paradigm in the noodle sector, precisely aligning with the optimal intersection of no soup/light soup + spicy flavor + industrialized noodles + light protein; Yuan Ji Yun Jiao adopts a mixed retail model of freshly packaged + selling raw and cooked to circumvent the value perception traps of pastries, with over 4,000 stores; Lao Xiang Ji, with self-raising poultry and a central kitchen, has become the leading quality-oriented company in the Chinese fast food market. Malatang (spicy hot pot) is the category that has undergone the most thorough chainification in Chinese fast food, with Yang Guo Fu and Zhang Liang each having approximately 5,000 stores. However, due to the highly socialized supply chain and the stronger category mindset over brand mindset, they have long failed to establish large-cap companies; this serves as the best reflection of how standardization solves replication but does not address differentiation. Zhongyin Babi Food, as the only large-scale listed example in the pastry sector, essentially operates as a supply chain output company with a central factory, cold chain, and franchise model. It presents robust finances and strong defensiveness but is limited by the low price ceiling of breakfast items, which restricts its growth elasticity. Risk warnings: Consumer sentiment in the restaurant sector may fall short of expectations; ongoing price wars between delivery platforms and price cuts in the same industry continue to suppress average order values and single-store profitability models; the rapid expansion of franchises brings food safety and quality control risks, where a single incident could cause non-linear impacts on brand perception; increased density of stores in core areas leads to same-store traffic diversion.