Taking a bowl of rice noodles overseas, is it an act of helplessness in TAM JAI INTL's (02217) profit dilemma?

Recently, TAM JAI INTL (02217) released its six-month performance report ending on September 30, 2023, and declared its first dividend since listing in 2021. Benefitting from the significant recovery in the catering industry this year, TAM JAI INTL recorded a nearly 10% increase in revenue compared to the same period last year in its semi-annual report. However, while the number of stores continued to increase, the company's net profit slightly declined. The inability to restore profitability as expected may become a concern for investors. Looking at TAM JAI's stock price this year, it reached a high of HKD 2.755 at the beginning of the year and has been on a downward trend since then. As of the closing on the 17th, the stock price was HKD 1.32, with a maximum decline of 60% this year. With the current stock price at a historical low, can TAM JAI INTL take advantage of the "east wind" of consumption recovery and return to a growth trajectory? The increase in store numbers highlights the issue of "increased revenue but not increased profitability." TAM JAI INTL mainly operates two major brands, "TAM JAI Yunnan Rice Noodles" and "TAM JAI Sanguo Rice Noodles," and is a fast-casual chain restaurant operator primarily based in Hong Kong, with involvement in mainland China, Singapore, and Japan. Looking at the performance in recent years, the company's revenue has continued to increase, but its net profit has declined since 2022, showing signs of "increased revenue but not increased profitability." According to the latest financial report, TAM JAI INTL achieved revenue of HKD 1.387 billion and a 10% year-on-year growth in the first half of the 2024 fiscal year. During this period, net profit decreased by 1.4% to HKD 81.629 million, with earnings per share of 6.1 HK cents. The company stated that the growth in income in the first half of the year was mainly driven by the net increase of 14 restaurants in the group's restaurant network and the growth of comparable restaurant income in Hong Kong. It is understood that the company's operating profit margin also increased from 17.1% in the first half of 2023 to 18.5%, mainly due to a decrease in packaging and consumable expenses driven by a reduction in takeaway orders, as well as lowered food and beverage costs through price adjustments and product substitutions. Despite the impact of the pandemic, TAM JAI INTL continues to adhere to an expansion strategy. In the 2022 fiscal year, TAM JAI INTL had a total of 175 stores, and as of September 30, 2023, the company expanded its restaurant network to 222 restaurants. According to the previous prospectus, the planned number of new store openings for the 2023 fiscal year was 55, and the company is close to completing its full-year store opening plan. Looking ahead, the company will continue to expand its business network, including exploring Western markets based on its Australian business. In mainland China, Singapore, and Japan, the company's business has entered the second stage of development, focusing on adapting to local markets, enhancing brand awareness, and increasing market penetration. The company stated that it plans to slow down the pace of expansion for the remaining period of the fiscal year ending on March 31, 2024, with new restaurants mainly concentrated in second-tier cities in Guangzhou and the Greater Bay Area. Profit decline due to the trend of consumer downgrading Since 2023, with a series of policies to boost domestic demand and promote consumption, offline traffic has gradually recovered, and the catering industry has also felt the warmth. Data from the National Bureau of Statistics shows that from January to June 2023, the national catering revenue reached 2.4329 trillion yuan, a year-on-year increase of 21.4%, far surpassing the 8.2% increase in total retail sales of consumer goods. The catering revenue from entities above the designated size reached 623 billion yuan, a year-on-year increase of 23.5%. The recovery of the catering industry is also reflected in the financial statements of many leading brands. In the first half of the year, most listed catering companies achieved a net profit turnaround and some even recorded a net profit growth rate of over 200% year-on-year. In 2023, a downward trend in average spending per customer has become a common phenomenon in the catering industry, prompting many brands to adopt a "price-for-volume" strategy while adjusting prices and positioning, actively expanding new stores and entering lower-tier markets. It can be seen that many catering brands that were once positioned as mid-to-high-end have adjusted their prices to be more affordable. According to the interim report of listed catering companies, the average spending per customer at XIABUXIABU Group (00520)'s mid-to-high-end brand, Cun Cun, decreased from 141.1 yuan last year to 133.4 yuan, and the average order value of "NAYUKI" (02150) decreased from 36.7 yuan to 32.4 yuan. From TAM JAI INTL's financial report, it can also be seen that although the average customer spending in Singapore increased, the average customer spending in mainland China decreased from HKD 49.1 to HKD 41.5, a decrease of about 15%, which dragged down the overall average customer spending to be basically flat compared to the same period last year. It is worth noting that the average number of bowls sold per seat and the average revenue per restaurant have both declined. This indicates that after a period of rapid expansion, TAM JAI INTL's profitability continues to be under pressure, and the phenomenon of "increased revenue but not increased profitability" is becoming more evident. Repairing the profit level will still require some time to accumulate. Catering industry actively seeks overseas expansion Behind the "price-for-volume" strategy, reaching the market ceiling is also one of the problems faced by TAM JAI INTL. In terms of revenue structure, the company's business is currently primarily in Hong Kong, with its revenue from Hong Kong increasing by 8.2% year-on-year to HKD 1.296 billion in the first half of the year, accounting for over 93% of the total revenue. Although the company has expanded into overseas markets such as Singapore and Japan, it has not yet formed a significant income scale. According to recent data released by the Hong Kong Tourism Board, Hong Kong recorded about 26.8 million visitor arrivals from January to October this year, and it is predicted that the number of visitor arrivals throughout the year will exceed 30 million. The latest data from the Hong Kong Census and Statistics Department showed that after adjusting for price changes, the estimated total revenue from eateries in the third quarter of 2023 increased by 8.4% compared to the same quarter last year. Despite the temporary disruption caused by extreme weather conditions in early September, the value of total revenue from eateries in the third quarter of 2023 continued to record a significant year-on-year increase of 12.5%. Benefiting from the recovery of local consumption and an increase in mainland Chinese tourists visiting Hong Kong, TAM JAI INTL's business in Hong Kong is expected to continue to maintain steady growth. However, for the local catering industry in Hong Kong, in additionDue to factors such as high rental costs, difficulty in recruiting workers, and intense competition among restaurant brands, the local catering market in Hong Kong is not large in scale. Just looking at the category of rice noodles, TAM JAI INTL may have already encountered a growth ceiling.Therefore, in recent years TAM JAI INTL has also begun to seek overseas expansion. Among them, the total revenue in the Singapore market in the first half of the 2024 fiscal year increased by 38.8% compared to the first half of the 2023 fiscal year. As of September 30th, 2023, the company had a total of 11 restaurants in Singapore. In the first half of the 2024 fiscal year, the company's revenue from its Japanese business achieved a year-on-year growth of 22.2%. Comparable restaurant revenue also recorded a similar increase, benefiting from cooperation with the new delivery platform Demaecan. Delivery revenue accounted for approximately 16.7% of total revenue during the reporting period. Regarding the Australian market, the company has established a joint venture with the well-known catering group ST Group and entered Australia through the restaurants operated by the joint venture company, along with a potential franchise operation model currently under negotiation. As for the Southeast Asian market, the company has signed a memorandum of understanding with the subsidiary BVCUISINE Inc. of Suyen Corporation (Suyen), a Philippine conglomerate, for potential entry into the Philippine market through a potential franchise operating model. Suyen currently operates five catering brands and has extensive experience, with a complete business network within its conglomerate. In the current increasingly competitive domestic catering industry, expanding into overseas markets has become the choice for many catering brands. From a market perspective, the international Chinese cuisine market still belongs to the blue ocean and is expected to become a new growth point for the catering industry. However, compared to the domestic market, overseas consumer groups pay more attention to ingredients, service, dining experience, and atmosphere, and the commercial rules and legal environment are different from those in the domestic market. Therefore, catering companies will still face many challenges in localization after going overseas. In addition, in the company's home market of Hong Kong, TAM has adopted a multi-brand strategy, aiming to increase revenue by expanding its target customer base through expanding product categories. The company has entered into a franchise agreement with Toridoll Holdings Corporation (Toridoll Japan), its controlling shareholder's subsidiary, to operate the "Marugame Seimen" brand restaurant in Hong Kong through a franchise model. They have also launched the new "Me More Afternoon Tea Restaurant". Based on the current fundamentals, although TAM's store count has increased in the first half of the year, whether the expansion of market share can ultimately an increase in profitability remains unknown. With the performance turning point yet to come, the company's stock price is under pressure, which is to be expected.