China’s Consumption Downgrade Claims But One other Sufferer: Ajisen

The once-dominant ramen home’s enterprise has slumped on a mixture of intensifying competitors and decrease client spending

Key Takeaways:

• Ajisen mentioned it misplaced as much as 40 million yuan in 2024, reversing a revenue of 180 million yuan within the earlier yr
• The previous ramen noodle king’s retailer rely sank to 575 within the first half of 2024 from a peak of 799 in 2019

Chinese language diners are notoriously fickle, with right this moment’s sizzling restaurant usually ending as yesterday’s leftovers in as little as a yr. The nation’s newest “consumption downgrade” as shoppers rein of their spending in favor of low cost eats is barely making issues worse, particularly for decisions thought of greater finish.

One such chain falling sufferer to such developments is Ajisen (China) Holdings Ltd. (0538.HK), as soon as hailed as a pioneer of Japanese-style ramen in China. On March 5, the restaurant operator warned that it floated into the pink final yr with a lack of as much as 40 million yuan ($5.51 million), reversing a revenue of 180 million yuan in 2023. It blamed its sinking fortunes on revaluation losses on funding properties and decrease profitability within the restaurant enterprise.

The revaluation losses associated to the weak property market in Hong Kong and on the Chinese language Mainland, its two fundamental markets. It mentioned the broader restaurant enterprise is being adversely affected by intensified competitors and adjustments in client habits. It mentioned income from its conventional dine-in enterprise has decreased. On the identical time, rising demand for takeaway companies has elevated working prices, resulting in a decline in general profitability.

Ajisen first sank into the pink within the first half of 2024. Its midyear report confirmed its income fell 6.6% year-on-year within the first six months of 2024 to 820 million yuan. It reported a lack of 7.16 million yuan for the interval, reversing a revenue of 130 million yuan in the identical interval of 2023. Its shares have taken a shower as its efficiency slipped, slumping round 25% over the previous yr to hover across the HK$0.80 stage.

Erratic backside line

The transfer into the pink is not new for Ajisen, whose profitability has been erratic within the final 5 years. The corporate recorded a revenue of 160 million yuan in 2019, solely to report a lack of 78 million yuan the subsequent yr. It returned to the black with a revenue of 21 million yuan in 2021, adopted by a lack of 140 million yuan in 2022 and eventually a revenue of 180 million yuan once more in 2023.

The chain’s means to maintain clawing its manner again to earnings could owe partly to its steady price discount and improved effectivity. Its ingredient prices as a proportion of income dropped to 24.4% in 2023 from 26.2% in 2022, whereas labor prices decreased from 29.8% to 26.2% over that point, and different working prices fell from 26.3% to 25%.

However will such cost-cutting and effectivity enhancements be sufficient to counter the longer-term headwinds?

Initially from Japan, Ajisen was first launched to Hong Kong in 1996 by native entrepreneur Poon Wei. After succeeding within the metropolis, she opened the primary Ajisen on the Chinese language Mainland in 1998 in Shenzhen, after which expanded quickly throughout the nation. In 2007, the corporate made a Hong Kong IPO, attaining a market capitalization of greater than HK$20 billion ($2.57 billion), incomes Poon the nickname of “Ramen Queen”.

At its peak in 2010, Ajisen floated a plan to have 1,000 shops in Mainland China inside 5 years. However then the corporate bought mired in a “Bone Broth” scandal in 2011, as individuals found its well-known broth that it claimed was the product of 20 hours of simmering was truly comprised of a focus. That significantly tarnished Ajisen’s picture, taking it years to recuperate.

Rise of recent Chinese language-style noodle homes

That incident marked a turning level for the corporate, following its years on the rise. Beginning in 2010, different ramen manufacturers reminiscent of Ichiran, Kagetsu Arashi and Butao began coming to China, giving shoppers extra decisions. As they supplied extra choices, the as soon as dominant Ajisen’s stagnating model started to look stale.

Concentrating on the mid- to high-end of the market, with bowls of noodles costing greater than 40 yuan, Ajisen carved out a spot primarily serving white-collar staff in buying facilities and workplace buildings. However individuals progressively got here to really feel its eating expertise and meal high quality did not appear to benefit its comparatively excessive costs. “It seems to be like quick meals however is not low cost” some netizens commented.

Following the preliminary inflow of recent ramen chains, a variety of new Chinese language noodle homes stirred up the competitors much more beginning round 2020. Increased-end manufacturers, reminiscent of Hefu, Majiyong, Chenxianggui and Zhanglala debuted and instantly grew to become favorites of each diners and traders. Hefu accomplished six funding rounds, and at one time was rumored to be planning a Hong Kong IPO. Such new challengers additional squeezed Ajisen’s market share.

These newcomers are additionally struggling below the newest “consumption downgrade” in China’s slowing economic system. White-collar workplace staff now not wish to spend more cash on high-end noodles, leaving such eateries excessive and dry. In keeping with enterprise registry Qichacha, China registered 31,000 new noodle homes within the first 5 months of final yr, whereas 29,000 had been de-registered after closing. That internet progress was decrease than in earlier years, displaying rising stress on the group.

Meantime, Ajisen by no means reached its grand plan for 1,000 shops. Its rely peaked at 799 in 2019 and has been falling ever since, right down to 562 by 2023. Issues stabilized final yr and the rely grew barely to 575 within the first half of 2024. However the chain continues to be removed from its peak in 2019, and the sooner 1,000-store goal now looks as if a distant dream.

Regardless of its inventory declines, Ajisen’s shares nonetheless commerce at a comparatively savory price-to-earnings (P/E) ratio of about 20 instances, greater than the 14 for Jiumaojiu (9922.HK) and 13.5 of Tai Hing Group (6811.HK). Which means traders should see worth within the inventory, even when such a ratio would not seem to match the corporate’s efficiency, leaving it prone to showing overvalued.

On the finish of the day, the long run for this pioneer and former famous person of China’s restaurant scene seems to be more and more cloudy. Within the face of challenges from model stagnation, intensifying competitors and client warning, price controls appear insufficient to revive its fortunes, and an even bigger overhaul, together with a rebranding, seems to be needed. However whether or not this former “Ramen Queen” can revive her fortunes stays to be seen.