Core Viewpoint - The recent IPO of "Encounter Small Noodles" on the Hong Kong Stock Exchange, touted as the first stock of Chinese noodle restaurants, has faced a significant decline, dropping nearly 29% on its opening day and currently hovering around 5 HKD, raising concerns about the future of the entire industry [1][3]. Industry Overview - The Chinese noodle restaurant sector experienced a surge in 2021, characterized by a wave of capital investment, with 24 financing events reported that year, leading to significant valuations for brands like "Encounter Small Noodles" [3][5]. - By 2023, the industry has cooled down considerably, with major brands like "Five Ye Mixed Noodles" closing over 600 stores within a year, and "Chen Xianggui" struggling with sales, indicating a shift in market dynamics [5][9]. Market Structure - The industry has formed a clear three-tier structure: - The first tier includes major players like "He Fu Noodles" with 577 stores, "Encounter Small Noodles" with 465 stores, and "Five Ye Mixed Noodles" leading with 670 stores [7]. - The second tier consists of brands like "Ma Ji Yong" and "Zhang La La," which are facing challenges due to market saturation and slowing growth [9]. - The third tier comprises local brands and small shops that struggle to expand beyond their local markets [9]. Financial Performance - "Encounter Small Noodles" is projected to achieve a net profit of 60.7 million RMB in 2024, translating to an average profit of 169,000 RMB per store, which is significantly low compared to industry standards [9][11]. - The high operating costs and low profitability are evident, with "He Fu Noodles" reporting a cumulative loss of nearly 700 million RMB from 2020 to 2022 [9][11]. Pricing and Consumer Perception - The average price point for new Chinese noodle restaurants is around 30 RMB, but many consumers perceive the value as lacking, leading to a disconnect between pricing and customer expectations [11][12]. - Brands are attempting to address these issues through price reductions, with "He Fu Noodles" reducing prices by 20%-30% in late 2023, while "Encounter Small Noodles" has seen a decline in average spending from 36 RMB to around 31 RMB [12][14]. Strategic Responses - In response to market challenges, brands are resorting to price cuts and franchise models to drive growth, with "He Fu Noodles" even exploring franchise options after a decade of avoiding them [12][16]. - However, these strategies are seen as short-term fixes rather than sustainable solutions, as profitability remains a critical concern [14][16]. Industry Outlook - The industry is undergoing a necessary correction, moving away from speculative capital-driven growth towards a focus on sustainable business practices, emphasizing quality, cost management, and customer satisfaction [16].
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