We Can All Make Money In China

We Can All Make Money In China

Want to cash in on the booming Chinese economy just like McDonald’s [2] and KFC [3] are doing? Now you can—as an investor, thanks to the U.S.-based initial public offering from China fast feeder Country Style Cooking Restaurant Chain. Its IPO was an instant hit, as the share price rose 52 percent on the first day of trading. Is there more growth to come?

Only mega-sized restaurant chains possess the financial wherewithal, political clout and international business expertise needed to transport their brands to China. Their early success has shown that developing a fast food chain in a country where peasants are moving into the middle class every day is a can’t-miss proposition, especially when the country is as populous as China.

If you look closely at the financial results of the key U.S. brands doing business in China, it’s clear that this is just about the only part of their overall business that’s showing real growth. Yum Brands (KFC, Pizza Hut [4]), for example, now makes more money in China than it does in the U.S. Check out the company’s dedicated website [5] to see how hot this market has been and, YUM expects, will continue to be. Right now, YUM is the largest fast food chain in China, while McDonald’s is the second largest.

So China is a gold rush for a handful of mega-companies, but other restaurant operators who lack their size and scope have been effectively shut out. There was no feasible way to participate in this emerging market bonanza.

Until now. Country Style Cooking Restaurant Chain (stock symbol: CCSC) operates 56 restaurants in its home city of Chongqing (population 31.4 million—no, that’s not a misprint) and 31 others elsewhere in Sichuan province. Its one-page menu features food items in the spicy Sichuan style that are prepared in commissaries and finished at units with the chain’s proprietary sauces. It’s a QSR setup, only with more dining in than takeout.

CCSC has been growing rapidly. Its 2009 sales were $72.3 million U.S., representing a 114 percent rise over 2008. Net income was $6.6 million, an increase of 70 percent. The chain had 4,579 employees at year’s end, 81 percent more than the previous year.

Other numbers are up, too, but not in a good way. Wages as a percentage of revenue were 14.3 percent in 2008, 15.6 percent in 2009 and 16.2 percent in the first half of 2010. CCSC’s labor costs are on the rise, but are still at levels U.S. operators can only dream about.

Cost of occupancy has risen, too. Real estate expenses as a percentage of revenue were 7.8 percent in 2008 and 2009, but 8.7 percent in 2010’s first half. Again, numbers that restaurant-savvy U.S. investors can live with.

So the fundamentals are good. As with any stock, there are a million reasons it could go up or down, none of them under the control of investors. One key for CCSC is where it can go for growth. Its specialty is Sichuan-style food, but other regions of China have their own flavor preferences. Yet unit growth seems imminent. Roughly 60 percent of the proceeds from the CCSC IPO are earmarked for new restaurants. Thirty of them are scheduled to come on line before the end of 2010.

Oh, and did we mention that CCSC is debt-free? That’s a huge plus, as is the near-term outlook. Website Thestreet.com reports that in China, “by 2014 the consumer food services market is expected to experience a CAGR (Compound Annual Growth Rate) of 8.8 percent from 2009, with the quick service restaurant sector expecting a CAGR of 10.3 percent.” If those aren’t getting-in-on-the-ground-floor numbers, we don’t know what are.

Shares of Country Style Cooking Restaurant Chain trade on the New York Stock Exchange. The stock’s average trading volume is just below one million shares per day. It was trading at $33 per share as we posted this story on the web.