Domino’s Chinese DPC Dash Operator Completes Hong Kong IPO

Key points to remember:

  • Chinese Domino operator DPC Dash has filed for an IPO in Hong Kong that could raise up to $100 million and value the company at around $500 million.
  • The company has benefited from China’s recent shift to takeout, posting same-store sales growth of 18.7% last year

By Doug Young

The local operator of the Dominoes DPZ The pizza chain is preparing for China’s latest IPO, showing that locally popular hotpots aren’t the only ones who can tap global financial markets these days for some pepperoni investors.

DPC Dash Ltd. disclosed the plan in its registration flyer filed in Hong Kong this week, in a relatively small deal that could raise up to $100 million. Before we go any further, a major reveal is needed that this particular writer is a regular diner at Domino’s in Shanghai. But that obvious bias aside, the company really does look like an interesting growth story, playing on China’s recent Covid-fueled craze for takeout that is Domino’s specialty.

This particular listing is the latest in a recent series of similar IPO plans by Chinese restaurant chains seeking to raise funds in Hong Kong. We’ve written about many of them, including the likes of Yang Guofu, Green tea group and QiXinTian. But among the group, which places a heavy emphasis on locally popular hotpots, DPC Dash stands out as the only foreign flavor.

The company is Domino’s main Chinese franchisee based in the United States. This is quite similar to the arrangement for Pizza Hut, the Chinese pizza market leader which is part of yum china YUMCwho is the chinese franchisee of the american fast food giant Yum Brands Inc. YUM. Talk is obviously cheap, but DPC Dash is pretty direct about its big future plans to challenge Pizza Hut.

“In the long term, our goal is to become the number one pizza company in China, as other Domino’s Pizza franchisees have done in Asia, Europe and North America,” the prospectus said.

We’ll take a look at the company’s financials shortly, including its recent rapid growth and rapidly improving same-store sales, both of which look pretty solid. Same-store sales growth looks particularly impressive considering that most major fast-food operators have seen anemic growth or even contraction in this metric lately due to pandemic-related disruptions.

Even as we write this article, the megacity of Shanghai is preparing to enter what is likely to become a full lockdown from April 1, as it tries to tame the latest local Covid outbreak caused by the variant highly contagious from Omicron. It will be a blow to DPC Dash, which counts Shanghai as its biggest market with 143 of its 468 stores nationwide at the end of 2021.

But aside from Covid, the market opportunity for pizza in China is quite large, according to third-party data in the prospectus. This data estimates that the Chinese pizza market was worth 30.5 billion yuan ($4.8 billion) last year and is expected to double to 62.3 billion yuan in 2025. The prospectus points out that the market is relatively underserved compared to other Asian peers, with around 10 pizzerias. per million people in China compared to about 29 in Japan and South Korea, and a whopping 237 in the United States

Potential in small markets

For DPC Dash, one of the biggest opportunities is in smaller Chinese cities where the company has not yet made a major push, unlike Yum China which is already well represented in these areas. DPC Dash points to third-party data showing it is currently the third-largest pizza chain in China with 3.6% of the market, compared to Pizza Hut’s 39%. But DPC Dash is actually much closer to Pizza Hut in top-tier Chinese cities, with 11.3% of the market versus Pizza Hut’s 17.1% in those markets.

The company is relatively well positioned to enter smaller markets where it currently lacks a presence due to its heavy focus on take-out delivery, which was already popular in China but has become even more so during the pandemic. Such a focus on delivery also helps it cut costs, as its stores only offer very basic in-store dining with smaller floor space and counter-only service.

This focus helped the company post same-store sales growth of 18.7% last year, a strong increase from growth figures of 9% for 2020 and 7.3% for 2019. Reflecting the great potential of smaller cities, the company’s same-store sales in markets outside of Beijing and Shanghai rose 37.7% last year. By comparison, same-store sales in Beijing and Shanghai — which collectively accounted for more than half of its store count at the end of last year — combined, rose “only” 14.2% for the year.

This rapid growth has helped the company improve its store-level operating margins to 9.2% last year, from 4% in 2020.

At the highest level, the company’s revenue rose 46% last year to 1.6 billion yuan, with the number of stores growing 29% during the year. It plans to open 300 stores in 2022 and 2023, bringing its total number of stores to 768 by the end of next year if it hits that target. By comparison, Pizza Hut had more than 2,500 stores in China at the end of last year.

DPC Dash is still operating squarely in the red, with a net loss that widened to 471 million yuan last year from 274 million yuan in 2020. Its adjusted net loss, which generally excludes non-cash items such as stock-based employee incentives, has actually shrunk. to 143 million yuan last year from 200 million yuan in 2020.

As we’ve said before, one of the advantages of DPC Dash over other chains is its roots as a take-out specialist. He noted in the prospectus that takeout orders accounted for 51.5% of China’s overall pizza market last year, but that figure is expected to reach around 60% of sales by 2025.

We’ll end with an overview of how the business might be assessed using Yum China as a yardstick, although we should point out that Yum China gets the lion’s share of its money from its local KFC operation which is much larger than Pizza. hut. Yum China, which is profitable and recently reported Revenue growth of 19% for 2021, currently trading at a price-to-sales (P/S) ratio of 1.9. A similar valuation for DPC Dash, which seems relatively achievable, would give the company a valuation of nearly $500 million.

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