2024 Week 46 - Food
The Hong Kong exodus - LH Group, Tam Jai, Fairwood, Cafe De Coral, Taste Gourmet
Written on 11th November 2024,
On Week 26, I wrote about my thoughts on all the listed caterers in Hong Kong.
One of the observation I had made then was to observe that Tam Jai is the favourite go to place for young Hongkongers and I was more positive about the Yakiniku chain like LH Group than the cha chang teng (hong styled cafe) like Fairwood and Cafe De Coral.
I am wrong. I should be bearish on all the caterers in Hong Kong.
One of the biggest risk in investing in the catering trade has to be the continual increase in the number of northbound Hongkongers travelling up to China for food and entertainment.
Since then, has the northbound Hongkonger accelerated?
8th October 2024,
Hongkongers making 1.78 million trips this year, compared with 1.83 million in 2023
-SCMP
Surprisingly, there is a slowdown in northbound traffic. While traffic had slowed, one thing that is not captured in the traffic data is the spending.
But with most of the listed catering companies screaming out in pain, it is easy to see where most of the spending is going to…
LH group started with the first profit warning in August. The profit warning announcement did not highlight how bad the situation is until
we found out that LH Group (LH) is not even profitable on an operating basis.
For LH, the fight to retain customers meant offering promotions which translate into lower gross margin. The double whammy of lower customer throughput i.e. revenue and lower gross margin while toggling with a fixed expense base meant that most caterers will record a much lower net profit or any profit at all.
If one of the best operator is facing such a dire situation, I guess the rest cannot be far off.
In October, TamJai sounded the next warning and the story remain the same.
Next up is Fairwood in November with the same story.
And just as I was wondering if Cafe De Coral will issue a profit warning…
At least the companies profiled above other than LH are still profitable.
But if everyone in the industry is screaming fire, should you rush for the exit?
There is simply no way and need to fight a trend.
I am pretty sure that Taste Gourmet will be issuing a profit warning soon because no matter how good they are, it is hard to do business1 if there are not enough spending in Hong Kong.
If you must panic, panic early2.
-Nassim Taleb
I could foresee this trend to extend to every segment of the Hong Kong economy if the cost of dental in China is one tenth of the cost in Hong Kong.
1st October 2024:
Retiree Linda Wong headed to Shenzhen to undergo a dental procedure while also enjoying some good food and shopping for bargains at a supermarket. Wong, in her sixties, said she had opted to book the procedure in Shenzhen because it cost only about HK$2,000, compared with more than HK$20,000 in Hong Kong.
-SCMP