By MA Yue

Home Original Chicken, a fast food chain specializing in Chinese-style chicken dishes, withdrew its application for an IPO in Shanghai. No further reason was given. Regulators raised questions about cybersecurity, corporate governance, food safety and labor practices during the IPO review last year. No red flags were found.

As of June last year, the chain had 1,099 restaurants, 997 of which are franchises. Revenue grew by 55 percent in two years from 2019 to 2021, but more than halved from 4.4 billion yuan to 2 billion in 2022 due to pandemic shutdowns. The company made over 100 million yuan in profit each year from 2019 to 2021, but the number dropped to 761 million last year.

China has been transitioning from an approval-based IPO system to a market-driven one. In February, the China Securities Regulatory Commission (CSRC) announced that the new registration-based system, which had been piloted in selected sectors of the Shanghai and Shenzhen stock exchanges, will be expanded to the rest of the market.

New rules were soon issued, making it easier for most firms to get listed. The only exceptions are consumer product companies – food businesses, home appliance makers, and fashion brands, especially – who would face more restrictions.

Restaurants went through three IPO waves in the past twenty years. The first two were in 2006 and 2014, consisting mainly of large chains that had been in business for many years. A few went public in Shanghai but most chose Hong Kong. The market changed significantly after the pandemic. Restaurants, especially newer, trendier ones, became more receptive to raising outside capital to sustain their cashflows and improve their operations. In some categories, such as coffee, independent shops that had every intention to grow organically found, to their own excitement and dismay, that the only way to compete with their VC-backed peers was to also get VC money and expand exponentially.

Eight restaurant chains still have IPOs pending in Shanghai, Shenzhen, or Hong Kong. With the exception of Yang Guo Fu (spicy hot pot), which was approved last October, all of them are in a stalemate. Lucha, a beverage chain, has had its prospectus rejected three times due to bad financial results during the pandemic.

Investors have soured on restaurants. The main concerns are overexpansion, geographical concentration, and the industry’s vulnerability to recession. The franchise model has also been widely criticized. Mixue, a bubble tea chain with 22,276 locations, has gained a lot of media attention for its questionable food safety practices and precarious financial condition. It filed for an IPO in Shenzhen last year but is reported to have withdrawn its application to try Hong Kong or even outside China instead. Supposedly rules are more lax there. The company has declined to comment on rumors about its IPO plans.