Yew Kee Duck Rice (YKGI) IPO: A tasty expansion opportunity

TL;DR

• YKGI, the company behind Yew Kee Duck Rice and Chicha Sanchen bubble tea, is set to list on the Catalist board of the Singapore Exchange (SGX) on 6 February 2023. The company intends to use the IPO proceeds to open new outlets in Singapore and drive expansion overseas. 
• YKGI's revenue grew strongly from 2019-21 driven by its Franchise business. Management of YKGI expects revenue to grow further in FY22 with the opening of new outlets and improved performance of its existing portfolio. 
• YKGI generated a higher net margin compared to its peers, but management expects cost pressures from higher food ingredient and manpower expenses. 
• Based on its listing price, YKGI would trade at a price-to-earnings (P/E) of about 11x, inline with the P/E of Kimly and Japan Foods.

What happened?

YKGI is set to list on the Catalist board of the Singapore Exchange (SGX) on 6 February 2023.

YKGI owns a portfolio of eight food and beverage (F&B) brands, including Yew Kee Duck Rice, XO Minced Meat Noodles and My Kampung Chicken Rice. 

The company operates them through 77 retail outlets in Singapore - comprising 43 food outlets and four food courts. The company is also the exclusive franchisee of all 30 CHICHA San Chen tea shops in Singapore. 

What you need to know about YKGI (Listed on Singapore Exchange as YK9)

#1 – Revenue expected to grow in FY2022

YKGI saw a sharp increase in revenue from $36.6 million in FY19 to S$56.1 million in FY21, driven by new store openings and an increase in its sales following the easing of Covid-19 restriction measures in Singapore. 

In 2021, its F&B operations and Franchise businesses each contributed more than 40% of its group revenue. Its Food Court business made up less than 10% of group sales. 

Notably, the bulk of the increase in revenue between 2019 and 2021 was driven by the franchise business. 

Due to the strong performance of Chicha Sanchen, the franchise revenue grew from S$3.7 million in 2019 to S$26.7 million in 2021. 

On the other hand, revenue from the other two divisions has stayed relatively stable during this period. 

However, YKGI’s revenue fell by 3% in the first half of 2022 compared to the previous year, as revenue in the Franchise business started to taper off. 

Management of YKGI expects an increase in revenue in 2022 compared to the previous year, which means that we should see a pickup in revenue in the second half of 2022.

This is due to the opening of new food outlets and improved performance in its existing food outlets. 

#2 – Higher net margin than peers

YKGI’s net profit grew to S$8.9 million in 2021 from just S$1.0 million in 2019, in tandem with the growth in its revenue over this period. However, its net profit fell to S$2.4 million in the first half of 2022 with the decline in revenue. 

The company remained profitable throughout the Covid-19 pandemic, as it was able to adapt its F&B offerings for takeaway or delivery. 

Net profit during this period was also supported by government grants and rental concession income, which amounted to more than S$4 million per year in 2020 and 2021. 

YKGI generates a higher margin compared to peers, likely due to the higher profit margin for the franchise business of Chicha Sanchen.  YKGI generated a net profit margin of 9.0% in 1H22 and 15.9% in 2021, above the net margin of Japan Food (5.8%) and Old Chang Kee (7.3%) in their last reported fiscal year. 

The net profit margin of YKGI would be similar to that of Koufu, which was in the range of 11-12% in 2016 to 2019. Koufu operated the R&B bubble tea franchise, which also lifted the group margins. 

#3 – Driving growth through overseas expansion

The initial public offering (IPO) involves 82.750 million shares sold at S$0.20 each through a placement, raising gross proceeds of about S$16.6 million. This would include 53.75 million new shares. 

The company intends to use the IPO proceeds to open new outlets in Singapore and drive expansion overseas. For example, management plans to open more Yew Kee Duck Rice and Chicha San Chen outlets in new markets across Southeast Asia. 

Going forward, management expects the company to face inflationary pressures with an increase in the cost of food ingredients and utilities. Manpower costs are also expected to rise with the foreign worker crunch in Singapore. 

To offset these cost pressures, management of YKGI is looking at various initiatives to drive operational efficiencies. The company intends to expand and upgrade its central kitchen and warehouse to raise its capacity, thereby increasing the amount of key ingredients that can be processed. 

What would Beansprout do?

Based on the listing price of S$0.20, YKGI would have a market cap on the Singapore Exchange of about S$85 million. This would be quite close to the market cap of Japan Foods and Old Chang Kee, which are similar F&B companies listed on the Singapore Exchange.

Based on its net profit in the last twelve months (LTM) and listing price, YKGI would trade at a price-to-earnings (P/E) of about 11.2x. This would be inline with the P/E of Kimly and Japan Foods, and slightly below the P/E of Old Chang Kee.

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