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Buy This Hong Kong Hot Pot IPO

Posted June 10, 2008

“Little Sheep Hot Pot will begin trading on the Hong Kong Stock Exchange this Thursday to the glee of investors. The company has built an empire of 330 restaurants in China, the U.S. and Japan in less than 10 years, and it’s still predicting record profits for 2008.”– Stephanie Grimmett

by Stephanie Grimmett

Baltimore — (TFN): Supreme fatty beef, deep fried cod shed, and don’t forget the house special meat ball platter, made “mainly of cuttlefish balls, whitebait balls, white fish balls, fresh shrimp balls and beef balls” (no snickering over that last one, please): The menu at Little Sheep Hot Pot doesn’t sound very appetizing to those of us in the West, but the restaurant is one of the fastest growing chains in China.

The description accompanying the aforementioned deep fried cod shed may put you off your lunch if you have a sensitive American stomach like mine. And I don’t think I’ll be sampling Little Sheep’s fare anytime soon, but I may be buying stock in the company.

Little Sheep Hot Pot will begin trading on the Hong Kong Stock Exchange this Thursday to the glee of investors. The company has built an empire of 330 restaurants in China, the U.S. and Japan in less than 10 years, and it’s still predicting record profits for 2008, even with the economic slowdown in the U.S.

Someone has to feed all of those hungry Chinese post-earthquake construction workers, afterall. And Little Sheep Hot Pot is uniquely designed to do just that as fast food, Mongolian-style.

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According to legend, hot pots date back to Genghis Khan, who supposedly ordered mutton immediately before a battle. With a looming deadline, his chefs only had time to chop up the mutton and drop it in boiling water, then add sauces on the side to dip it in. Genghis liked the culinary experiment, and the battle he won after eating it, so much that he gave his soldiers the same meal as a reward for their victory, placing hot pots squarely in the center of traditional Mongolian cuisine.

And then Little Sheep came along and turned the recipe into a quick meal for on-the-go patrons. The restaurant began adding the dipping sauces formerly used after cooking directly to the boiling meat and invented the fast food hot pot in the process.

It sounds quite simple, but the idea was revolutionary enough in Mongolia (now an “autonomous region” of China) to create a sensation. And Little Sheep began opening restaurants all over the PRC.

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Hong Kong investors have been itching to get their hands on shares of the successful chain, as evidenced by Little Sheep’s IPO oversubscription rate: investors asked for 71 times the number of shares available. The company is offering only 245 million shares at HKD2.68-3.68 (about 34-47 cents in the U.S.) and hoping to raise more than HKD460 million ($59 million). That number could reach HKD518 million ($66 million) if the over-allotment option goes into effect.

Europe’s largest publicly traded private equity firm, 3i Group owns a 20.25% stake in Little Sheep, a smart investment with the hot pot chain pulling in 14.6% profit growth in 2007 and expecting another 37% growth this year.

As a whole, China stocks haven’t been thriving this year. But Little Sheep is not your average big-name Chinese stock. Unlike most of the Chinese financial, utility and resource companies you’re used to hearing about in the news, Little Sheep is a private company, with no government ownership, in a sector the government rarely, if ever, manhandles. And if China does decide to stick its nose into the grocery sector and enact controls on food prices, as it’s currently doing with the prices of electricity and steel, it will mean cheaper ingredients and even better profits for Little Sheep. 

Little Sheep’s Hong Kong stock symbol hasn’t been released yet, but when it is, and once the stock has settled after its IPO fervor, you should consider grabbing a piece of the pot.

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Posted by Stephanie Grimmett · Filed Under International Investing 

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