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The former serves a wide variety of local Chinese and Western dishes in Hong Kong and mainland China while the latter is a hot-pot chain operator in mainland China.
In this article, I’ll take a look at two areas to help us decide which company is the better buy now for investors.
I’ll start by comparing the business performance of both companies over the last five years.
Let’s start with Fairwood. From 2014-2019, it grew revenue from HK$2.2 billion (US$283.8 million) to HK$3.0 billion. Similarly, net profit increased from HK$144.0 million to HK$179.9 million.
The former was up by 36% while the latter improved by 25% during that period. Also, restaurant count grew from 124 to 159. So far, so good.
On the other hand, Xiabuxiabu more than doubled its revenue from RMB 2.2 billion (US$310.8 million) in 2014 to RMB 4.7 billion in 2019.
Net profit also grew by 104% during that period to RMB 288.1 million. New store openings was the main driver behind the solid growth as store count increased from 452 in 2014 to 1,022 in 2019.
Both companies did well in growing store count, revenue, and net profit over the last five years. Comparatively, though, Xiabuxiabu performed better with higher growth across all three metrics.
The next thing I’ll consider here is the valuation of both companies. The two valuation metrics I will focus on are the price-to-book (PB) ratio and price-to-earnings (PE) ratio.
To start with, both Fairwood and Xiabuxiabu have the same PB ratio of 3.1. Next, Fairwood and Xiabuxiabu have PE ratios of 13.4 and 25.4, respectively.
Comparatively, the market average’s PB and PE ratio stood at 1.1 and 12.0, respectively. Here, I’m using the iShares MSCI Hong Kong Index Fund (NYSEARCA: EWH) as a proxy for the market average.
Overall, we can see that both companies are trading at higher valuations when compared to the market average. Still, Fairwood is the cheaper food operator here thanks to its lower PE ratio.
In sum, I think there is no clear winner here. Xiabuxiabu is clearly growing at a higher rate but has a higher valuation.
On the other hand, Fairwood is the cheaper stock here, albeit growing at a slower pace.
Investors should, therefore, decide whether they want higher growth or better value. The former should look at Xiabuxiabu while the latter might consider Fairwood.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Lawrence Nga doesn’t own shares in any companies mentioned.