A Hot Chinese IPO Is on the Menu

Given KFC's popularity in the world's most populous nation, Investors approaching Yum! Brands (NYSE: YUM  ) as a play on China now have a pure play to ponder.

Country Style Cooking (Nasdaq: CCSC  ) , a Chongqing-based chain of quick-service eateries, went public yesterday. There were 5 million shares offered at $16.50 apiece yesterday, and the market gobbled them up. The Wall Street debutante closed 47% higher on its first day of trading.

What's behind the hype? Well, the CSC chain is on a growth tear. There were just nine counter-service restaurants at the start of 2008. The Chinese comfort food concept had a whopping 101 locations open by this summer.

CSC's income statement reflects the heady expansion. Revenue soared 114% last year, and climbed 54% through the first six months of 2010. Earnings aren't growing as quickly -- up 69% last year and 37% through the first half of this year -- but the economies of scale are usually hard to see when a company is reinvesting profit into growing the chain quickly.

Investors need to be realistic. This isn't some high-margin dot-com: CSC is cranking out a real product with real costs and related overhead. Net margins during the first half of this year clocked in at 8.5%. While this isn't McDonald's (NYSE: MCD  ) with 20% net margins over the past year, it stacks up well with Chipotle Mexican Grill's (NYSE: CMG  ) 9% showing.

There is plenty of expansion space for CSC, since half of its restaurants are currently in its Chongqing municipality.

Stateside investors don't often get a chance to invest in a fast-food chain in an emerging market. Brazil Fast Food -- the parent of the Bob's burger chain and a Yum! franchisee in Brazil -- trades infrequently despite its 737-unit presence.

CSC will be different. Even when expansion costs are high, leisure plays in China play well if they're growing quickly and profitably. Home Inns & Hotels (Nasdaq: HMIN  ) has held up so well that two more Chinese lodging chains -- 7 Days (NYSE: SVN  ) and China Lodging Group (Nasdaq: HTHT  ) -- went public late last year and early this year, respectively.

The success of CSC may also have a negative effect on Yum! Brands. Instead of investors assuming that KFC or Mickey D's will take over China, CSC's initial growth spurt indicates the growing appetite in China to embrace homegrown -- and home-cooked -- players.

Things are just starting to heat up in China's kitchen.

Which private company would you like to see go public this year? Tell us all about it in the comment box below.

Chipotle is a Motley Fool Rule Breakers recommendation. Chipotle is a Motley Fool Hidden Gems pick. Motley Fool Options has recommended a bull call spread position on Yum! Brands. The Fool owns shares of Chipotle, and Yum! Brands. Try any of our Foolish newsletter services free for 30 days. True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.

Longtime Fool contributor Rick Munarriz is glad to see the IPO spigot flowing again. He does not own shares in any of the companies in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


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