When your home market feels like an overheated kitchen, sometimes the smart move is to find a new place to cook. That's the strategy playing out across China's restaurant industry right now, where chains are increasingly fleeing overseas to escape cutthroat competition and nervous consumers back home.

The latest example: Jiumaojiu International Holdings Ltd. (9922.HK) just announced a substantial overseas investment that will give it 49% ownership of Big Way Group Inc., a small but growing North American chain specializing in hotpot, one of China's most beloved dining formats. Jiumaojiu is shelling out $43 million for the stake, according to its Dec. 29 announcement.

Here's how the deal breaks down: $15 million goes to existing shareholders for their stock, while another $28 million buys newly issued shares. Jiumaojiu already owned 10% of Big Way from a purchase last July, so this latest move lifts its total ownership to just under half. Interestingly, though, Jiumaojiu's voting rights will sit at only 10.8%, making it clear that Big Way's husband-and-wife founders, Yao Xinzhong and Luo Xiaofang, aren't giving up control of their growing empire.

Why This Deal Matters

Big Way currently runs 21 Big Way Hot Pot restaurants scattered across Vancouver, Toronto and California. That's a tiny operation compared to Jiumaojiu's 686 stores as of last September. But size isn't everything. Big Way appears to be hitting its stride, with profits surging to $984,000 in 2024 from just $210,000 the year before. That's nearly a five-fold jump, and exactly the kind of growth trajectory that makes an investment interesting.

The market's initial reaction to the announcement was muted. Jiumaojiu's stock dipped 2.8% the day after the news broke, though it recovered those losses over the next two trading sessions. The back-and-forth likely reflects holiday trading patterns more than anything else. With many investors on vacation, the real market response may not emerge for a few more weeks.

Because Jiumaojiu holds only a minority stake, it won't consolidate Big Way's financials into its own results. That's probably one reason the announcement didn't generate more excitement. But the strategic logic runs deeper than quarterly accounting.

The China Problem

The reality is that Jiumaojiu and most of its competitors are struggling in China's brutal restaurant market. Jiumaojiu is having an especially rough time. Analyst sentiment tells the story: out of 23 analysts polled by Yahoo Finance, more than half rate the company a "hold" or "sell." Compare that to hotpot giant Haidilao (6862.HK), where 26 out of 32 analysts give it a "buy" or "strong buy" rating.

Jiumaojiu was something of a one-hit wonder. The company skyrocketed to fame on the back of its Tai Er chain's signature sauerkraut fish, a creative take on traditional hotpot. But consumer tastes eventually shifted, and the brand took a hit when diners discovered the fish was prepared offsite in central kitchens rather than fresh in restaurants. To address this, Jiumaojiu launched a campaign last March to freshly kill and prepare each fish to order in its restaurants, and early results look promising.

Still, the broader challenge remains: China's restaurant market has become a race to the bottom, with chains battling to see who can offer the lowest prices. "Poor man's meals" have become the dominant trend as cautious consumers watch their spending. For restaurant operators, it's an exhausting grind with shrinking margins.

The Overseas Advantage

Here's the thing that makes overseas expansion so appealing: foreign outlets consistently outperform domestic Chinese restaurants. The numbers are striking.

Look at Haidilao, which breaks out its overseas operations through its separately listed Super Hi International unit (9658.HK; HDL.US). Super Hi's 107 restaurants achieved 4.0 times daily table turnover in last year's third quarter, compared to 3.8 times for Haidilao domestically in the first half. More importantly, Super Hi's third-quarter gross margin hit 34.3%, considerably higher than Haidilao's domestic 27.8% in the first half of last year.

Better margins, higher turnover, less brutal competition. It's not hard to see the appeal.

Jiumaojiu began its overseas push in 2021, opening Tai Er restaurants in Canada, Indonesia, Malaysia, Singapore, Thailand and the U.S. The company also runs one outlet of its Lai Mei Li brand in Singapore. While Jiumaojiu doesn't specify its exact overseas footprint in recent reports, a look at its international websites suggests around two dozen locations, with roughly half split between Malaysia and Singapore.

That means the Big Way investment would essentially double Jiumaojiu's overseas presence while adding a second brand and dining format to its international portfolio. That's meaningful diversification.

What Big Way Brings to the Table

Jiumaojiu highlighted something important in its announcement: Big Way has fully localized its operations in the U.S. and Canada. That's not as simple as it sounds. Successfully adapting Chinese dining concepts for Western markets takes real skill, and Big Way has apparently figured it out. The company says Big Way has attracted a broad base of non-Chinese customers, which is crucial for scaling beyond ethnic enclaves.

For its part, Jiumaojiu believes it can contribute meaningful expertise to Big Way's next growth phase. "The group possesses systematic expertise in standardized chain restaurant operations, store model replication, management system establishment, and organizational and talent development," the company said.

The partnership does look promising. Big Way brings local market knowledge and a proven ability to appeal to non-Chinese diners. Jiumaojiu brings operational scale and systems that could help Big Way expand more efficiently. The two companies have already worked together since Jiumaojiu's initial 10% investment last July, so they've had time to develop a working relationship.

If things continue going smoothly, it wouldn't be surprising to see Jiumaojiu eventually make a play for majority control or even acquire Big Way outright.

Jiumaojiu's Rough Patch

The company could certainly use the boost. Jiumaojiu's revenue and profit fell 10% and 16% respectively in the first half of last year as most major metrics weakened and the company continued shuttering underperforming stores.

The stock tells an even grimmer story. Jiumaojiu was once a market darling, hitting HK$38.40 in the early days after its 2020 IPO. Those glory days feel like ancient history now. The stock closed at HK$1.79 on December 31, down more than 95% from its all-time high.

That collapse has left the company trading at a bargain-basement valuation with a price-to-sales ratio of just 0.39. That trails nearly all of its major competitors. Haidilao trades at 1.65 times sales, Super Hi at 1.2 times, and newly listed noodle specialist Xiao Noodles (2408.HK) commands a multiple of 2.18.

Whether the Big Way investment can help turn things around remains to be seen. But for a company struggling at home, looking abroad for growth makes a lot of sense. And in an industry where overseas operations consistently deliver better economics, doubling down on international expansion might just be the recipe Jiumaojiu needs.