Guotou Securities International has initiated coverage on XIAO NOODLES (02408), issuing a "Buy" rating with a target price of HK$7.1. The firm projects net profits for 2025, 2026, and 2027 to be RMB 120 million, RMB 230 million, and RMB 350 million, respectively, translating to earnings per share (EPS) of HK$0.19, HK$0.37, and HK$0.56.

The company's store count is expected to reach 503 by the end of 2025, representing a 40% increase from the end of 2024. Revenue for 2023, 2024, and the first half of 2025 was RMB 800 million, RMB 1.15 billion, and RMB 700 million, with year-on-year growth of 91%, 44%, and 34%, respectively. Net profit for the same periods was RMB 46 million, RMB 60 million, and RMB 42 million, showing growth rates of N/A, 32%, and 95%. The company achieved profitability in 2023, and its net profit margin has been consistently improving.

Key viewpoints from Guotou Securities International are as follows:

**Cost-Effectiveness and Standardized Operations Form Core Moat** XIAO NOODLES has established a competitive edge through its "absolute cost-effectiveness" strategy. The average customer spending in the first half of 2025 was only RMB 31.8, significantly lower than competitors in the same commercial areas. The company has continuously reduced menu prices over recent years, with annual decreases of approximately 4-5%, and plans further reductions to solidify its position as the most cost-effective option, trading price for volume to ensure store revenue and profit.

Furthermore, the company has successfully built a highly standardized, systematic, and digitalized operational framework. The menu has been streamlined to 30-40 SKUs, catering to all dayparts and scenarios. A proprietary IT system integrates the entire process from ordering and supply chain to management, ensuring consistent quality and efficiency. Supply chain costs have been optimized through scale procurement, with the cost of raw materials as a percentage of revenue decreasing from 38.3% to 31.4%. This system allows for profitability improvement at the store level even while implementing price reductions to drive volume.

**Ample Room for Store Expansion with a Clear Growth Trajectory** XIAO NOODLES is accelerating the expansion of its store network. The total number of stores at the end of the 2023, 2024, and 2025 fiscal years was 252, 360, and 503, representing year-on-year growth of 48%, 43%, and 40%, respectively. The company plans to open 150-230 new stores annually from 2026 to 2028, aiming to surpass 1,000 stores by 2028.

Growth avenues are clear: first, increasing density in existing first- and second-tier cities, expanding from core commercial areas to street-front locations and suburbs; second, tapping into lower-tier markets, where the growth rate for noodle restaurants exceeds that of first-tier cities; and third, initiating international expansion, having already entered Hong Kong with plans to expand into Singapore. A healthy single-store economic model provides a solid foundation for rapid replication.

**Substantial Size and High Growth in the Chinese Noodle Restaurant Industry** In 2024, the total market size for Chinese noodle restaurants reached RMB 29.7 billion, accounting for approximately 29.8% of the entire Chinese fast-food market. The industry has maintained a high compound annual growth rate (CAGR) of 12.7% over the past four years. The segment specializing in Sichuan-Chongqing flavors, which is XIAO NOODLES' focus, has grown even faster at 12.8%, demonstrating stronger consumer appeal.

The competitive landscape is highly fragmented. The combined market share of the top five players in 2024 was only 3.0%, with the largest brand holding less than 1%, characteristic of a "large market, small players" scenario. This low concentration presents an opportunity for chain brands with replicable business models, strong supply chains, and capital support to significantly increase their market share through organic expansion and consolidation.

**Strengthened Financial Position Post-IPO** Prior to its IPO, the company had a high asset-liability ratio and insufficient liquidity. It carries no interest-bearing debt, with liabilities primarily being operational in nature. The IPO resulted in net proceeds of RMB 560 million, which is expected to substantially alleviate funding constraints, significantly lower the asset-liability ratio, and increase liquid assets.

Risk factors include intensifying industry competition and consumer demand falling short of expectations.