Sluggish macro squeezes out struggling restaurants – During 1H26, China’s F&B sector remained resilient, with industry revenue growing 2.8% YoY. This represents a slowdown of 1.5ppts compared with the same period last year while large restaurants (defined as annual revenue > RMB2m) faced greater pressure, growing only 1.8% YoY.  Reflecting the sluggish environment, net store closures stood at 410K in 1H26, with the total store count declining 4.8% from end-2025.  The number of F&B entities fell even more by 17.3% YoY to 1.08m.

Sub-sectors largely extend FY25 trends – Of the six major Chinese catering companies that we have been tracking to identify broader industry trends. Haidilao (HDL), Jiumaojiu (JMJ) and Xiabuxiabu (XBXB) represent hot pot, Green Tea and Xiaocaiyuan (XCY) represent casual Chinese dining, and Yum China represents fast food. In general, hot pot segment conditions remained challenging, with SSS declining due to less differentiated products and lower consumption frequency. Casual restaurants grew steadily on swift network expansion, supported by their value-for-money positioning. Fast food also remained robust, aided by larger scale effects.

1H26 results diverged by business strategies

Overall, 1H26 performance diverged according to their business strategies. Mature operators reported growth in both revenue and profit, traffic-focused players traded margin for volume, and restructuring operators managed to improve profitability or narrowed losses.

Mature players such as Yum China and Green Tea delivered growth in both revenue and profit while continuing to expand their networks. They recorded the highest revenue growth among the 6 comparable peers.  Meanwhile, Yum China and Green Tea posted a store count growth of 6.6% and 21.8% during 1H26.

Haidilao and Xiaocaiyuan saw steady revenue but margin pressure, as they adjusted channel mix or pricing strategy to attract more consumers at the cost of declining margins. Haidilao’s core operating margin stood at 11.3%, down 0.4ppts YoY, as delivery revenue surged 121% YoY and diluted profitability. Xiaocaiyuan saw its net margin fall by 4.1ppts to 10% whereas dine-in ASP fell 12% comparing to end-25 to RMB50.5.

Jiumaojiu posted revenue declines but improved profits with revenue down 13.2% YoY but net profit up 24.9% YoY for a 1ppt lift in net margin to 3.2%.  Xiabuxiabu managed to narrow losses by 55% despite revenue declining 23.1% YoY thanks to streamlining of its store network.

Lowering price to boost traffic – Intense competition prompted restaurants to cut prices to attract diners during the period. Yum China's 2Q ASP fell 8%, Xiaocaiyuan's dine-in ASP dropped about 12% to RMB50.5, and Yujian Xiaomian's fell 11.5% to RMB27.7. This strategy boosted traffic, with Xiaocaiyuan's turnover rate up 0.4x and Jiumaojiu's Tai Er rising from 3.1x to 3.5x. However, financial outcomes diverged. Yum China's net profit rose 9% as volume growth offset price cuts, while Xiaocaiyuan's net profit fell 24.2% despite revenue growth, as cost pressure outweighed traffic gains.

SSS remains weak despite discounting – 1H26 same-store sales (SSS) remained under pressure across most brands, as in FY25, despite aggressive price discounting. On a YoY basis, Xiaocaiyuan's SSS fell 12.5%, Green Tea dropped 9.7%, and Xiabuxiabu's declined 10.1%. It is also noted that price cuts failed to generate sufficient incremental traffic amid weak consumption and intense competition. Only Tai Er achieved positive SSS of 7.4% YoY and Yum China 1% YoY through model upgrades, while Haidilao's SSS slipped 1.3% YoY. Overall, discounting did not seem to be an effective move to increase demand, and SSS remains a key risk to earnings.

Increasing food delivery mix weighs on margins – The subsidy war among the delivery platforms has cultivated a broader consumer preference for delivery. In 1H26, delivery mix continued to rise despite weakening subsidies, exceeding FY25 full-year levels and suggesting a structural shift in consumer habits. Haidilao's 1H26 delivery revenue surged 121% YoY, with its share rising to 9.2% (7.7% in 2H25 and 6.1% in 1H25). Yum China's delivery mix reached 54% (+4ppt versus 2H25), including KFC at 54% and Pizza Hut at 52%. This shift pressured margins because delivery carries lower GPM due to higher expenses such as platform commissions, delivery and packaging costs. In response, Xiaocaiyuan strategically cut its delivery mix from 39% to 32.6% and redirected resources to dine-in. Overall, a deeper delivery mix boosts revenue but dilutes margins unless operators can control costs and avoid excessive low-price orders.

Our view:

Weak macro conditions and intense competition are expected to keep 2H26 demand subdued, limiting same-store sales recovery. Persistent discounting and a higher delivery mix will likely pressure margins further, accelerating closures among marginal operators and driving industry consolidation. As weaker players exit, strong brands and supply-chain ability are likely to gain market share. We therefore expect 2H26 to mirror 1H26, with modest growth, continued closures, resilient leaders, and persistent margin divergence.

We favor Yum China and Green Tea, which are trading at 14.5x and 5.4x FY26E P/E, respectively. Yum China offers upside on both topline and bottom line, driven by its ambitious target of 30,000 stores by 2030.  The Pizza Hut acquisition should also enhance earnings upon completion. Green Tea targets full-year revenue growth of above 20% and profit growth above 30%, supported by front-loaded 1H openings (131 stores, up 21.8% from end-FY25) that will contribute fully in 2H, validated new-store economics (12.5-month payback), and overseas expansion. HDL, JMJ, XBXB, and XCY are trading at 10.8x, 14.8x, N/A, and 12.3x FY26E P/E, respectively. (Amelia Deng)