Interior of a Xiangeqing restaurant in Shanghai Photo: CFP

China's high-end restaurant operators have been struggling to sustain their revenue since the government launched a campaign against lavish official spending in late 2012.

Beijing Xiangeqing Group Co, a high-profile restaurant chain famous for spicy Hubei and Hunan cuisine, is turning to new areas to try and improve its sagging fortunes.

The company said last week in a filing with the Shenzhen Stock Exchange that it had signed a cooperative agreement with the Institute of Computing Technology under the Chinese Academy of Sciences to explore high-tech areas of new media and big data.

To facilitate the cooperation, Xiangeqing announced on Monday that it would seek to raise up to 3.6 billion yuan ($578 million) by a private placement of shares on the Shenzhen bourse. Meng Kai, the company's founder and chairman, will personally invest 960 million yuan through the private placement.

"Given the established image of Xiangeqing as a high-end restaurant, it has been very hard for Xiangeqing to transit into a mass-market brand," the company said in the filing.

To counter the slowdown in the high-end catering sector, Xiangeqing will focus on new media, big data and environmental protection in the future and the restaurant business may no longer be part of its listed assets, it said.

But investors showed less confidence in Xiangeqing's new direction. Shares in the company dropped 3.94 percent on Monday and 2.21 percent on Tuesday.

There could yet be more surprises. Trading in Xiangeqing's shares halted on Wednesday, with the company saying that it was considering "major matters," and trading will resume when a decision has been made, it said in a filing on Wednesday.

Caught in a downturn

China's high-end catering sector and other industries related to lavish spending such as premium liquor experienced a tough year in 2013, following the central government's decision in late 2012 to curb extravagant spending by officials.

Last year, catering companies in China reported total sales of 2.54 trillion yuan, up 9 percent year-on-year, compared with a growth rate of 13.6 percent in 2012, data from the National Bureau of Statistics showed.

However, the combined revenue of larger catering companies - those with at least 2 million yuan in annual sales revenue - dropped 1.8 percent to 818.2 billion yuan in 2013, the first fall since the statistics started being tracked.

Xiangeqing is one of the companies that has been hardest hit. In 2013, it reported a net loss of 564 million yuan, compared with total profit of 108.6 million yuan in 2012. Though the company reported net profit of 60 million yuan in the first quarter this year, it said that gains from its environmental business were the major contributor.

Famous Peking duck chain operator China Quanjude Group also suffered in 2013, with its net profit falling by 28.4 percent to 109 million yuan, according to its financial report released in January.

To combat the slowdown, Xiangeqing has closed 13 of its chain stores since July last year, and only 18 Xiangeqing restaurants are currently operating.

It also cut prices by around 20 percent at the beginning of this year to attract more consumers, a Xiangeqing employee told the Global Times on Tuesday.

Average consumption per person at Xiangeqing has been reduced to around 150 yuan from over 200 yuan and "our business returned to normal after the price adjustment," said a sales manager at a Xiangeqing restaurant in Beijing. 

Wrong recipe?

When the company announced the closure of five restaurants in February this year, Jiang Zhong, a member of the company's strategy department, told the media that Xiangeqing would focus on less high-end catering in the future, as well as environmental protection.

In a relatively short period, the company appears to have lost faith in the catering sector, despite having been involved in the business for more than seven years.

The company has been trying to diversify for a long time and has made several bold moves.

In December, Xiangeqing announced that it would acquire a 51 percent stake in Jiangsu Shengyi Environmental Technology Co. Later the same month, the company said it would buy a 51 percent stake in Hefei Tianyan Green Energy Development Co. And in February Xiangeqing proposed to wholly acquire Hefei Tianyan.

In March, Xiangeqing again surprised the investment world by announcing it would buy into two TV content companies, Beijing CCTV Splendid Film and TV Corp and Dinv Television Media (Shanghai) Co. This month, it unveiled an interest in the booming Internet sector.

Wang Danqing, a partner at Beijing-based ACME Management Consulting, told the Global Times on Tuesday that the moves may make Xiangeqing less vulnerable to turmoil in a single industry.

"Xiangeqing may eventually benefit from the fast growth in the three sectors [big data, new media and environmental protection], but high returns always come with high risks, as competition in the three sectors is fierce," Zheng Yujie, an analyst at CIC Industry Research Center, told the Global Times on Tuesday.

Others are also uncertain about the rapid change in Xiangeqing's focus. "It is not clear what Xiangeqing is doing… it will be a great challenge for the company to jump into a completely new sector," Li Zhiqi, chairman of CBCT Future Marketing Consulting Group, told the Global Times on Tuesday.

Experts said the prospects for Xiangeqing in the Internet sector are uncertain, as the industry is already dominated by giants like Baidu Inc, Tencent Inc and Alibaba Group.

One of Xiangeqing's rivals, Shanghai-based Xiao Nan Guo Restaurants Holdings, a Hong Kong-listed restaurant chain operator, chose a safer path by expanding its lower-end brand The Dining Room from Hong Kong into the mainland market in July last year.

China Quanjude has also started to put more efforts into family banquets and adjusting its menu to cater more to the mass market.

Li said that reliance on business from officials is unhealthy for high-end restaurant chains.

"There is still demand for high-end cuisine in the mass market. What they need to do is to target different consumers and improve their service quality," he said.