Share prices of Little Sheep surged yesterday after the hotpot chain operator said its second largest shareholder Yum! Brands is purchasing an additional 7.3-percent stake in the company.

The company's share price soared nearly 8.3 percent to HK$4.69 yesterday, the biggest ever in the past two months, before settling down at HK$4.4 at close, up 1.62 percent from the previous day.

Little Sheep late on Wednesday said Yum! Brands plans to pay HK$300 million to buy 7.3-percent stake from its shareholders, at a price of HK$4 per share.

The shareholders include six executive directors including Chairman Zhang Gang, and two non-executive directors and some other high-level executives.

The company's shares were suspended from trading on Wednesday and resumed trading yesterday.

However, the share purchase plan is yet to be cleared by the relevant authorities, Little Sheep said in a statement.

Jamieson Wang, vice-president of Public Affairs & Government Relations of Yum! Restaurants China, was not reachable for comments on the deal.

The proposal, if finalized, will be the second such between Little Sheep and Yum! Brands. In March, the US catering group agreed to buy a 20-percent stake in Little Sheep for $63 million, which made Yum! Brands the second largest shareholder in the company after Chairman Zhang who holds a majority stake. The deal was completed in June.

"The purchase signals Yum! Brands' passion for China's catering industry, and also its strong confidence in Little Sheep," said Yu Gong, executive general manager of Beijing EZ Capital, a venture capital and private equity consultancy.

"Obviously, the 20-percent stake is not enough for Yum! Brands and the company wants more," said Yu.

Yum! Brands, the operator of KFC and Pizza Hut restaurants, has pinned high hopes on the Chinese market, which contributes nearly 40 percent of its sales.

China's restaurant industry grew 27 percent last year to $259 billion, according to Euromonitor.

Yum! Brands entered the Chinese fast food sector in 2005, by creating the East Dawn brand.

However, the company has charted plans to expand into more areas after it agreed to buy stake in Little Sheep.

After completing the first deal, Yum! Brands appointed two non-executive directors in Little Sheep. The directors are however, not involved in the business operations.

Set up in 1999, Little Sheep has expanded to have 475 restaurants in China and beyond by the end of 2008. The company's interim financial report showed that sales during the first half increased by 18.5 percent from a year earlier while profits fell 7.2 percent.

"Yum! recognizes the business model of Little Sheep. We want to be a leading restaurant brand and Yum!'s global experience could be of big help to us," said Li Lichan, spokesperson, Little Sheep.