Haidilao International Holding
Price target:
Morningstar ‘four stars’ HK$17.10
‘Undervalued’ with ‘impressive’ 95% payout ratio after 2QFY2024 results
Hong Kong-listed Chinese hotpot restaurant operator Haidilao International is “undervalued”, with its shares trading at just 12 times Morningstar Equity Research’s estimated FY2024 earnings.
Senior equity analyst Ivan Su notes that the company announced its first interim dividend of 39.1 Hong Kong cents for the six months ended June, representing an “impressive” payout ratio of 95%.
“While the company has not formalised a dividend policy, historical patterns suggest that once payout ratios reach such elevated levels, they often remain high for an extended period, unless significant investments or mergers and acquisitions occur,” writes Su in an Aug 27 note.
He adds: “Therefore, we have adjusted our long-term assumption on the dividend payout ratio from 60% to 80%. Under this revised assumption, Haidilao is currently trading at a 7% dividend yield.”
See also: OCBC, citing potential recovery, initiates coverage on Nanofilm with tentative 'hold' call
‘More confident’
The company on Aug 27 announced revenue in 2QFY2024 ended June 30 rose 13.8% y-o-y to RMB21.49 billion ($3.93 billion). Net income, however, fell 9.7% to RMB2.04 billion.
Basic earnings per share from continuing operations was RMB0.38 compared to RMB0.42 a year ago. Diluted earnings per share from continuing operations was RMB0.38 compared to RMB0.42 a year ago.
Haidilao’s interim results do not change Morningstar’s outlook for the company. Still, Su says he feels “more confident” following the earnings call as the firm sees an improvement in average spending in the Chinese restaurant sector.
See also: Macquarie revises Singapore earnings growth for FY2024 to 7% from 3%
“While other pieces of the puzzle remain, we see increased earnings visibility for the sector, reinforcing our favourable long-term view,” he adds, maintaining his four-star rating against a five-tier scale, which represents that “appreciation beyond a fair risk-adjusted return is likely”. He also maintains his fair value estimate of HK$17.10 ($2.86).
Despite macroeconomic headwinds in China, Haidilao’s revenue grew y-o-y, driven by same-store sales increases, notes Su.
Breaking down the 15% comparable growth shows a 20% y-o-y increase in customer traffic, offset by a 5% drop in the average spending.
The dip in average spending was due to heavy discounting during the economic slowdown, says Su. However, with Haidilao now scaling back these promotions, management has observed improvements in average spending without any drop in customer traffic. “They expect this positive trend to take hold through the rest of the year.”
The increase in average spending is not unique to Haidilao. Jiumaojiu, a catering group focusing on mainland China, also reported rising average tickets in July and plans to reduce promotions in the coming months, says Su.
“These comments suggest that spending in the restaurant sector has most likely bottomed out. More importantly, rising average spending, without a corresponding traffic decline, indicates that the industry can avoid a price war,” he adds. “Therefore, we continue to expect Haidilao to maintain above 10% operating margin, a key factor underpinning our four-star rating of the firm.”
Super Hi
Haidilao is a Chinese hotpot restaurant operator that started in Sichuan in 1998. The company is the second-largest restaurant company in China, behind Yum China but ahead of Xiabuxiabu and Jiumaojiu.
All of Haidilao’s restaurants are company-owned. According to Morningstar, expansion opportunities are now limited to only Greater China following the spinoff of the Hong Kong and Nasdaq dual-listed Super Hi International Holding — the operator of Haidilao stores overseas.
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On Aug 27, Super Hi announced revenue for 2QFY2024 ended June rose 12.5% y-o-y to US$183.3 million ($238.6 million). Super Hi attributes the increase to continued recovery in international markets and growing table turnover rates, which rose to 3.8 times per day in 2QFY2024, compared to 3.3 times per day in 2QFY2023.
The total table turnover rate is calculated by dividing the total tables served for the period by the product of the total Haidilao restaurant operation days for the period and the average table count during the period.
As of June 30, Super Hi has 122 “self-operated” Haidilao restaurants in 13 countries across four continents. It presents this geographical data across Southeast Asia, East Asia, North America and Others. In 2QFY2024, Super Hi opened four new Haidilao restaurants and closed one in Southeast Asia that had been underperforming for a prolonged period, resulting in a net increase of three new Haidilao restaurants.
That said, Super Hi reported a loss of US$104,000 for 2QFY2024, compared to a loss of US$2.2 million in 2QFY2023. Super Hi attributes this improvement to greater revenue during the quarter.
Operating income during the quarter was US$8.5 million, down 14.1% y-o-y. Operating income margin fell to 4.6% from 6.1% last year. Super Hi attributes this to higher rental and related expenses, including property management fees from opening new restaurants and the increase in variable lease payments, along with listing expenses of US$1.8 million for its Nasdaq dual-listing in May.
This is Super Hi’s first set of results under its new group CEO and executive director Yang Lijuan, who took on the top job on July 1 after Haidilao co-founder Zhang Yong stepped down. Yang joined Haidilao in 1995 as a waitress. She served as CEO of Haidilao International from March 2022 to June.
Commenting on Super Hi’s results, Yang says: “During the second quarter of 2024, we focused on enhancing our local restaurant management across key areas including environment, services, products and food safety. This approach aims to improve guest satisfaction, strengthen guest connections and boost operational efficiency.”
She adds: “Our efforts yielded tangible results, with our table turnover rate increasing to 3.8 times per day, up 0.5 times per day from the same period of last year. During the quarter, revenue grew by 12.5% y-o-y, driven by the ongoing recovery of the macro environment and our local restaurants’ concerted efforts to improve performance by enhancing guest satisfaction, expanding our guest base, capturing more diverse consumption scenarios and optimising product offerings. Our achievements underscore our commitment to sustainable growth and position us well for continued success in the evolving restaurant industry landscape.” — Jovi Ho
CSE Global
Price target:
RHB Bank Singapore ‘unrated’
RHB Bank Singapore analyst Alfie Yeo has highlighted CSE Global 544 ’s exposure to global growth across diversified segments in an August 27 unrated report.
Yeo notes that the global systems integrator offers exposure to energy, infrastructure, mining and minerals sectors across the US, UK, Singapore, Australia and New Zealand. The stock is a play on critical communications and infrastructure development, he adds.
Aside from registering a strong 1HFY2024 ended June, CSE Global also has a robust order book of $692 million. Yeo points out that the company’s order intake continued to be strong at $391 million, similar to 1HFY2023.
“Its order book is largely accounted for by the electrification segment, followed by automation and communications. We estimate that about 30% of its order book will be recognised in the remainder of this year,” he says.
RHB thinks CSE Global’s growth will be driven by both the electrification and communications segments, with the automation segment outlook remaining stable.
The electrification segment, Yeo says, is driven by infrastructure and renewable energy development in towns and cities, steering more power grid electrification projects. These are where there is increasing demand for electricity due to digitisation, IT and automation, more data centres, adoption of electric vehicles and more efficient utility installation, among others.
Meanwhile, growth in the communications segment will be supplemented through acquisitions in the US, where the company is looking to increase its contribution.
Yeo also highlights CSE Global’s new acquisition — the company recently announced the US$11.5 million ($14.97 million) acquisition of RFC Wireless Inc, an advanced communication solutions provider from portable and mobile radios to wide area networks and infrastructure.
The acquisition is earnings accretive. Based on net profit ended Dec 31, 2023, the acquisition will contribute to about 13% of CSE’s existing net profit.
“Its strategy is to acquire and aggregate more of such similar companies across the US to bolster the customer and installed base for its communications business. Such acquisitions will support earnings growth going forward,” says Yeo. — Khairani Afifi Noordin
Delfi
Price target:
Lim & Tan ‘accumulate’ $1.04
Stock has ‘attractive yields’ as it waits for recovery
Lim & Tan Securities has lowered its target price for Delfi to $1.04 from $1.30, but kept its “accumulate” call on the chocolate manufacturer as it has “attractive yields while awaiting recovery”.
This report follows the group’s 1HFY2024 ended June results, in which CGS International previously also lowered its target price to 93 cents but maintained its “add” call.
Lim & Tan’s analyst Chan En Jie says that Delfi’s 1HFY2024 results came in below expectations, with revenue and net profit coming in at 46% and 42% of his full-year forecast.
Revenue declined 7.8% y-o-y to US$260.8 million ($340.12 million), impacted by several headwinds including a weaker Indonesian rupiah against the US dollar, weaker consumer spending as well as termination of an agency brand in Indonesia.
The main contributor to weaker sales is due to a declining rupiah against the US dollar, which also impacted raw material costs bought in US dollar, notes the analyst.
He says that excluding forex impact, total revenue saw a smaller y-o-y drop of 3.3%, but the exchange rate differences may have found support since July 2024 from the upcoming US rate cuts.
As cocoa prices have skyrocketed, almost tripling from US$3,500 per ton to US$9,000 per ton over the past year, rising cocoa prices will inevitably compress margins unless price adjustments are passed on to customers, says Chan.
Meanwhile, gross margins of 28.8% saw a slight drop as Delfi reduced trade promotions to defend margins from higher cocoa costs, the analyst adds.
“Delfi’s SilverQueen brand name is culturally connected to Indonesians, and Delfi is confident the pricing power of its brands enable them to pass through price increases when necessary,” says Chan. “Management believes current cocoa prices of more than US$9,000 per ton are unsustainable which will likely encourage farmers to plant more beans and increase supply.”
But despite lower earnings, Delfi maintained its interim dividends at 2.72 cents, he adds. “Backed by stable cash flows and a strong net cash position, we believe Delfi has the capacity to maintain full year dividends, an attractive 7.2% yield,” Chan continues.
Chan bases his valuations on 12.9 times FY2024 P/E, and cuts his previous FY2024–FY2025 revenue and earnings estimates by 11%/10% and 22%/21% respectively in view of higher cocoa prices and rupiah/US dollar weakness.
At its current share price of 80 cents, Delfi’s valuations of 9.9 times forward P/E and 1.4 times P/B are at a deep discount relative to its historical average and peers, the analyst adds. — Nicole Lim
Silverlake Axis
Price targets:
CGS International ‘reduce’ 25 cents
PhillipCapital ‘accept cash offer’
Privatisation offer ‘reasonable’: analysts
A day after reducing her call from “hold” to “reduce” and lowering her target price to 25 cents, CGS International (CGSI) analyst Andrea Choong reiterated her “reduce” call Silverlake Axis 5CP (SAL) after its privatisation announcement.
On Aug 26, SAL received a voluntary unconditional offer from its chairman, who controls 74% of the company’s stake, to take it private at 36 cents per share in cash.
The offeror, E21, is wholly owned by Zezz FundQ and is an entity set up for this corporate exercise. Zezz FundQ is a controlling shareholder of SAL and has two classes of shares.
The shares include ordinary shares wholly owned by founder and chairman Goh Peng Ooi and redeemable convertible preference shares wholly owned by Merit Sigma, which is wholly owned by a fund managed by Ikhlas Capital Singapore, an Asean private equity fund.
Choong notes that the consideration for the offer will be, at the election of the shareholder, either 36 cents in cash for each share or a combination of 30 cents in cash and one new redeemable preference share (RPS) in E2I. The redemption amount for each of E21’s RPS is 18 cents.
“The offer of 36 cents in cash per share represents a 20% premium to its last transacted share price and a 28% premium to its volume-weighted average price of the last month of trading,” says Choong in her Aug 27 report. “The offer values SAL at 24 times FY2025 P/E (ex-cash), which is comparable to the average of peers in its sector (average 26 times FY2025 P/E).”
The analyst says this offer seems reasonable. Should all eligible shareholders take up the total cash offer, this would imply a cash outlay of about $235 million by E21 (for the stake not owned by Zezz FundQ), in her estimate.
Meanwhile, Choong says the RPS will not carry any voting or dividend rights and will be mandatorily redeemed by E21 upon the expiry of five calendar years from their issuance.
“We highlight that the RPS are in a private unlisted company and will not be listed on any securities exchange, which makes it relatively challenging to assess the risks and creditworthiness of the offeror at the current juncture,” Choong adds.
PhillipCapital analyst Glenn Thum is recommending SAL’s shareholders accept the company’s cash offer of 36 cents.
The offer of 36 cents per share represents some 2.7 times SAL’s net asset value (NAV) per share of 13.5 cents as of June 30, Thum points out in his Aug 29 report. It is also 20% higher than the company’s last-closed price of 30 cents on Aug 23.
Alternatively, shareholders may opt for a combination of 30 cents per share in cash and one new redeemable preference share in the capital of E2I. The new redeemable preference share will not be listed on any securities exchange and does not carry any voting or dividend rights. They will mandatorily be redeemed five years after their issuance at 18 cents apiece, representing a five-year CAGR of 24.6%.
As such, Thum recommends investors accept SAL’s cash offer.
On Aug 23, SAL reported earnings of RM103.3 million ($31.1 million) in FY2024 ended June 30, 39% lower y-o-y. 4QFY2024 earnings fell by 79% y-o-y to RM14.7 million due to lower gross profit and higher costs.
Based on Thum’s estimates, SAL’s 4QFY2024 results were below his estimates. The company’s revenue and earnings for the full year stood at 97% and 70% of his full-year estimates respectively.
“Revenue [for the FY2024] was flat as the increase in recurring revenue (maintenance and enhancement services, insurance ecosystem transactions and services, and retail transactions processing revenue) was offset by a drop in non-recurring revenue (software licensing, software project services, and sale of system software and hardware products),” he writes.
“[Full year] gross profit fell 9% y-o-y as there was a change in revenue mix and a fall in higher margin revenue streams like software licensing. Higher costs of sales and operating expenses (opex) from streamlining business operations led to a decline in patmi,” he adds. — Nicole Lim & Felicia Tan
Hong Leong Asia
Price target:
CGS International ‘add’ $1.20
‘Blowout’ 1HFY2024 with undemanding valuations
CGS International’s Ong Khang Chuen and Kenneth Tan have kept their “add” call on Hong Leong Asia H22 H22 at a higher target price of $1.20 from $1.00.
The analysts note that Hong Leong Asia’s patmi in 1HFY2024 ended June of $50 million formed 66% of their full-year forecasts, beating expectations.
The group also resumed an interim dividend per share (DPS) of 1 cent for 1HFY2024.
“Both core segments performed strongly in 1HFY2024, with y-o-y profit after tax (pat) growth of 29% at its powertrain solutions segment and 35% at building materials segment,” write Ong and Tan.
Hong Leong Asia’s subsidiary, China Yuchai, recorded strong unit engine sales growth of 16% y-o-y in the period, outpacing the industry’s growth of 4% y-o-y due to improved product price competitiveness, new gas engine model launches and stronger export sales.
Ong and Tan also see the policy launched in July by China’s National Development and Reform Commission (NDRC) as a driving factor for Yuchai.
The stimulus programme encourages the scrapping of older commercial vehicles and equipment in favour of newer, more environmentally-friendly models, with rebates of up to RMB140,000 ($25,571) per truck provided to owners who scrap existing heavy-duty trucks and replace them with new energy trucks.
“We believe the supportive policy backdrop can aid industry prospects in 2HFY2024, though effectiveness could be constrained by the weak economic backdrop in China,” write Ong and Tan.
Meanwhile, Hong Leong Asia’s subsidiary in Malaysia, concrete supplier Tasek, saw higher volumes and selling prices, leading to better profitability in 1HFY2024.
The analysts write: “Industry outlook remains positive in Malaysia, in our view, driven by rising data centre demand and expectations of more government infrastructure rollouts for the Penang LRT, Johor autonomous rapid transit (ART), and potentially the Kuala Lumpur-Singapore high-speed rail.”
They add that operations in Singapore also improved on the back of a strong order book and the cessation of the heightened safety alert.
“While Hong Leong Asia’s prefabrication business faced some slowdown in 1HFY2024, we expect a better showing in 2HFY2024 as [its] order book grows.”
The analysts’ higher target price comes from improving prospects across Hong Leong Asia’s key business segments, higher earnings per share (EPS) and higher stake in Yuchai. They have raised their EPS estimates for FY2024 to FY2026 by 6.7% to 8.4% on higher sales volume assumptions from Yuchai and the company’s higher stake in Yuchai.
“We believe Hong Leong Asia is an underappreciated proxy for the Singapore/Malaysia construction industry upcycle,” say the analysts.
“Excluding listed subsidiaries/associates, Hong Leong Asia’s Building Materials unit segment (60% of 1HFY2024 patmi before corporate costs) has an implied valuation of $172 million (2 times 12 month-trailing P/E), based on [its] latest market cap,” they add. — Douglas Toh
China Yuchai
Price target:
CGS International ‘add’ US$13.20
FY2024 to be ‘year of recovery’
CGS International’s Ong Khang Chuen has maintained his “add” call on NYSE-listed China Yuchai at a raised target price of US$13.20 ($17.20) from US$11.70 following the company’s healthy 1HFY2024 ended June results. China Yuchai is a subsidiary of SGX-listed Hong Leong Asia.
China Yuchai’s 1HFY2024 patmi of RMB240 million ($43.9 million) formed 71% of Ong’s FY2024 forecast, beating his expectations.
He writes in his Aug 23 report: “[The] key surprise was strong unit engine sales growth of 16% y-o-y, which outpaced industry growth of 4% y-o-y in 1HFY2024.”
This was due to improved product price competitiveness, the launch of new gas engine models, and stronger export sales. Improved economies of scale and cost reduction efforts also drove a 0.6 percentage point (ppt) y-o-y improvement in gross profit margin to 16.8%.
“Its share of profit from associates and joint ventures (JV) also grew 45% y-o-y, led by MTU Yuchai (JV with Rolls Royce for production of power generators),” adds Ong.
Ong also sees the policy launched in July by China’s National Development and Reform Commission (NDRC) as a driving factor for Yuchai in 2HFY2024. However, its effectiveness could be constrained by the weak economic backdrop in China.
The stimulus programme encourages the scrapping of older commercial vehicles and equipment in favour of newer, more environmentally-friendly models, with rebates of up to RMB140,000 ($25,571) per truck provided to owners who scrap existing heavy-duty trucks and replace them with new energy trucks.
In June, Yuchai announced a US$40 million ($52.1 million) share buyback plan. As at Aug 14, 3.2 million shares have been repurchased for US$38.5 million.
In June, the company introduced equity incentive plans involving 6.54% of the expanded equity in its subsidiary, Guangxi Yuchai Marine and Genset Power (MGP), which specialises in power generators and marine engines.
The analyst writes: “We see potential for MGP to pursue an initial public offering (IPO) in the next five years. An independent valuation by Zhongming Valuer as at December 2023 estimates MGP’s fair value at around RMB2 billion. As at end-FY2023, MGP has a net asset value of RMB1.3 billion, versus China Yuchai’s RMB12 billion.”
Overall, the analyst expects FY2024 to be a year of recovery for Yuchai, with its undemanding valuations of 0.3 times price-to-book value (P/BV). — Douglas Toh
