Hong Kong-listed Chinese hotpot restaurant operator Haidilao 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, which represents 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.”
‘More confident’
The company announced on Aug 27 its results for 2QFY2024 ended June 30, with revenue up 13.8% y-o-y to RMB21,490.9 million. Net income, however, fell 9.7% to RMB2,038.13 million.
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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, but Su says he feels “more confident” following the earnings call as the firm is seeing average spending improvement for the Chinese restaurant sector.
“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.
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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 International is a Chinese hot pot 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.
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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.
Super Hi similarly announced on Aug 27 its results for 2QFY2024 ended June 30, with revenue up 12.5% y-o-y to US$183.3 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.
Total table turnover rate is calculated by dividing the total tables served for the period by the product of total Haidilao restaurant operation days for the period and 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 restaurant 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 the quarter, 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% this time last year. Super Hi attributes this to higher rental and related expenses, including property management fees from the opening of 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 this year.
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.”
As at 10.45am, shares in Haidilao are trading 40 Hong Kong cents higher, or 3.24% up, at HK$12.74; while shares in Super Hi are trading 14 Hong Kong cents lower, or 1.11% down, at HK$12.50.
