Once a darling of financial capital, the stock of one of Singapore’s favourite hotpot restaurants, Haidilao (HKG: 6862), has taken a heavy beating. Since its peak in February 2021, the Hong Kong-listed company has seen its valuation dropped by 80% to S$15.8 billion. It even appeared in a Straits Times article in 2021 titled “Hotpot chain Haidilao is Hong Kong’s worst stock”.
Now, with Singapore’s reopening and Shanghai’s two-month lockdown easing, would we see consumers return to Haidilao’s restaurants? More importantly, would the company see a reversal of fortune?
Given the unique predicament Haidilao is facing, investors might wonder if this is the time to buy the dip.
Haidilao Experienced A Record Loss In FY 2021
From turning a S$63.9 million profit in 2020, Haidilao suffered a massive S$859.7 million loss in 2021. In what seems to be the most challenging year for Haidilao, management attributes the losses to the following factors: First, the closure and suspension of more than 300 restaurants; second, a drop in restaurant operating performance; and third, the repeated COVID-19 outbreaks disrupting business.
For our Singapore readers who often see Haidilao outlets popping up, the announcement of closing 300 stores might come as a surprise. In fact, the hotpot chain has over 1,597 restaurants globally, so it’s closing about one-fifth of its total stores – though none is in Singapore. The core reason for that is Haidilao’s decision to expand during the pandemic, where it opened 843 new stores from 2020 to the first half of 2021. In hindsight, this (over)expansion during the pandemic was clearly a bad decision.
In a time when takeaway was the rage and people are afraid to eat out in big groups, its stores’ performance had drastically declined. The table turnover rate dipped from 4.8 per day in 2019 to 3.5 in 2020, to 3.0 in 2021. For its new restaurants, the rate was even lower at 2.3 per day.
Not only that, the new restaurants opened were in such close proximity to older restaurants that they cannibalised business from them. As a result, management executed the Woodpecker Plan to shut down underperforming stores and strengthen the performance of the remaining stores. Nevertheless, the damage has been done. According to its interim report in 2021, the total staff, property, and financing costs borne by the failed expansion are around S$684.9 million.
To further rein in costs, management is restoring the regional management system, as well as rebuilding functional departments to empower restaurant operations more effectively. Going forward, Haidilao is now more cautious about the expansion of new restaurants, and increasing diversification of its fare, such as expanding its sub-brands like Shi Ba Cuan, a Chinese fast-food noodle chain.
Haidilao And Other Chinese Restaurant Stocks Rise As China Reopens
You might have heard of Shanghai’s infamous 2-month lockdown in 2022 where people were confined to their own homes and couldn’t go out, let alone eat hotpot outside.
It finally came to an end when at the start of this month when major cities like Beijing and Shanghai began to relax pandemic restrictions. More importantly, dine-in services for restaurants are resumed. As optimism of re-opening increases, Chinese food stocks have surged, with Yum China Holdings – the largest restaurant chain in China – surging 9% in 5 days; and Haidilao jumping by 12%. After 2 years of delivery, Chinese hot-pot diners would be happy to have back their dancing noodle man, free manicures, and birthday cakes. Such services showcase Haidilao’s genuine commitment to exemplary customer experiences and are what differentiates it from its competitors.
Given that 91.9% of Haidilao’s income is from Mainland China, the restaurant will benefit from the economic reopening of the world’s second-largest economy.
Haidilao And The Hot Pot Phenomenon May Just Be Beginning
In Singapore, Hong Kong and China, the hotpot trend is heating up; but for many others around the world, adding vegetables, meat and fish into a bubbling cauldron of fragrant broth is still a relatively unfamiliar concept.
By looking at Haidilao’s annual report, we see that demand amongst foreign patrons for hotpot is quite high as the average spending per guest for Haidilao’s restaurants outside China (RMB 197.9/guest) is nearly double of that of its mainland China peers (RMB 101.2/guest).
Average Consumer Spending (Haidilao)
Out of Haidilao’s total 1443 restaurants currently, 1,329 are in China and only 114 are in other parts of the world.
What immediately comes to mind is the global expansion of the brand; though this time, it could apply the lessons learnt from its previous overexpansion mishap. Looking at previous case studies of successful food chains going global (McDonald’s, Starbucks, Pizza Hut), they all share the same three characteristics: standardised product offerings, unparalled customer loyalty, and efficient management structure. Haidilao’s food safety standards, supply chain procurement, and even the delivery processes are all maintained through more than 180 company regulations to ensure a uniform customer experience at all its outlets. And at the risk of sounding like a food snob, the good thing about Haidilao restaurants is that you are basically cooking it yourself – so there are no worries about the chef messing it up.
Meanwhile, Haidilao’s “service first, consumer first” approach help drives customer loyalty up, to the point that consumers readily help spread the brand through word of mouth, saving the company on marketing expenses. On the last characteristic, the company is still undergoing organisational restructuring to form an orderly and efficient operating mechanism.
As excitement builds up about Haidilao opening its first stores in the Philippines, San Diego, and other markets, global interest in the hotpot chain is expected to continue rising, considering that global Google search volume for “Haidilao Hotpot” has almost doubled since 2020. According to Mintel research, consumer spending on hotpot shops will increase by 9.9% annually till 2025, outpacing the entire food-service market. Thus, Haidilao rides on a highly favourable market wave of the internationalisation of the Chinese hotpot.
Haidilao Is Leading The Innovation and Technological Drive
The Haidilao restaurant at Marina Square Singapore boasts numerous futuristic experiences, from automatic soup base machines that remember customers’ favourite soup base recipes, to an Intelligent Kitchen Management System. Even while waiting, diners can immerse themselves in VR e-gaming at the 5G experience corner.
Besides investing in technology for business operations, Haidilao has developed a wide line-up of food items. In 2021, a total of 368 new products were created, including: 18 hotpot soups, 147 dishes, 75 desserts and snacks, and 128 drinks. One product, Haidilao’s Weissbier craft beer, even won first place in the 2021 CBC China International Beer Challenge. Additionally, Haidilao obtained 22 independently developed patents in 2021, bringing its total to nearly 100 patents. Some of the innovations include intelligent noodle-cooking equipment and a DIY milk tea machine.
These initiatives wholly illustrate Haidilao’s dedication to using technology and innovation to enhance customer experiences. In a book written by Haidilao’s co-founder and former CEO, and titled “海底捞,你学不会” which in English it means “You Can’t Copy Haidilao”, Mr Zhang Yong emphasize that competitors will never be able to imitate Haidilao’s customer experience because Haidilao will keep elevating their standards through technology and innovation.
How Does Haidilao’s Key Financial Ratios Compare To Its Competitor?
We will inspect 5 different ratios to evaluate Haidilao’s profitability, liquidity, growth, leverage and valuation. We will also compare these ratios with its closest competitor, Xiabuxiabu, the second-largest hotpot chain in China.
|Gross Margin (TTM)||14.85%||23.67%|
|EBITDA Margin (TTM)||8.81%||8.00%|
|Net Income Margin (TTM)||-10.13%||-4.76%|
Though Haidilao’s gross margin is at 14.85%, its 5-year average was 21.11%. It experienced lower margins this year due to more raw materials and consumables used due to optimisation of the menu to improve customer experience.
Haidilao maintains a healthy level of liquidity to meet its working capital requirements: a S$1.92 billion stockpile of cash and cash equivalents for procuring food ingredients, consumables, and equipment.
|Revenue Growth (Year-on-year)||43.68%||12.58|
|Revenue Growth (Forward)||21.06%||14.65|
|EBIT Growth (Year-on-year)||-80.52%||-71.69%|
|EBIT Growth (Forward)||56.40%||30.08%|
We see that, in general, Haidilao has higher revenue and EBIT growth compared to Xiabuxiabu, except for EBIT growth from 2020 to 2021.
|Debt to Equity||97%||85%|
Haidilao has seen its debt-to-equity ratio climb from 2.2% at the start of 2020 to 97% at the end of 2021, as it increased its use of banking financing to almost double its number of outlets during that time.
|Price to Sales||1.66||0.53|
|Price to Book Value||9.05||1.66|
|Price to Cash Flow||18.83||3.13|
Haidilao has a much higher valuation multiple – in terms of price to sales, book value and cashflow – as compared to Xiabuxiabu. Note that we do not use Price to Earnings here as earnings for both companies are negative.
The Bottom Line
Today, the shares of Haidilao are down by 80% since its February 2021 peak, reaching its lowest valuation ratio since its 2018 IPO. With investors lofty expectations now watered down after its 2021 full-year results, there is a greater chance for the company to outperform.
Additionally, its management’s ability to swiftly address disappointing results, such as through enacting the Woodpecker plan, gives greater conviction on Haidilao’s quality of management. If you’re looking for a company with unwavering customer loyalty, promising growth prospects and efficient use of technology, Haidilao may tick all these boxes.
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