How is the performance of Haidilao?

Currently, there are three Haidilao-related companies listed on the Hong Kong stock market, including Haidilao (06862.HK), which operates the Haidilao hotpot chain in Greater China, Teahai International (09658.HK), which operates overseas Haidilao hotpot chain stores, and Yihai International (01579.HK), the upstream material supplier for the first two companies.

Teahai International is the overseas business spun off by Haidilao in August 2022. At that time, Haidilao shareholders could receive Teahai International shares in proportion. Teahai International was introduced on the Hong Kong Stock Exchange in December 2022 and listed on Nasdaq in May 2024.

Based on the current prices of the three Hong Kong-listed companies, the total market value of the Haidilao series in Hong Kong stocks may reach HKD 88 billion. Daniel Zhang is the controlling shareholder of the three listed companies, with a total holding value of HKD 49.2 billion.

All three companies recently announced their performance for the first half of 2024 ending on June 30. In terms of performance, all three companies achieved double-digit revenue growth, but their profit performance varied. After the performance announcement, the stock price of Haidilao, which operates in Greater China, rose slightly, while Teahai International and Yihai International fell by 3.51% and 6.02% respectively.

Haidilao: Core operating profit growth

As of June 30, 2024, Haidilao had a total of 1,343 restaurants, with 1,320 located in mainland China and 23 in the Hong Kong, Macau, and Taiwan region. In the first half of the year, Haidilao opened 11 new restaurants and closed a total of 43 stores, indicating that Haidilao is still maintaining a policy of cautious expansion and optimizing its stores.

Compared to the same period last year, the average customer spending in 2024 was RMB 97.4, a year-on-year decrease of 5.34%, reflecting adjustments in Haidilao's menu pricing. The average customer spending in mainland China decreased by 5.15% year-on-year to RMB 95.7, while the average spending in the Hong Kong, Macau, and Taiwan region decreased by 3.80% year-on-year to RMB 197.7.

There was a significant improvement in overall table turnover rate in the first half of this year, increasing from 3.3 in the same period last year to 4.2. The table turnover rate in third-tier and below cities in mainland China saw the most significant improvement, rising from 3.2 to 4.1 year-on-year. The overall table turnover rate in mainland China showed a significant improvement, increasing from 3.3 to 4.2 year-on-year. The table turnover rate in the Hong Kong, Macau, and Taiwan region only slightly increased from 4.1 to 4.2 year-on-year.

The improvement in table turnover rate offset the impact of average customer spending. In the first half of 2024, Haidilao achieved operating income of RMB 21.491 billion, a year-on-year increase of 13.79%, with restaurant operation revenue reaching RMB 20.414 billion, a year-on-year increase of 13.82% In the first half of the year, the attributable net profit of shareholders decreased by 9.74% year-on-year to 2.038 billion yuan, mainly due to changes in net exchange gains and losses, as well as the impact of the cancellation of the mainland value-added tax additional deduction preferential policy. Excluding these impacts and not considering the performance of equity method investees and joint ventures, as well as fair value changes in financial assets, Haidilao's core operating profit was 2.799 billion yuan, an increase of 13.02% year-on-year. It is estimated by Finet that its core operating profit margin in the first half of the year may be 13.02%, still a decrease of 0.09 percentage points compared to the same period last year.

Haidilao announced a mid-term dividend of HKD 0.391 per share.

In the first half of the year, Haidilao introduced a franchise model, but so far, the related business does not seem to contribute to revenue. Haidilao stated that it will continue to adopt a bottom-up approach to opening stores in the second half of the year to enhance operational management capabilities, with a significant increase in the number of new stores compared to the first half of the year.

Teahai International: From Profit to Loss

Different from the focus on business optimization in the Greater China region, Haidilao's overseas business Teahai International still focuses on expansion. As of June 30, 2024, Teahai International had a total of 122 restaurants, a net increase of 7 stores compared to the same period last year, expanding its restaurant network to 13 countries in Asia, North America, Europe, and Oceania. Southeast Asia remains the main market, with 74 restaurants, a net increase of 4 compared to the previous year, accounting for 60.7% of the total. The half-year revenue was 196 million US dollars, accounting for 54.9% of the total revenue.

Overall, in the first half of 2024, Teahai International's average customer spending was $24.6, approximately 175.47 RMB, a 3.53% year-on-year decrease. The overall average table turnover rate increased from 3.3 in the same period last year to 3.8, with the table turnover rate in the main market of Southeast Asia increasing from 3.3 to 3.7. The operating profit margin at the restaurant level increased by 0.4 percentage points year-on-year to 8.7%.

In the first half of 2024, Teahai International's revenue increased by 14.51% year-on-year to 371 million US dollars, approximately 2.646 billion RMB; however, due to rising costs such as raw materials, consumables, employee costs, and rent, the company recorded a net loss of 4.58 million US dollars during the period, compared to a profit of 3.54 million US dollars in the same period last year.

Considering that Teahai International will continue to expand into overseas markets in the future, costs may continue to rise, affecting its future profitability.

Yihai International: Net Profit Decreased by 13.8%

Yihai International mainly provides cooking seasoning solutions and is also a supplier of seasoning products for related parties such as Haidilao, Teahai International, and Shuhai Supply Chain. Unlike Haidilao and Teahai International, which operate chain restaurants, Shuhai Supply Chain mainly provides integrated food ingredient supply chain solutions to catering chain enterprises and retail customers. In addition, Yihai International also provides food to consumers.

Its products mainly include hot pot seasonings, compound seasonings, convenient fast food, and other businesses.

In the first half of 2024, related party customers (namely Haidilao, Teahai International, and Shuhai Supply Chain) contributed revenue of 989 million yuan to Yihai International, an increase of 11.46% year-on-year, accounting for 33.8% of Yihai International's total revenue. However, third-party customers remain the most important source of revenue for Yihai International, contributing revenue of 1.691 billion yuan in the first half of the year, a year-on-year increase of 10.29%, accounting for 57.8% of its total revenue.

Driven by customer demand growth, Yihai International's revenue in the first half of 2024 increased by 11.88% year-on-year to 2.927 billion yuan. Due to market-based price adjustments for hotpot base materials sold to related parties, the gross profit margin decreased by 0.5 percentage points year-on-year to 30.5%. In addition, the significant increase in online marketing expenses and transportation costs led to a 46.9% increase in distribution expenses. As a result, Yihai International's net profit attributable to shareholders in the first half of the year decreased by 13.85% year-on-year to 308 million yuan. The company declared a mid-term dividend of 0.2825 yuan per share.

Finance News noted that the profit margin of Yihai International's related parties is relatively low, and the increase in the proportion of third-party customers should be beneficial to its future profit level. However, judging from the increase in marketing expenses in the first half of the year, the expansion of marketing channels may not be as smooth, which may also be one of the reasons for the decline in its stock price after the performance announcement.

Conclusion

Haidilao still mainly relies on its business in the Greater China region. Its biggest challenge is the fierce competition in the local catering industry. Its past practice of expanding by opening new stores to increase revenue growth may not be effective.

In the first half of this year, Haidilao introduced a franchise system. At the performance release conference, the management stated that the applications were very enthusiastic, mainly from third-tier and below cities. Since 2021, third-tier and below cities have surpassed second-tier cities to become the market with the most Haidilao stores. Looking at its performance in the first half of the year, the same-store daily sales growth in third-tier and below cities was the strongest, increasing by 19.16% year-on-year, compared to 10.47% in first-tier cities and 13.03% in second-tier cities. Lower-tier markets may become the main growth point for Haidilao in the future.

Alongside announcing mid-term performance, Haidilao appointed Zhang Junjie, the founder of the currently popular Ba Wang Cha Ji tea brand, as an independent non-executive director. He will mainly be responsible for supervising the Haidilao board and providing independent judgment. It remains to be seen whether this will bring new ideas for Haidilao's development