Haidilao International Holding Ltd (“Haidilao”) (HKG:6862)’s stock has taken a beating this year. Its shares have plunged more than 50.0% year-to-date, as dine-in restrictions and safety measures means that the company experienced less in-store traffic, hammering its business hard. 

Here are 3 reasons why Haidilao’s share price is falling.

1. Covid-19 challenges

The company’s business was severely affected in 2020 due to the outbreak of the Covid-19 epidemic. To protect the health and safety of its customers and employees, the company suspended the operations of all its restaurants in Mainland China voluntarily from January 26, 2020. Meanwhile, the Covid-19 epidemic raged overseas, which severely affected its restaurant business in the overseas markets. 

The company gradually reopened restaurants in Mainland China from March 12, 2020 as Covid-19 restrictions eased. In each reopened restaurant, various Covid-19 prevention and control measures were adopted, including the implementation of customer flow controls, setting up a temperature measure point, providing hand sanitizer at the entrance, and distributing disposable mask storage bags to customers, in order to create a safe and sound dining environment. 

For the financial year ended 31 December 2020, the company recorded a revenue of RMB28.6 billion, an increase of 7.8% as compared to the year 2019. However, profit for the year 2020 was RMB309.5 million, a decrease of 86.8% as compared to the year 2019. 

Apart from the Covid-19 challenges mentioned, management pointed out that overall profitability of the company in 2020 was greatly affected by foreign exchange losses due to the appreciation of the RMB against the US dollar and other foreign currencies. The net loss of foreign exchange in 2020 was RMB234.8 million as compared to the net gain of foreign exchange in 2019 of RMB90.7 million.

2. Weak new stores performance

Despite the uncertain business conditions, Haidilao adopted an aggressive approach in store expansion, as it anticipated a recovery trend in the catering industry. The company opened many new restaurants in the second half of 2020 and in the first half of 2021. As of June 30, 2021, the number of global restaurants more than doubled to 1,597 stores as compared to 768 as of 31 December 2019. 

As a result, the company recorded revenue of RMB20.1 billion in the first half of 2021, an increase of 105.9%, as compared to the corresponding period in 2020. Meanwhile, profit for the first half of 2021 amounted to RMB96.5 million, an increase of 110.0% as compared to the corresponding period in 2020. 

Notwithstanding the improved financial performance, new store performance has been weaker than expected, while same-store table turnover recovery is only at 60.0-70.0% of 2019 levels. Management has commented that the period of time for the newly-opened restaurants to their first breakeven and returns on cash investment was longer than prior periods; and that the operations of restaurants were still suffering from the continued impact of the Covid-19 epidemic. 

Key Business Highlights31 December 201931 December 202030 June 2021
Number of Haidilao restaurants7681,2981,597
Average table turnover rate (times/ day)4.83.53.0
Average spending per guest (RMB)105.2110.1107.3

(Source: FY2020 and first half FY2021 results)

3. Possible consumer behavioural changes

China has adopted an assertive approach when it comes to containing any outbreaks of Covid-19, moving quickly to conduct mass-testing and quarantining. As an example, authorities in the southern Chinese province of Guangdong have lockdown areas to try to control a flare up in Covid-19 cases in Guangzhou due to the Delta variant. 

From the investor’s perspective, one should be cautious of possible consumer behavioural changes post-Covid-19, like fewer dining-out occasions and more home cooking and takeaway. In the past, people have been waiting for tables, but now it is tables waiting for people. If those consumer behaviour changes are permanent post-Covid-19, Haidilao’s investment case and aggressive expansion strategy may be detrimentally impacted.  

Haidilao’s hotpot competitor, Xiabuxiabu Catering Management (China) Holdings Co., Ltd (“Xiabuxiabu”) (HKG:0520) is facing similar challenges.  Shares of Xiabuxiabu are down over 60.0% this year, on course to erase almost all of their 2020 gains. Chief Executive Officer He Guangqi revealed in a recent interview with the Chinese media that Xiabuxiabu will close 200 loss-making stores. He pointed out, “After more than two months of market visits, we found that some stores had serious site selection errors, which resulted in losses. This is also a decision made by the company in order to maintain long-term operations.”

Tables turned

In an industry that is most competitive, Haidilao has achieved unprecedented heights. Investors have poured into its stock in the past, sending its price soaring to dizzying valuations. Even with the more than 50.0% decline this year, the company is still trading at a market capitalization of HKD173.1 billion and trailing price to earnings (PE) ratio of 102.0 times. 

(Source: Google Finance)

The company is currently struggling to replicate its past success despite significant new store additions, fuelling fears that the pandemic may cause further disruption to Haidilao’s business model. Investors could do well to be cautious and stay on the side lines for the moment. 

1 COMMENT

  1. In this sector, another interesting stocks is Ajisen Holdings. Its more of a value play, though, with the benefit that, even if the market fails to recognize its value, dividends will make up for it – dividends have been steady for quite some time. This IF the business really is a good business.

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