A Deep Dive IntoHaidilao International Holding Ltd | Part 2

Founded in 1994 and listed in 2018, Haidilao International Holding Ltd (“Haidilao”) (HKG:6862) is a global fast-growing Chinese cuisine restaurant brand focusing on hotpot cuisine. In Part 1 of this article, we examined the industry and business model of the Haidilao. In Part 2, we will take a closer look at management and financials of the group.  

Major shareholders  

The key founders of Haidilao include Mr. Zhang Yong, Ms. Shu Ping (spouse of Mr. Zhang), Mr. Shi Yonghong and Ms. Li Haiyan (spouse of Mr. Shi). Mr. Zhang and his wife hold the majority stake of 68.60% through several discretionary trusts. Meanwhile, Mr. Shi (and his wife together) holds 16.39%. 

(Source: FY2019 annual report)

Management model and philosophy

Haidilao began with humble origins. Its founder, Mr. Zhang opened its first shop in 1994 with only 4 tables in a small booth. Mr. Zhang was a low-wage factory worker who loved learning and tried hard to improve his life circumstances. As a result of his own life experiences, he empathized with the challenges and aspirations of his young employees coming from rural areas or small towns. Haidilao’s culture was very much shaped from the onset by Mr. Zhang’s values and belief in meritocracy and fair opportunities for social mobility. He highlighted that “the core philosophy of Haidilao is that you can change your life using your own hands”. This is very much the driving force behind the management model of Haidilao and sends a very powerful message to all its employees. 

Haidilao’s philosophy of “aligned interest and disciplined management” (连住利益，锁住管理) ensures the interest of employees are united with the company to propel bottom-up driven growth and disciplined management. The group’s high levels of employee loyalty are rare in the business world. Its rate of frontline staff turnover is far below that of competitors and management staff turnover is low. Furthermore, the group has structured very attractive pay incentives and welfare packages to take care of its employees. Outstanding employees may even receive free apartments, parental subsidies, children’s educational allowances and other benefits. There are also referral incentives and many employees would refer their family and friends to work there.

Financials  

Measure 1: Growth in revenue and profits

Haidilao has recorded spectacular growth in revenue and profits at compounded annual growth rates (CAGR) of 58.00% and 51.04% from FY2017 to FY 2019. Hotpot cuisine is in demand and business has flourished as Haidilao is one of the largest hotpot cuisine brands in China. 

Measure 2: Profitability

Haidilao’s net profit margins have remained fairly stable around 8.8% – 9.7% over the past 3 years despite the competitive F&B landscape where the barrier of entry is low, and competition is plentiful and fierce. Furthermore, the group has achieved a double-digit return on equity ratios over the same period which is commendable.

Measure 3: Liquidity

No major concerns here as Haidilao has a strong balance sheet and has recorded positive current and cash ratios from FY2017 to FY2019. Additionally, the group has a negative net gearing ratio for FY2019 which indicates that its bank and cash balances exceed its total borrowings.

Round 4: Dividends payout

Haidilao’s dividend per share has increased in line with higher profits. However, as the group is in a growth phase, management should conserve cash to reinvest in the business.  

Release of 1H 2020 financial results

Haidilao recently released its financial results for the 6 months ended 30 June 2020. A snapshot is enclosed.

	Cumulative period ended	Change
	30.06.2020 RMB’000	30.06.2019 RMB’000	%
Revenue	9,760,605	11,694,626	(16.54)
Revenue from Haidilao restaurant operations	9,150,653	11,331,412	(19.25)
(Loss) profit before tax	(924,418)	1,251,008	(173.89)
(Loss) profit for the period	(964,507)	912,165	(205.74)
Net (loss) profit attributable to owners of the company	(964,602)	911,035	(205.88)

As of 30 June 2020, the principal business of the group has been materially affected due to the outbreak of Covid-19. The group had suspended the operation of all restaurants in mainland China temporarily since 26 January 2020. With the pandemic now in control, the group has reopened most of its restaurants suspended in Mainland China since 12 March 2020. The health crisis also hit markets outside Mainland China as the virus enveloped the globe. 

In the first half of 2020, Haidilao actively opened new restaurants and continued to expand its network. The group opened 173 new Haidilao restaurant, expanding the global Haidilao restaurant network from 768 restaurants as of 31 December 2019 to 935 restaurants as of 30 June 2020, among which 868 restaurants were located in 164 cities in Mainland China, and 67 restaurants were located in Hong Kong, Macau, Taiwan, Singapore, South Korea, Japan, the United States, Canada, the United Kingdom, Vietnam, Malaysia, Indonesia and Australia.  

Besides, the group adopted a series of measures during the pandemic from the perspectives of “customer satisfaction” and “employee efforts”. Certain of its restaurants in Mainland China has taken the lead in the resumption of “safe delivery” and “contactless delivery” services. The group developed and launched retail products such as semi-finished convenient dishes and proactively expanded various online sales channels such as Haidilao App and third-party e-commerce platforms. In the first half of 2020, Haidilao introduced more than 91 new dishes in the whole market and different regional markets, including Chongqing butter hot pot, branded shrimp paste, black pepper flavored beef and sakura mousse cakes, providing guests with a richer selection of products. 

Additionally, the group continued to boost intelligent upgrading or its restaurants, striving to provide customers with service that is both standard and personalized. As of 30 June 2020, it equipped 3 restaurants with intelligent robotic arms and 23 restaurants with “Thousand People Thousand Flavours” intelligent soup bases preparation machines. 958 robot waiters and 385 “Xiaomei” telephone robots have been used in its restaurants globally. Meanwhile, the group continuously develops and updates its Intelligent Kitchen Management System (IKMS) and restaurant procurement system. These intelligent elements guaranteed the food safety of its kitchen and improved the operating efficiency of its restaurants. 

Conclusion

With a closing share price of HK$51.45 as at 8 September 2020, Haidilao is trading at a price to earnings (PE) ratio of 513.37, with an indicative yield of 0.29%. The overall performance of Haidilao restaurants has improved on a month-to-month basis following the pandemic.  The group is on track to assume its growth momentum as the health crisis comes under control and measures of social distancing are lessened. Growth investors can monitor its business recovery carefully before considering an investment. 

(Source: Google Finance)

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