Haidilao International Holding Ltd. (“Haidilao”) (HKG:6862) and Xiabuxiabu Catering Management (China) Holdings Co., Ltd (“Xiabuxiabu”) (HKG:0520) are two hotpot restaurant chains listed on the Hong Kong stock exchange.
In this article, we will make some quick-and-dirty comparisons, numbers-wise, between the two companies to help you determine which might give you more value for money.
Introducing the companies
Founded in 1994, Haidilao has grown into a globally renowned catering enterprise focusing on hotpot cuisine. By the end of 2019, Haidilao has opened 768 chain restaurants in China, Singapore, U.S., South Korea, Japan, Canada and Australia with over 54 million members and 100,000+ employees.
On the other hand, Xiabuxiabu was founded in 1998 and operates Chinese hotpot restaurant operations in Mainland China. As of 31 December 2019, the group owns and operates 1,022 Xiabuxiabu restaurants and 102 Coucou restaurants in 125 cities over 22 provinces and autonomous regions in China.
The table below shows the market capitalization, revenue and profit levels for both companies. Note that the market capitalisation is as of 21 August 2020, and the revenue and profit numbers both relate to the fiscal year 2019.
|Market Capitalisation (HKD)||235.85 billion||9.01 billion|
|Revenue (RMB)||26.56 billion||6.03 billion|
|Profit after taxation (RMB)||2.35 billion||290.64 million|
|Profit attributable to the owners of the company (RMB)||2.34 billion||288.10 million|
Round 1: Profitability
We start by looking at the profitability of each company in terms of their net profit margin and return on equity ratio.
|Fiscal year 2019|
|Net profit margin||8.84%||4.82%|
|Return on equity (ROE) ratio||22.07%||12.07%|
From the above table, Haidilao’s net profit margin of 8.84% is higher than Xiabuxiabu’s net profit margin of 4.82%. Haidilao has a more efficient cost base. It could also indicate that Haidilao has some form of pricing power in that it targets the mid-range to high-end customer segment, while Xiabuxiabu focuses mainly on the mass market customer segment.
Additionally, Haidilao’s ROE ratio of 22.07% is significantly higher than Xiabuxiabu’s ROE ratio of 12.07%, which demonstrates that Haidilao’s management is much more efficient in allocating and converting every dollar of investor capital into profit.
Round 2: Liquidity
|Fiscal year 2019|
|Net gearing ratio (Net debt / equity)||N/A – net cash||N/A – net cash|
From the table above, we discover that both companies have pristine balance sheets. Haidilao and Xiabuxiabu have recorded current ratios of 1.27 and 1.17 respectively, indicating that their current assets are more than sufficient to cover their current liabilities.
While the cash ratio of Haidilao and Xiabuxiabu may be slightly low, there should not be any liquidity concerns as both companies are in a net cash position.
As gearing can be a double edge sword, companies that can rely on internal funds for its business operations and expansions are always preferred. As of 31 December 2019, Haidilao’s net cash position of RMB3.85 billion eclipses Xiabuxiabu’s net cash position of RMB785.19 million. Therefore, we would give the edge to Haidilao given its stronger liquidity position.
Round 3: Growth
We will compare the compounded annual growth rate of revenue and net profit of the two companies for the past 5 years. Companies that can grow their sales and profitability can see their share price rise.
|Fiscal year 2015-2019|
|Net profit growth (attributable to owners of the company)||71.24%||2.27%|
Haidilao has superior revenue and net profit growth compared to Xiabuxiabu. As investors, we should investigate the factors fueling Haidilao growth and whether the company can sustain that pace of growth going forward. We should also consider why Xiabuxiabu is unable to deliver the same prospects even when both companies operate in the same industry and face similar competitive forces.
Round 4: Valuation
Finally, we will compare the price to earnings (“PE”) and dividend yields of the companies.
|Share price (as at 21 August 2020)||HKD44.50||HKD8.33|
(Source: Google Finance)
Xiabuxiabu is trading at a much cheaper valuation than Haidilao. The market is more optimistic about Haidilao’s prospects and business expansion. However, Xiabuxiabu has a slightly higher dividend yield of 1.43% versus 1.43% for Xiabuxiabu.
Overall, in terms of valuation, Xiabuxiabu could be considered the cheaper option for investors looking to tap into the fast-growing Chinese consumer market. However, while we do not wish to overpay for the investment as investors, we should not be averse to paying a fair price for a higher quality business. After all, “price is what you pay, but value is what you get”.
In summary, Haidilao is the overall winner here as the Company has won 3 out of 4 rounds. While this is a simple exercise, comparing just a few financial aspects of both companies, it hopefully serves as a good starting point in deciding which company is more interesting to investigate further.
Aside from the financial metrics, we urge investors to carefully study the prospects for each business, and consider the capabilities of each management team in executing their business plans.