Deep Sea Dredging : Haidilao Intl (HKG:6862)

For those unaware, Haidilao opened it’s very first overseas restaurant right here, in Singapore.

That was in 2012. Over the course of time, the hotpot chain went on to open a total of 17 outlets across Singapore, in order to placate queues, and meet the insatiable demand for it’s food and services.

Notably, the brand is well known for it’s impeccable service. Google searches on their restaurants will almost certainly result in ratings of 4.5 stars or above, a scarcity for chain restaurants.

But while the hotpot chain is top of the mind for it’s customers, it’s share price is very much a different story. The counter has suffered a decline of nearly 80% in lieu of bleak news regarding it’s business performance.

An interesting company like HDL would definitely attract investors who are looking for value. We shed light on it’s credentials and business performance to determine what it’s future looks like.

A Full Package

It’s safe to say that there’s more to HDL than just it’s food. Customers are also attracted to it’s unique concept and outstanding service.

The brand habitually employs the use of robot waiters, wireless chargers, and freebies to fascinate diners. The cozy and comfortable environment of it’s outlets also helps to draw in crowds.

Combining fresh ingredients with unrivaled service in such a environment makes them a good option for family dinners, or just for those late night cravings. These factors allow HDL to charge premium prices for their food.

The brand has gone on to establish close to 1,600 restaurants across the globe. This includes over a hundred international branches, with the bulk of their branches in operating in China.

In a daredevil move, management executed a branch opening spree in 2020, unveiling over 500 new restaurants and adding another 300 outlets in 2021. This is despite the ongoing Covid-19 pandemic.

Performance Metrics

Total revenue for FY 2021 looks promising, likely to come in somewhere close to RMB$35-40B. This would be a new record for the company. However, this is where the good news ends.

It’s restaurants have started to experience lower table-turnover rates, as well as decreasing customer spending. Reasons cited include an overabundance of restaurants, lock-down restrictions, and revised food prices.

The company plans to address these issues by closing or suspending 300 stores for the next two years. According to them, operations will be resumed “in appropriate times”.

Furthermore while the company enjoyed exceptional profit margins pre-pandemic, these too have been eroded badly. Annual net profit margins of above 9% have dwindled to a fraction of that number (0.5%).

It’s likely such problems have affected investor confidence in the company, causing a free-fall in it’s share price.

Mending The Gap

HDL needs to boost table-turnover rates while continuing to maintain food and service standards throughout it’s business empire. A easing of Covid-measures and stronger marketing/customer engagement will be crucial to this result.

The company also needs to exercise prudent cost-management, as they do not plan to lay off any employees despite large scale store closures. This is somewhat troubling as staff costs take up 38% of total revenues.

Lastly, the amount of debt the business has is concerning as well. HDL currently has a debt/equity ratio of 75.4%. This includes long-term bonds and bank borrowings as well.

Combined with paper-thin profit margins and sizable expenses, while it’s not an immediate issue, problems could surface down the road.

It’s likely that the business will need to raise more funds in order to meet subsequent payments should business fundamentals fail to improve.

Diners enjoying a meal at HDL.

To Conclude

HDL has built a strong name for itself by emphasizing on service standards, as well as other strengths. As a tenant, they also have substantial advantages in better rental terms and rates.

When executed efficiently, hotpot as a segment also benefits the group. Waiting times are minimized and employees can focus on quality service instead of cooking and food preparation. 

My take on it’s technological edge is that it acts as a crowd-pleaser and also boosts overall efficiency during operations. This helps maximize staff utility rates, which is helpful in times like this.

If the company is able to navigate the pandemic unscathed, it will likely emerge with a strong leadership position in the hotpot segment.

Correspondingly, investors who brought into the counter will also enjoy a stake in this prominent and impressive F&B business.

Casey H

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