Hotpot Favourite Haidilao’s Cold Stock Performance Still Has Fiery Potential

Hotpot Favourite Haidilao’s Cold Stock Performance Still Has Fiery Potential

10th September 2021 | 6 min read
  • Haidilao has one of the world’s strongest brand names in the hotpot space but its stock performance is one of the worst.
  • CEO Zhang Yong’s employee-centric focus remains unrivalled.
  • Haidilao burnt itself by expanding at a time when pandemic restrictions prevented restaurant dining.
  • The hotpot chain’s stock price is simmering close to its 52-week low but is still not cheap.

With a brand name instantly synonymous with hotpot, Haidilao’s [ ] reputation simmers high above the rest. Its food quality is unmatched, its customer service is beyond exemplary and its queues for tables are even longer than its queues for the restrooms (which is impressive considering hotpot’s unforgiving toll on the sturdiest of stomachs).

Gaining 90% through 2020’s pandemic, Haidilao’s stock performance displayed greater resilience than the heat tolerance of its average diner. Over the two years prior, its stock price has surged almost 250%.

However, after reaching all-time highs in February 2021, Haidilao’s share price has since fallen 70%, making it the worst performing stock on the Hang Seng index.

China’s regulatory crackdown, lingering COVID concerns, changing consumer behaviours and Haidilao’s inability to retain its expansion pace has turned a hot stock cold.

Nonetheless, stewing towards the bottom end of its 52-week price range, Haidilao’s stock price may be a better discount than its promo codes.

CEO Zhang Yong is a hotpot hot shot

Much of Haidilao’s success can be accredited to CEO and founder Zhang Yong, who  was Singapore’s richest billionaire throughout 2019 and 2020. Having been a low-wage factory worker, Zhang empathised with employees and builtHaidilao with the  mantra “employees are more important than customers.”

Using a meritocracy system, Zhang is known for implementing regimented corporate structure that revolves around employee above customer satisfaction.

Each store manager is entitled to a 3% stake in the company and must pass 45 theory and practical tests. Their performance is measured through customer satisfaction and staff morale.

Promotion remains internal with outside applicants not being considered. Climbing the ranks stays within the company. Staff also enjoy perks such as accommodation and education allowances.

The net result is an extremely low staff turnover rate – 10% on the frontline and negligible in management.

In 2010, Haidilao even opened its own university that educates future staff about the company’s culture.

Image credit: Peija Li on Unsplash

Peppery pandemic performance

Although Haidilao’s stock price rose throughout the pandemic, its core business didn’t escape unscathed.

When Haidilao IPO’d in 2018, it raised USD 1 billion to help its international expansion plans. Revenue grew from CNY 16.97 billion in 2018 to CNY 26.56 billion in 2019. In 2020 itself, revenue growth stalled to just CNY 28.61 billion.

Despite the pandemic locking down cities around the world, Haidilao nonetheless remained faithful to its international expansion. Over 540 outlets were opened in 2020, bringing its total to over 1,200 restaurants in 14 countries.

At a time when customers were being forced to stay indoors, the cost of opening new stores heavily weighed on Haidilao’s bottom line. Profit fell 87% to CNY 309 million in 2020.

Its stock may have been bubbling but its financials were left undercooked.

Tables turned

In 2021, Haidilao’s aggressive expansion outpaced its weak financials. After reaching an all-time high of HKD 85.80 in February 2021, Haidilao’s stock price crashed to lows not seen since 2019.

Whilst Haidilao was proficient in opening new stores, new store performance was far less inspiring. Same-store table turnover was reportedly at 60–70% of 2019 levels.

Zhang had previously proudly claimed that a new Haidilao outlet opens every 3 days, but such a practice proved to be fatal at a time when dining out was discouraged.

In March 2021, Haidilao issued a profit warning that stated the company expected to record a decrease of 90% in net profit for the year ending 2020. True enough, when it came time to announce their end of year earnings, Haidilao reported an 86.8% decline in profit to CNY 309.5 million.

2Q2021 offered a glimmer of hope but investors weren’t feeling the warmth. Revenue jumped from CNY 9.7 billion to CNY 20 billion and a profit of CNY 96 million for the period was reported compared to the previous year’s CNY 964 million loss. During the period, 662 new Haidilao restaurants were opened.

Credit agency Fitch Ratings was far from impressed by Haidilao’s results, lowering their outlook to negative from stable. Fitch highlighted concerns regarding weak profitability and high capital expenditure for restaurant expansion. Attention was also brought to Haidilao’s table turnover rate which fell from 3.5x to 3.0x in 2Q2021 due to dilution from new restaurants.

Haidilao’s debt is also slightly troubling. 2Q2021 results showed that the group had CNY 7.73 billion worth of debt – an increase from CNY 3.4 billion in just one year. With cash of CNY 4.82 billion, its net debt stands at CNY 2.91 billion. Its debt to equity ratio was 75.4%, which is rather alarming.

Haidilao’s declining stock price also wasn’t helped by Beijing’s regulation crackdown that had an overwhelmingly cold effect on Chinese stocks.

Image credit: Haidilao

Still something brewing

For all intents and purposes, Haidilao is a restaurant business. No argument there. But, its approach to growth is more in line with that of a tech business. Much like Xiaomi or even Didi, the hotpot restaurant group is interested in achieving economies of scale before making big bucks. 

Instead of charging over USD 1,000 for a smartphone, Xiaomi was more interested in selling cheaper products at a wider scale to capture market growth. Its strategy worked and Xiaomi has now overtaken Apple as the 2nd largest smartphone maker in the world.

Haidilao is implementing a similar strategy through its aggressive expansion. Yes, it’s eating away at its financials, but the long-run game is in motion.

Also in a similar vein to tech companies, Haidilao is building its own ecosystem. Already known for its superb customer satisfaction, Haidilao continues to enhance its diners’ experiences. Robot waiters have been deployed in over 900 restaurants, and intelligent soup base machines allow for more customer personalisation in their broths.

Even small touches such as toys for children, a giant plush to accompany solo diners and the group’s signature noodle dance sets Haidilao apart from its competitors in an industry with fairly low barriers to entry.

Haidilao has even reinvented food delivery. Through Alibaba, Haidilao offers a unique delivery experience that transforms customers’ living rooms into a mini outlet. A staff member is sent to your home to set up the cooker and ingredients to recreate the authentic Haidilao experience. What’s more, the staff member returns to clean up the mess once you’ve finished eating.

Behind the scenes, Haidilao is investing technology too, utilising dish supplying and allocating machines, efficient cleaning systems and tablets that enable customers to self-order. 

It all comes at a cost but winning over loyal customers is priceless.

Pricey menu but not a pricey stock

Haidilao remains one of the priciest hotpot options. Nonetheless, many generally consider Haidilao’s delicious food and impeccable customer service to be worth its asking price. 

In terms of its stock price value, the verdict is less unanimous. Fitch is clearly taking a bear stance against Haidilao. Its P/E ratio is certainly on the high end at 108.23 and its earnings per share is a measly 0.26.

However, it’s worth considering that the company’s stock price is at its low end of its 52-week range. Furthermore, Haidilao is continuing to expand, so it is technically still in growth mode. As already stated, Haidilao’s strategy is not akin to your regular restaurant group.

Haidilao’s growth story is inspiring and buying into it now is a low-cost bet that Zhang will succeed. 

Written by Cohan Chew

Having co-founded Europe’s biggest East Asian culture website (WeAreResonate.com), Cohan has since ventured into East/West equities. His writing background includes Seeking Alpha, The Motley Fool, Capital A, Time Out Singapore, The Huffington Post, Gigwise and Redstar Qingdao.

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