You’ll know Haidilao International (SEHK: 6862) is one of the fastest growing hotpot operators in China today.
It’s founder, Mr. Zhang Yong launched Haidilao in Sichuan Province, China in 1994. Since then, it has opened around 1,600 restaurants in Greater China. Its overseas unit, Super Hi International has close to 100 outlets – including Singapore, Thailand, Malaysia, Australia and the US.
Despite operating in a highly competitive hotpot industry, Haidilao has been successful.
So… why this dividend payer’s shares plunged 64%?
Shares have plunged 64% since the start of its IPO, with most of its decline occurring over the last few years.
Two reasons: first, the COVID-19 pandemic has destroyed many restaurant businesses, including Haidilao. Many of its outlets had to shut down, or relocate to other locations to survive. Second, and more important, is the bad news surrounding China — especially its property debt crisis and antitrust regulations in recent years.
As a result, shares trade at a bargain bin today.
Question: would I buy Haidilao today?
Let’s dive in.
Haidilao stayed one step ahead on this from the rest
At a market cap of HK$70 billion, Haidilao Hotpot is one of the few highly successful operators in the highly competitive restaurant industry. I wrote about it here before.
Put it this way, before the pandemic struck Haidilao has grown its revenues from CNY7.8 billion in 2016 to CNY41 billion last year.
Before the pandemic struck, it had compounded net profits at a rate of 47% per year, between 2016 and 2019, with net profits growing from CNY735 million to CNY2.3 billion during that period. I believe it can continue to compound its growth rate if there wasn’t a pandemic.
Btw, Haidilao was listed on the Hong Kong Stock Exchange in 2018.
What’s Haidilao secret sauce? Two words: customer obsession.
The thing is, what I’ve found unique about Haidilao is it does things differently. This is crucial operating in a commodity-like sector: restaurants.
You see, unlike many restaurant operators, Haidilao doesn’t spend heavily on advertising. Instead it builds its brand through “word of mouth” from satisfied customers. Haidilao focuses on its customers, by giving them the best dining experience. For instance, its restaurants have an army of staff to give you foot massages, manicures, even dances, while waiting for your table.
What’s more, there’s even a noodle guy performing “live noodles dances.” Impressive.
Haidilao goes all out to give you the best experience. And this differentiates itself from other hotpot operators.
Here’s another thing: because it’s a hotpot chain, all the cooking is done by customers. Haidilao only needs a cold storage for frozen food.
So, at least 75% of their restaurant space is dining. This allows the company to maximize its seats, reduce customers’ waiting time and reduces a need for a huge kitchen with many chefs.
Haidilao’s constant innovation doesn’t just stop at the customer. It also focuses on improving its efficiency of food delivery. For example, it has used robotic arms for dish delivery, and even automated soup base preparation machines.
These help reduce operating cost, but more importantly improve the business operations’ efficiency. improving its efficiency.
Such technological uses allow each Haidilao outlet to break even quickly.
According to management, a Haidilao hotpot outlet breaks even within three months. That’s half the time a restaurant chain takes. Haidilao can also pay back an entire outlet’s start-up capital within a year.
Such short breakeven time also allows it to attract franchisees to open up its outlets for it. This gives Haidilao tremendous leverage – further control operation costs. Look: franchisees allow Haidilao to collect royalty fees and not incur additional operation costs by opening new outlets.
Haidilao is a “capital-efficient” business
Such efficiency allows it to deploy capital efficiently. When China re-opened its economy after the pandemic, its return on equity quickly jumped from 3% in 2020, to 21% in 2022 to 46% in 2023. It made losses in 2021.
Not many restaurant operators can achieve such ROE with its high operating costs in a highly competitive industry.
What I’m concerned with Haidilao’s dividends?
The restaurant industry is highly competitive. I’ve always found restaurants a lousy business because of the huge operating costs: plagued by low profit margins, high staff turnover and the never-ending new entrants of new hotpot operators. That’s one of Haidilao’s real problems.
But here’s the other thing: with China’s slower consumption spending, many budget conscious customer might instead opt for a cheaper alternative for dine-ins, which could hurt Haidilao’s foot traffic.
According to Bloomberg: “As slow economic growth continues to hurt traffic and increases the number of promotions, restaurant operators expect weaker comparable performance in coming months.”
This could affect its dividends over the long run.
Would I buy Haidilao at 6.6% dividend yield today?
Now, taking the good with the bad – Its revenues, customer obsession and the ability to differentiate itself has been outstanding. However, it has been wrecked by China’s bad situation now: property debt crisis, and a slowing consumption spending.
Now, there’s one other major thing you need to know: dividends.
Haidilao has paid a huge dividends of 75 cents per share last year, making it a 6.6% dividend payer. However, it has cut dividends over the last few years since COVID. What’s worse, it stopped paying dividends in 2021.
While the situation has started to turn around for Haidilao, more time needs to be observed to see a consistent dividend payout.
I admit, it can be hard to predict the impact of China’s hotpot environment Haidilao. Its ROE has recovered but dividends haven’t seen a consistent recovery trend.
Put it this way, I prefer to see dividends first, as a sign of business excellence. At this point, Haidilao hasn’t achieved growing dividends consistently. To be honest, this is a deal breaker for me. There are also other great dividend payers out there too.
However, Haidilao makes an excellent turnaround in a special situation for the skilled speculator — not for a dividend investor.
Sometimes, investing can be simple.
Willie Keng, CFA
Founder, Dividend Titan
Hey my Name is Amit from India. I work as an Equity Research Analyst at a family office. We are heavily invested in Haildilao from about 6 months. Purely because of quality of business.
Such companies in India trade at 80 to 90 PE ratio which is crazy