Haidilao Earnings: Cost Cuts Helped Margins but Management Remains Cautious on Near-Term Expansion

No-moat Haidilao’s 06862 first-half earnings were in line with the positive profit alert issued in July. Management maintained a cautious tone on new unit openings by not providing any guidance for this year. We fine-tuned our model but kept longer-term assumptions largely unchanged. Overall, we are maintaining our HKD 13.70 fair value estimate and view Haidilao shares as overvalued.

In the first half of 2023, revenue increased 25% year over year, driven almost entirely by same-store sales growth. That said, weak macroeconomic conditions remain an overhang on restaurant sales, evidenced by same-store sales at Haidilao still below the prepandemic levels. The company maintained a very disciplined approach to expansion, opening just 11 net new restaurants in the first half, translating to a 1% increase in total units.

Haidilao delivered very strong profitability in the first six months of the year, recording an operating profit margin of 12.5%, significantly exceeding the 1.4% from the same period last year and 10.4% seen in 2019. The biggest driver behind margin expansion was lower staff cost/revenue ratio—down almost 5 percentage points year over year. That said, these cost savings came mostly from: 1) a lower service headcount per restaurant; 2) utilizing a higher percentage of part-time employees; and 3) a shift in compensation toward more variable pay. While we recognize there is more room to reduce costs near-term, we do not believe the current margin profile is maintainable over the long run. This is based on our view that customers are still expecting high service standards when they pay a premium to dine at Haidilao. Eventually, customers will notice the decline in service levels and be less willing to pay a premium to dine at Haidilao when other hotpot chains offer a similar experience but charge less. Furthermore, while a shift toward variable pay helps to reduce overheads during a downturn, it also limits margin expansion during good times in the near term.