Launching Coverage on Three China Restaurant Chains; Xiabuxiabu Cheap, Haidilao Overvalued

We initiate coverage of three China restaurant operators, Haidilao International HDALF, Jiumaojiu International JIUMF, and Xiabuxiabu Catering Management 00520, all with no-moat and Standard Capital Allocation Ratings. While we take a positive view of these firms’ recovery trajectories, we struggle to identify meaningful long-term competitive advantages in their business models. Our top pick in the restaurant space remains wide-moat 5-star-rated Yum China, with its long-standing brand recognition and unrivaled supply chain capabilities.

Among the three, we think Jiumaojiu is closest to getting a narrow moat rating. The group’s multibrand strategy positions it well to meet the changing demands of its customers. Continuing investments into brand development, product innovation, and supply chain capabilities will also likely shore up the group’s competitive positions. That said, quality doesn’t come cheap, and the market recognizes the strength of Jiumaojiu’s business by valuing it at close to a 30 times earnings multiple. Our fair value estimate for Jiumaojiu is HKD 13.70 per share, reflecting our view that shares are fairly valued.

We think there is some upside to Xiabuxiabu shares, as they currently trade at just 13 times the earnings multiple for this year. Running a multiconcept portfolio, Xiabuxiabu is the second-largest hotpot operator in China. Despite having more than 1,000 locations, we still see unit growth and cost reduction possibilities, as well as the potential to add more brands to its portfolio over time. Our fair value estimate for Xiabuxiabu is HKD 4.90 per share, and we see almost a 30% upside to the share price.