Company Reports

Following the impressive table turnover rates achieved by Haidilao and its aggressive store-opening strategy, we are increasing our fair value estimate for the company by 25% to HKD 17.10. Our base case assumes that the operating environment for restaurants in 2024 will be slightly better than in late 2023, and Haidilao should record positive same-store-sales growth for the full year, translating to a slight improvement in operating margin. That said, even after raising our fair value estimate, we still view Haidilao’s shares as fairly valued. Our preferred picks in the Chinese restaurant space are Yum China and Jiumaojiu.

We are not fond of the structure of Haidilao’s business as it doesn’t own the trademark to its namesake brand. Instead, the firm licenses the Haidilao brand from a company privately held by founder Zhang Yong. We think this model exposes Haidilao’s shareholders to additional risks and contingencies.

Following the recent market correction, Chinese restaurant operators are trading at attractive valuations and offer prime buying opportunities for long-term investors. Apart from Haidilao, our coverage—Yum China, Jiumaojiu, and Xiabuxiabu—now sits comfortably in five-star territory. Wide-moat Yum China is our top pick in the sector, which is trading at a considerable 50% discount to our $80 fair value estimate.

No-moat Haidilao’s 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.

We initiate coverage of three China restaurant operators, Haidilao International, Jiumaojiu International, and Xiabuxiabu Catering Management, 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.

We are not fond of the structure of Haidilao’s business as it doesn’t own the trademark to its namesake brand. Instead, the firm licenses the Haidilao brand from a company privately held by founder Zhang Yong. We think this model exposes Haidilao’s shareholders to additional risks and contingencies.