Initial Memo: Haidilao International Holding Ltd. (6862), 77% 5-Year Potential Upside (Jayme YAK, EIP)
Jayme believes that the robust and promising performance in both service and food quality, brand reputation and innovations by Haidilao will remain a strong and unique player in the industry.
Linkedin | Jayme Yak
Company overview
Founded in 1994, Haidilao International Holding Ltd. (Haidilao) has become an internationally renowned Chinese hot pot chain. In the food and beverage sector, Haidilao has set itself apart through its innovative approach to a traditional dining experience. Haidilao is committed to more than just delivering high-quality food, it is also known for its unparalleled customer service. As of 2022, there are more than 1,300 outlets across Mainland China and overseas, including Singapore, U.S., Japan, Australia, etc.
a. Revenue drivers
Firstly, same-store sales growth is one of the main revenue drivers for Haidilao. While there are constantly new stores opening, existing stores still maintain and increase their sales through multiple ways including holding outlet-specific promotions. For instance, in Singapore, there is a $69.90 all-you-can-eat set meal only for the Clarke Quay outlet and a free-flow high tea station at the 313@Somerset outlet. Such promotions and constant improvements in the dining experience and introduction of new items on the menu help to increase sales for existing outlets.
Secondly, there is also aggressive expansion into international markets. Currently, Haidilao operates in Singapore, the U.S., Australia, Japan, South Korea, Canada, the U.K., Vietnam, Malaysia and Indonesia. This helps Haidilao generate even more revenue as they tap into the markets outside of China and the increasing affluence in markets like Singapore. Considering local preferences and cost of living, Haidilao has been relatively successful in its expansion to nations like Singapore for both economic and cultural factors. In Singapore, while there is a relatively high cost of living, disposable incomes of Singaporeans are similarly rising. Hence, there is a significant group of consumers who can afford this relatively more expensive option. Culturally, Singapore is also made up of the majority of Chinese, who are familiar with the concept of hot pot. Such factors have further driven Haidilao’s success overseas.
b. Cost drivers
There are several cost drivers for Haidilao, namely the cost of raw materials and ingredients (consumables) and labour costs.
Firstly, given the high emphasis on quality and fresh ingredients, the cost of materials and consumables contributes significantly to Haidilao’s costs.
Secondly, the labour costs across its more than 1,300 outlets in China and overseas also contribute significantly to its operating costs. Compared to other industry players, labour costs are even more significant for Haidilao, as they do not just have to hire chefs and service crew. Given their focus on customer service, Haidilao has to hire sufficient staff to ensure every table gets adequate attention and quality service. Since Haidilao also provides additional services like manicures and shampooing, their labour costs would undoubtedly be higher than competitors who do not offer such services.
Industry Outlook
With rising affluence and development in the Chinese market, dining options like Haidilao have become more prevalent and accessible. Fortunately, with Haidilao’s consistent efforts in food quality and customer service, it managed to establish itself as a popular and top player in the industry. These are several factors that would affect Haidilao’s performance:
a. Rising affluence and increased consumer spending in the Chinese market
There is a positive outlook for the Chinese market following the nation’s easing of COVID-119 policies and requirements in December 2022. Customers are less worried and conscious and are visiting stores and eating in again.
b. Lifted COVID-19 restrictions
With the COVID-19 restrictions lifted/ eased, dining now poses few challenges for companies like Haidilao who specialise in providing exceptional dining experiences. In contrast, having Haidilao delivered to your home does not deliver the same experience and satisfaction when dining in, as the core of the business is absent. Hence, with the lifted restrictions, customers can dine in and without any safe distancing requirements. This would increase Haidilao’s total customer capacity and sales.
Investment Theses
a. Outstanding Customer Service
Despite being in the food and beverage sector, Haidilao boasts an exceptional commitment to its customer service. This provides their customers with a memorable, enjoyable and comfortable dining experience. From the moment customers step into the store to the time they are waiting and eating, customers get to enjoy top-notch and unique experiences. In August 2023, Haidilao just launched a shampooing service at one of its outlets in Wuxi, Jiangsu province (Figure 1). This is on top of other services they provide, including manicure sessions (Figure 2). On top of those, there are also complimentary drinks and snacks as customers wait, board games, hair ties, screen protectors etc.
b. Employee-Centric Business
Haidilao focuses not just on providing exceptional service to customers; the employees are also well taken care of, with attractive pay incentives bonuses and welfare packages. Outstanding and loyal employees even receive more perks such as free apartments, allowances for children’s education etc. These allow employees to feel a sense of belonging and commitment to serve. The loyalty that Haidilao has developed in its employees is proven by the low turnover rate of 10%, far below that of its competitors and other players in the industry.
Risks
ESG Assessment
ESG rating agency Sustainalytics gave Haidilao an ESG risk rating of 33.7 which lies in the high risk range.
Conclusion
Haidilao demonstrates robust and promising performance in both service and food quality. Haidilao constantly launches new products and services that set itself apart from other players in the industry. Considering the brand reputation and innovations by Haidilao thus far, it is clear that Haidilao will be able to stay resilient and remain a strong and unique player in the industry.
*Do note that all of this is for information only and should not be taken as investment advice. If you should choose to invest in any of the stocks, you do so at your own risk*