Summary. Maintain BUY and raised TP to HK$ 37.56, based on 47x FY20E P/E (rolled over from 57x FY19E P/E). We believe HDL’s fundamental remained intact and faster store expansions could translate into a decent earnings upside in FY20E.
- 1H19 net profit inline, if we exclude impacts from IFRS 16. Haidilao’s net profit rose by 41% YoY to RMB 911mn, ~5% below CMBI’s est. However, excluding impact from new accounting standards (~RMB 58mn or 0.5ppt of total sales), net profit could have gone up by 50%, to RMB 969mn, inline.
- Faster-than-expected restaurant expansions dragged down OP margin. Number of restaurants increased by 127 (120/ 7 in China/Overseas) to 593(550/ 43), by 1H19, much faster than our original forecast of 104 (96/ 8 respectively). Growth rate of 74% in 1H19 actually speeded up from 68%/ 71% in 1H18/2H18, hence resulting in 0.7ppt drop in OP margin to 11.4% in 1H19. We now expect new openings to be 301/ 209/ 186, and total stores will reach 767/ 976/ 1,162 in FY19E/ 20E/ 21E, implying a 36% CAGR.
- Ramp-up of new stores remain quick. We believe fall in table turnover for new stores (from 4.2x in 1H18 to 3.9x in 1H19) was only due to faster-than-expected openings, but the ramp up pace of a single store was still quick. Operating breakeven period was 1-4 months, vs 1-3 months in the past as openings were skewed to 2Q19 (50/80 in 1Q/2Q), a low season for hot pot.
- … while more-matured stores continued to improve steadily. More-matured stores are still growing steadily, as indicated by the 4.7% SSSG in 1H19 (table turnover to 5.2x from 5.0x in 1H18), vs 6.2% SSSG in FY18.
- Overseas margin improved. We believe it is on the right track as OP margin climbed together with table turn (from 3.7x to 3.9x) and openings of highly popular stores in UK and Australia, even though ASP was averaged down (from RMB 196 to RMB 186) by entering Malaysia and Vietnam market.
- Presuming a faster earnings growth in 2H19E. We foresee a faster earnings growth in 2H19E, thanks to: 1) potential increase in ASP to cope with rising raw materials prices (mostly pork and chicken prices), 2) better margins from greater operating leverage due to higher table turnover during peak season and 3) restaurants opened in 2H18 and 1H19 to contribute positive profit after six months.
- Maintain BUY and raised TP to HK$ 37.56. We maintain BUY and raised TP to HK$ 37.56, based on 47x FY20E P/E (rolled over from 57x FY19E P/E), implying a 1.4x 3 years PEG. Current valuation is not demanding, at 40x FY20E P/E or 1.2x PEG (vs domestic/ int’l peers avg. median of 2.0x/ 2.2x). We adjusted our FY19E/ 20E/ 21E EPS by -6.9%/ -0.5%/ +1.2%, to factor in 1) greater depreciation, finance costs and lower rental expenses due to new accounting standard, and 2) faster store expansion.
