Maintain BUY and lifted TP to HK$ 53.56, based on 54x FY21E P/E (from 45x as it is bottoming out after this 1H20). We believe HDL’s traffic could normalize in 2H20E and its faster-than-expected new store expansion could fuel better sales and earnings in FY21E, hence we now forecast a 34% NP att. CAGR during FY19-22E.
- 1H20 results inline. Haidilao reported a 17% YoY sales decline and net losses of RMB 965mn in 1H20, which are roughly inline with its profit warning. We attribute this loss to: 1) sharp drop in GP margin, 2) operating deleverage and 3) initiate losses from more than expected restaurant openings.
- However, new restaurant expansion is a beat. Number of stores in mainland China/ overseas increased by 152/15 to 868/ 67 in 1H20, representing a 58%/ 56% YoY growth, accounting for 48%/ 83% of our FY20E estimates. It is certainly a beat because new stores in first half usually accounted for only ~35% of full year, based on average of past three years.
- 1,000 new stores for next three years is possible. Mgmt. is cautiously targeting 1,000 new restaurants in FY20E-22E, and expect limited local cannibalization in traffic, as store density in many regions are still low. Moreover, Haidilao can now take more advantage of the big data after series of IT upgrades, and with a more accurate calculation on local demand and servicing area, store expansion can be much more effective. We revised up our new openings estimates to 389/ 353/ 328 and total stores will reach 1,157/ 1,510/ 1,838 in FY20E/ 21E/ 22E, implying a 34% CAGR.
- Traffic is recovering healthily and we believe expectation for FY21E is not aggressive. Table turnover fell by 29% YoY to 3.4x in 1H20 (vs 4.8x in FY19). However, the improvement trend is rather healthy, already reaching 4.1x (80% recovery rate vs Aug 2019) in Aug 2020. With this pace, we believe our forecast of 4.5x/ 4.5x in 2H20E/ FY21E is not at all aggressive.
- Better margin is likely in 2H20E. Haidilao experienced a headwind in raw material costs in 1H20, but that had been eased lately. As more higher margin product launches are planned, plus lower staff costs pressure, we believe both GP/ OP margin can see reasonable improvements in 2H20E.
- Maintain BUY and raised TP to HK$ 53.56. We adjusted our FY20E/ 21E/ 22E EPS by -63%/ +23%/ +25%, to factor in 1) higher losses in 1H20 but 2) higher earnings driven by faster store expansion. We lifted TP to HK$ 53.56 and maintain BUY, based on 54x FY21E P/E (up from 45x). We reckon the current valuation is not demanding at 46x FY21E P/E (vs Int’l catering/ consumer staple peers average of 36x/ 25x), given a 34% 3 years NP CAGR.
