Maintain BUY and adjusted TP to HK$ 78.40, based on 2.2x FY19-25E PEG (unchanged and implied 61.1x FY22E P/E). We believe HDL’s traffic could gradually normalize, thanks to better services and products while new store expansion will remain fast. Hence we now forecast a 31% NP att. CAGR during FY19-23E.
- 1H20 results inline. Haidilao’s sales grew by 8% YoY to RMB 28.6bn while net profit declined by 87% YoY to RMB 309mn, in-line with its profit warning. Despite relatively slow recovery rate (~80% vs FY19), FX losses adjusted NP margin already returned to 8.2% in 2H20, vs 8.8% in FY19.
- Heathy SSSG recovery into YTD 2021. Management highlighted that traffic still improved in Jan-Feb 2021 vs 4Q20 (CMBI est. 3.6/ 4.1/ 3.9 for Jan/ Feb/ 4Q20), despite drags from mini COVID-19 outbreaks, and gradual improvement should be expected, driven by: 1) rolling out of more value added services for members, 2) better services after salary raised in 2H20 and 3) upgrades of product quality (e.g. more plant-based food).
- No change in store expansion policy. 807/ 91 new contracts were signed and 322/ 58 were opened in FY20/ Jan-Mar 2021, leaving ~520 outstanding stores. We believe expansions in FY21E will be skewed to tier-3 & below cities and overseas. We expect new openings to be 583/ 631/ 581 and total stores will reach 1,881/ 2,512/ 3,093 in FY21E/ 22E/ 23E, implying a 34% CAGR.
- Input and staff costs inflation should not be a concern. The impact of raw material cost inflation should not be meaningful for HDL, in our view, thanks to economies of scale and rising bargaining power over suppliers. Also, even though HDL raised the salary and benefits (by RMB 200-1,600 since 3Q20) for many of its entry and mid-level staffs, this should in turn improve its overall service quality and customer experience eventually.
- Incubation of new businesses continued. Employees are encouraged to initiate new catering business, and 10+ brands had already been launched, across various products (e.g. milk tea, noodles, dumping, etc.). These pilot projects are welcomed to utilize HDL’s technology and management philosophy (e.g. mentorship and other effective incentive systems).
- Maintain BUY and raised TP to HK$ 78.40. We adjusted our FY21E/ 22E EPS by +2%/ -1%, to factor in 1) slightly faster store expansion and 2) better staff cost control. We fine-tuned TP to HK$ 78.40 and maintain BUY, based on 2.2x FY19-25E PEG (unchanged and implied a 61.1x FY22E P/E). Current valuation is not demanding at 41x FY22E P/E (vs Int’l catering/ consumer staple peers average of 33x/ 25x), given 31% 3 years NP CAGR.
