A significant increase in the 2H23 turnover rate drove the company to become profitable for the first time in 2023. At the same time, the company maintained a strong turnover rate trend in the second half of last year in 1Q24, which is expected to help the company further improve its profit margin in 2024 over the same period last year. In terms of stores, the company is expected to expand at an accelerated pace over the next 3 years. Under the current strong trend, we believe that the company's valuation still has the potential to continue to unleash. We raised our target price to HK$18.6 (11x2024 EV/EBITDA) and maintained a “buy” rating.
The increase in turnover rate led to a profit for the first time in 2023: the company's revenue in 2023 increased 23% year over year, and recorded net profit of 25.7 million US dollars to mother, turning a loss into a profit for the first time. Although only 5 new stores were opened in 2023 (net opening of 4), the company's 2H23 turnover rate increased significantly from 3.3 times per day for 1H23 to 3.8 times per day, and achieved an average turnover rate of 3.5 times per day throughout the year, which is a significant increase from 2022 (3.3 times per day). The company's gross margin expanded 1ppt to 65.8% year-on-year in 2023. The increase in the turnover rate brought obvious positive operating leverage, driving the employee expense ratio and the rental fee ratio to decrease by 0.9 ppt and 1.3 ppt, respectively, and significantly increased the operating profit margin of restaurants by 4.9ppt to 9.0% year on year in 2023.
Since 2024, the turnover rate has maintained a strong trend: management revealed that the 1Q24 turnover rate continued the strong trend in the second half of 2023, and was significantly higher than 1Q23. Based on this trend, management expects a significant year-on-year increase in the overall turnover rate in 2024. Management aims to maintain the 2024 net interest rate at a level similar to that of last year, but considering that the turnover rate and operating efficiency are expected to continue to improve in 2024, we believe that the 2024 profit margin performance is expected to be superior to management's guidance.
The number of stores is expected to expand at an accelerated pace: the company opened 4 new stores in 1Q24, and the turnover rate reached a high level one month after opening. Although the company adheres to a bottom-up and relatively cautious store opening strategy, management said the number of new stores opened by 2024 is likely to reach double digits. The company aims to see a significant increase in the number of stores in the next 3-5 years. We expect the company's overall number of stores to reach more than 200 in 5 years (compared to 115 at the end of 2023).
Long-term optimism about TEHAI's growth potential and profitability: As the only listed catering company with overseas markets, TEHAI's vast expansion space has not been reflected in its current valuation after the split from Haidilao. We believe that compared to catering players in the Chinese market, Tehai's expansion in overseas markets will not be limited by regional economic development, so the number of stores may have a higher ceiling than Chinese restaurant players. On the other hand, the hot pot chain has only just started in overseas markets, and competition has not yet fully started, so the expansion of the company's short-term store network has limited impact on the turnover rate. We are optimistic about the accelerated expansion of TEHAI stores and the continued increase in store profit margins after 2024, which is expected to drive the market to give TEHAI a higher valuation level again.
Investment risks: Increased competition in the industry; decline in Haidilao brand strength; sharp rise in labor costs.