Definitive in the short to medium term: Haidilao's 23-year turnover rate improved to 3.8 times per day, corresponding to the average number of shoppers of 290,000 stores, basically recovering to the 19-year level, verifying that a series of management changes implemented earlier, from product iteration and marketing acquisition, to salary structure adjustments and store operations were effective. Currently, it is also continuing to explore ways to increase repeat purchases and expand new customers to further quantify the potential customer base around the store. It identifies more than 130 million potential customers around 3 kilometers in nearly 900 stores, and combines differentiated promotion with indicators such as the frequency of visits to the store and membership level marketing strategy To further improve the turnaround. In addition, Haidilao has also iterated the “Hi Hi Hi System” to allow managers to track multi-dimensional data such as store turnover and profit in real time, and adjust operation strategies in a timely manner, with regular reminders and accountability from the digital system to continuously improve store operation efficiency, making it possible for Haidilao to respond more flexibly to terminal changes, and future performance is quite predictable. We expect the 1Q24 turnover rate to increase by ~ 30% year on year at a low base, and the turnover rate to increase 7.9% year over year to 4.1 times per day; under the forecast of net opening of 44 stores throughout the year, we expect Haidilao's 24-year revenue/15.1% year-on-year revenue/net profit to 461.8/5.18 billion yuan, respectively, corresponding to a slight improvement of 0.4 pct to 11.2%.

Open franchise boosts performance in the short term: 1) Since March, Haidilao has been open to join, signed a 10-year contract with franchisees, collected millions of franchise fees at once, and extracted revenue on a monthly basis, without increasing the price of raw materials. Assuming franchisee revenue of 22 million yuan/year (vs 23-year average of 28.6 million yuan/year) and a revenue margin ratio of ~ 8%, we estimate the franchisee's operating profit of 2.2 million yuan/year (operating profit margin of 10%). Under an income tax rate of 25%, the net profit of the franchise store is 1.65 million yuan (net profit margin 7.5%). Combined with a single store capital expenditure of 8 million yuan, we estimate that the payback cycle also reached 4.8 years, longer than Taiji 1.5-2 years and KFC/Pizza Hut 2-3 years. Not to mention that franchisees still have to pay millions of franchise fees. It is estimated that the number of franchisees that land in the short term may be relatively limited. 2) Unlike Taiji and KFC/Pizza Hut, service quality is one of Haidilao's core competencies, but it is still unknown whether the franchise model can guarantee a continuous high degree of standardization of service quality to maintain customer consumer stickiness and a stable turnover rate, and further verification is needed. Based on the expectation that Haidilao opened 25 franchisees in 24, each with a franchise fee of 7 million yuan and a revenue draw of 1.76 million yuan, we estimate that it will bring the reporting side a revenue increase of 220 million yuan (accounting for only 0.5% of Haidilao's revenue for 24 years); combined with a 20% tax rate assumption, it is estimated to contribute 180 million yuan in net profit (accounting for 3.4% of Haidilao's net profit in 24 years).

Profit forecast and valuation: We raised 2024/25 revenue by 4.7%/5.4%, and introduced the 2026 forecast, which is expected to increase 11.4%/9.3%/7.9% year-on-year to 461.8/504.6/54.43 billion yuan, respectively; increase the 2024/25 net profit by 7.1%/6.4%, and introduce the 2026 forecast, which is expected to increase 15.1%/12.1%/10.7% year-on-year to $58.1/ 6.43 billion yuan, respectively. We calculated the market value range based on the number of Haidilao stores in 2024 (1,418/25 direct and franchised stores, respectively), direct turnover rate (4.1 times per day), and customer unit price (99 yuan). As an industry leader with proven performance certainty and excellent dividend rates, Haidilao should enjoy a valuation premium. Combined with 15-20 times P/E, we expect the market capitalization to be between HK$858-114.3 billion under neutral assumptions, with an average value of HK$100 billion vs. current market value of HK$98.3 billion, which is worth continuing attention. We gave Haidilao 20 times the 2024 P/E, corresponding to the new target price of HK$20.51, a 5% reduction from the old target price, and there is still room for growth of 16% compared to now. Risk warning: Store improvements fall short of expectations; macroeconomic downturn; raw material price increases; food safety risks.