The turnover rate trend is strong, but the current valuation may be under pressure to maintain the “holding” rating: Thanks to successful marketing strategies and store management capabilities, Haidilao's turnover rate has recovered well since the beginning of the year, and is superior to other restaurant players. We acknowledge that in the past 4 months, the certainty of Haidilao's full year 2024 results has improved significantly. However, under the influence of a higher base, the company may face negative sentiment brought about by a slowdown in the 2Q24 turnover rate and the year-on-year decline in 1H24 profit margins. At the same time, we believe that Haidilao's current valuation is high (11x 2024EEV/EBITDA and 20x 2024E P/E, higher than peers) and lacks cost performance, which may cause the stock price to bear greater downside risk. Therefore, we maintain Haidilao's “hold” rating.
The certainty of the turnover rate in 2024 has increased dramatically, and customer unit prices have been rising steadily: under a relatively low base, we expect the overall turnover rate in 1Q24 to increase by more than 30% year-on-year and reach more than 4 times.
After entering 2Q24, the year-on-year growth rate is expected to slow down as the peak season passes and the base figure rises, but it is still expected to remain 3-4 times higher. Considering seasonal effects, we expect the 2H24 turnover rate to be higher than 1H24 under relatively normal circumstances. Therefore, we predict that Haidilao will have a turnover rate of more than 4 times for the whole year of 2024, which is not a big problem. In addition, Haidilao's customer unit price has been rising steadily since the beginning of the year (estimated to reach around 102 yuan in 2024 YTD).
The company hopes to ensure that customer unit prices at least do not fall in the next few quarters. We predict that the customer unit price will remain around 102 yuan for the whole of 2024 (compared to 99 yuan in 2023).
Operating profit margin 1H24 is under year-on-year pressure, and is expected to expand slightly throughout 2024: Looking back at 2023, the company experienced a serious shortage of manpower in the first half of the year, and the number of employees in a single store only gradually returned to normal in the second half of the year. We predict that the recovery in the number of employees in a single store will lead to a year-on-year increase in the 1H24 labor cost ratio at a lower base, thereby narrowing the 1H24 operating profit margin year over year. Looking ahead to 2024, we predict that labor and rental expense ratios will remain stable year over year, while potential gross margin expansion (based on increases in customer unit prices) and operating leverage brought about by increased turnover rates (based on fixed costs such as depreciation and headquarters expenses) are expected to help record a slight expansion in operating profit margins throughout the year.
New store openings in 2024 will be concentrated in the second half of the year: the company has opened only 4 new direct-run stores since the beginning of the year.
Management continues to maintain the guideline of newly opened direct-run stores in 2024 as a “single-digit percentage” of the number of stores at the end of 2023. According to our research, we believe that the number of new direct stores opened by Haidilao is expected to reach 60-100 in 2024, and will focus on encryption in high-tier cities in the second half of the year (mainly in second-tier cities). Although the franchise model has been opened, considering the high threshold for Haidilao franchisees (initial investment of 50 million yuan or more), we judge that the franchise model is mainly aimed at exchanging resources in the short term, and its contribution to revenue will be limited in the foreseeable future.
Investment risks: Increased competition in the industry; decline in Haidilao brand strength; sharp rise in labor costs.