We believe that the US stock listing on Tehai International is of great significance in enhancing Haidilao's global brand power and speeding up the expansion of its overseas stores. Considering Te Hai's strong turnover rate trend and the potential for growth brought by the global layout, we believe the company should enjoy a higher valuation than domestic catering players. For the first time, it covered Tehai International's US stock (HDL.US), with a “buy” rating, and a target price of $26.7. In line with the target price of US stocks, we raised the target price of TEHAI Hong Kong Stock (9658.HK) to HK$20.8, maintaining a “buy” rating.
Landing on NASDAQ is of great significance to the company's development: Tehai International officially listed on the US NASDAQ with $19.56 per ADS (equivalent to HK$15.28 per common share) on May 17. The number of common shares corresponding to the newly issued ADS (including over-allotted shares) is equivalent to 5.0% of the original common shares listed on Hong Kong stocks, which means that the shares in the original Hong Kong stock were diluted by 4.76%. The company announced that it plans to use 70% of the net proceeds from the listing (estimated US$44.31 million to US$51.66 million) to enhance brand power and expand the global restaurant network, while the remaining 30% will be used, on average, for improving supply chain capacity, digitalization and technological upgrading of restaurant management, working capital and other general corporate purposes. We believe that the significance behind the listing of TEHUS shares mainly includes the following aspects:
(1) Increase brand strength and popularity, and accelerate the pace of expansion—Tehai's listing in the US will help the company enhance Haidilao's brand power and popularity on a global scale. At the operational level, this will enhance the company's ability to bargain abroad, thereby reducing the company's overseas financing, procurement and rental costs. The increase in brand strength and popularity also helps to increase customer traffic at Haidilao's overseas stores.
(2) Improve stock liquidity and raise the valuation level — US stock listing will bring better liquidity to TEHAI's shares and increase trading volume. Furthermore, after TEHAI's US stock listing, the market's valuation of TEHAI is expected to target global catering players, thereby boosting TEHAI's valuation level and further unlocking the company's investment value as a global restaurant player.
(3) Adequate capital will accelerate the pace of expansion — after the US stock listing, Tehai's net cash will reach more than 200 million US dollars. Adequate capital can support the company's relatively active expansion strategy in the future. We predict that TEHAI's 2024 store opening plan will not change much (net increase of more than 10 stores), but the pace of expansion from 2025 to 2026 is expected to be faster than expected.
The turnover rate trend remains strong, and profit margins are expected to be better than expected: based on better internal assessments and incentive mechanisms and more careful store location selection decisions, the company's 1Q24 turnover rate reached 3.9 times per day, a significant year-on-year increase (3.3 times per day in 1Q23), and remained flat compared to 4Q23. Considering seasonal factors, we predict that the turnover rate for 2Q24 (off-season) will decrease from 1Q24, but the 2H24 turnover rate is expected to increase month-on-month from 1H24, and the turnover rate is expected to reach 4 times per day for the whole of 2024. We believe that a higher turnover ratio will bring more significant operating leverage, thereby driving the company's 2024 store operating profit margin higher than market expectations. We predict that TEHAI's operating profit margin in 2024 is expected to reach a high number of units (higher than 6.3% in 2023 and the company's guidance on the number of units in 2024).
There is still room for improvement in valuation: Tehai's current price-earnings ratio (27x 2024 P/E) appears to be mainly due to the company's rapid expansion period, resulting in a high proportion of depreciation and amortization in revenue.
Tehai is currently trading at 10.8x 2024 EV/EBITDA, slightly lower than Haidilao (6862.HK), and far below the average level of international catering players (15.8x 2024 EV/EBITDA). As a restaurant chain that focuses on overseas markets and is in a period of rapid expansion, we believe that using EV/EBITDA to target overseas restaurant players is a reasonable valuation method. Therefore, although Tehai's stock price has risen sharply by nearly 20% since the announcement of the US stock listing news on April 26, we believe that the company's valuation still has room to continue to improve. Based on the valuation of 13x 2024EV/EBITDA (20% discount compared to the 2024 EV/EBITDA average value of international brands), we obtained a target price of $26.7 for HDL.US and HK$20.8 for Hong Kong stocks (9658.HK).
Investment risks: Increased competition in the industry; decline in Haidilao brand strength; sharp rise in labor costs.