Investment highlights

For the first time, TEHAI International (09658) gave it an outperforming industry rating. The target price was HK$14.70, corresponding to 0.8 times 2025 PEG and 26 times 2025 P/E. The company mainly expands and operates Haidilao stores in overseas markets. At the end of '23, it had opened 115 Haidilao restaurants in 12 countries around the world. The reasons are as follows:

The time is right for Chinese food brands to set sail overseas, and the barriers to chain operation are high. The international Chinese food market is expected to grow steadily and rapidly (Frost & Sullivan predicts that the international Chinese restaurant market size CAGR is expected to reach 7.1% in 24-27, far exceeding the overall growth rate of the industry by 3.7%), and the hot pot category has become a high-quality track for the international Chinese food market due to its strong taste inclusiveness, high level of standardization, and expandability. In terms of the pattern, the current international Chinese food market is scattered, and industry concentration is low. CR5 was about 2.1%/0.5% in terms of revenue/number of stores in '21. At the end of '22, the number of restaurants operating more than 10 restaurants/Chinese food brand stores covering 2 or more countries accounted for only 13.1%/less than 5%. We believe that operating international Chinese food brands across regions requires high requirements for localization and standardized operation, scale effects, and brand building.

Tehai International: Leading hot pot brand expands globally. Over the past 23 years, the market has been steadily rising, and the single-store model has improved markedly, turning losses into profits. We believe that the core competitiveness is mainly: 1) Benefiting from the Haidilao brand's influence as a representative of the hot pot category and its attractive product and service experience, etc., the company has gradually accumulated brand awareness overseas (the number of registered members/total number of customers in the 19-23 year point membership program CAGR reached 52%/35%, exceeding the CAGR of 32% of the number of stores during the same period).

2) Reuse domestic management experience and strengthen organizational strength to better standardize Chinese food: the concept of “connecting interests and locking in management” mobilizes the enthusiasm of frontline employees, refines the management structure, supervision and assessment, and empowers key headquarters functions to help restaurants improve their operating standards. 3) Organizational vitality helps localization: high-frequency and high-quality new localized dishes, supply chain localization and scale effects, localized special services and digital marketing enhance the popularity of local consumers.

The company has broad prospects for opening stores in the international market. We estimate that Tehai International has about 300 potential stores. We believe that in the future, we can release profits by speeding up store expansion, improving market turnover, and improving store efficiency.

What is our biggest difference from the market? We believe that the company is expected to boost store efficiency by improving operations and increasing turnover, diluting headquarters costs with steady scale effects under store opening to increase profit margins, and is optimistic about subsequent profit releases.

Potential catalysts: Store growth exceeds expectations, turnover exceeds expectations, profit releases exceed expectations.

Profit forecasting and valuation

We expect the company's 24/25 revenue to be $770 million/$869 million (13% CAGR for 23-25), adjusted net profit of $0.32/47 million (34% CAGR for 23-25), and EPS of $0.03/0.07 (36% CAGR for 23-25), respectively. The current stock price corresponds to 21 times 2025 P/E and 0.6 times 2025 PEG. We believe that the company is still in the stage of store expansion and single-store model improvement. The scale effect has not yet been fully released. Considering the steady expansion of stores in the future and the improvement of the single-store model, the first coverage gave the industry a rating of 0.8 times 2025 PEG and 26 times 2025 P/E, corresponding to a target market value of HK$9.6 billion, a target price of HK$14.70, and a current upward space of 23%.

risks

Turnover/store/profit falling short of expectations, food safety risk, overseas policy risk, exchange rate fluctuation risk.