1H24 results are basically in line with our expectations

Haidilao announced 1H24 results: revenue +13.8% to 21.49 billion yuan; net profit to mother of 2.04 billion yuan, -9.7% year over year (mainly due to exchange loss of 0.026 billion yuan in the first half of the year and zero VAT deductible income vs. 1H23, total revenue of 0.35 billion yuan); core operating profit 1 was +13.0% year over year, and profit margin was basically the same year over year. The results were largely in line with our expectations. At the end of June '24, there were 1,343 restaurants in Haidilao, and 32 were closed in 1H24 (11 new homes were opened and 43 closed). The 1H24 overall/same store turnover rate was 4.2 times (1H23 was 3.3/3.4 times); the customer unit price was 97.4 yuan, down about 5% year on year, slightly higher than 2H23.

An interim dividend of HK$0.391 per share was declared in 1H24, with a dividend rate of 95%.

The cost of raw materials and discounts were significantly optimized; the labor cost rate increased year-on-year. 1H24 raw material cost rate -1.7ppt year on year, mainly benefiting from reduced procurement costs, menu optimization and refinement of operations; discounted fee rate (excluding depreciation of right-to-use assets) -1.5ppt year on year, benefiting from the operating leverage effect of over 200 stores that have ended the discount period and increased store sales; labor cost ratio +2.7ppt year on year, mainly due to the normalization of the number of jobs and optimization of piecework wages and dividends since 2H23 to stimulate employee motivation.

Development trends

At the same time as customer unit prices stabilized, the trend of turnover was steady. The unit price for 1H24 customers was 97.4 yuan, up slightly from 2H23, and we observed a steady, moderate increase from 1Q24 since 2Q24; we estimate that the customer unit price was basically stable in the second half of the year. Judging from the recent turnover performance, we estimate that the overall turnover rate in July was flat year on year (more than 4 times in July last year); the same store turnover rate declined slightly year over year, and the overall number of same-store turnover units decreased month-on-month compared to June, all of which were affected by differences in the number of holiday days. We are concerned that the turnaround in the second half of the year faced the year-on-year performance of a higher base in the second half of last year (2H23 has already turned 4.2 times).

Focus on the quality development of the main brand and continuously improve store management; launch the “Red Pomegranate Plan” to encourage the development of new brands. 1) Continue to sort out and adjust the number of stores and focus on quality development: We expect most of the 43 stores to close in 1H24 to be loss-making stores, and it is expected that the closure of stores will narrow in the second half of the year. The turnover rate of new 1H24 stores reached 4.6 times; the company expects 2H24 store expansion to increase significantly from month to month. 1H24 management at all levels continues to improve store management around the “three tables” (operating schedule/management form/basic table); implementing a multi-store model to encourage outstanding store managers to manage multiple stores. Currently, about 100 store managers have become multi-management store managers, managing more than 200 stores. 2) Implementing the “Red Pomegranate Program” to encourage incubation and development of new brands, we believe it will help the company expand different price segments and categories.

Profit forecasting and valuation

Taking into account the impact of some store closures and the reduction of one-time revenue such as VAT deductions to zero, we have lowered the net profit of 13%/10% to mother for 24-year/25-year to 4.32 billion yuan/5.05 billion yuan. The current stock price corresponds to 24-year/25-year 14x/12x P/E. Maintaining the outperforming industry rating, taking into account the downturn in performance forecasts and the downward shift in the industry center, the target price was lowered by 19% to HK$16.94, corresponding to 20x/16x P/E in 24/25, with 37% upward space.

risks

The turnaround trend fell short of expectations; store openings fell short of expectations or store closures exceeded expectations; profits fell short of expectations.