Key points of investment

2024H1 revenue increased 14% year over year, and the medium-term dividend rate reached 95%. The company achieved revenue of 21.491 billion yuan (yoy +14%), achieved net profit of 2.038 billion yuan (yoy +14%), and achieved core operating profit of 2.799 billion yuan (yoy +13%). The double-digit increase in performance was mainly due to a sharp increase in the turnover rate and continuous improvement in core business quality. The company announced an interim dividend of 1.939 billion yuan, with a dividend rate of about 95%, surpassing the 2023 dividend rate, the highest since listing. The current dynamic annualized dividend rate is about 6%, and shareholder returns are impressive. Combined with the actual controller's high share ratio, we expect a large percentage of dividends to continue over a long period of time.

The turnover rate continues to rise, and long-term growth is still broad

The “spiritual consumption” attribute caters to current consumption trends, and the turnover rate can be expected to continue to rise. 2024H1 achieved a turnover rate of 4.2, significantly higher than the 3.3 level of 2023H1, and the performance growth rate was significantly higher than the average growth rate of Social Zero Catering. We believe that its excessive growth rate is mainly due to the fact that the brand positioning actually meets the current needs of “spiritual consumption”, matches the company's excellent brand operation efficiency, and its brand potential is sustainable in the long term. With the help of summer new products+game co-branding, we expect an impressive turnaround rate. By the end of July, 5 new summer products, including Haidilao and Leishan Sour Soup Pot, had sold more than 5 million copies; during the supper period up to the beginning of August, delivery orders increased 17% month-on-month, and orders for hot pot dishes increased 34% month-on-month. Looking ahead to 2024H2, considering more holidays in the second half of the year, we expect the turnover rate to remain flat or surpass 24H1.

As the turnover rate remains high, there is still plenty of room for standard stores to open for a long time. We expect the company to maintain at least a single-digit growth rate of new stores throughout 2024. Store operating data, using the turnover rate as an example, is an important forward-looking indicator of store opening. We expect the company's actual store opening pace to be optimistic and optimistic along with the store's operating conditions. According to the announcement, the number of 24H2 stores expanded is expected to increase significantly compared to the 11 24H1 stores. The “Red Pomegranate Plan” was launched to boost the enthusiasm of outstanding store managers in the short to medium term and open up long-term growth. The Red Pomegranate Program was launched for the first time to encourage incubators to develop more new food brands, such as “Flame Please Yakiniku” and “Xiaohi Hot Pot”. We believe that on the one hand, this move can have a synergy effect with the multi-store model to further boost the enthusiasm of excellent store managers; on the other hand, it will also gradually open up the company's long-term growth.

The quality of core operations continues to improve. Looking forward to further improvement in the next few years, going back to 2023, the company's net interest rate is higher than 2 pcts in the same period in 2019, and the operating quality has leapt. Take a closer look at 2024H1. With the release of management dividends, the quality of core operations continues to improve. Specifically, the gross margin of 2024H1 increased by about 2 pcts year over year. We expect that it is mainly due to an increase in supply chain efficiency and a decrease in raw material costs; the actual rent share improved by 0.5 pcts year over year, mainly due to the natural optimization of fixed rent after the turnover rate increased; and the share of depreciation and amortization and finance-related expenses increased significantly by nearly 2 pcts year over year. This is mainly due to the gradual entry of stock stores into an empty depreciation window period. Looking ahead to 2024H2 and the next few years, the depreciation and amortization expense ratio is expected to be further optimized, and the quality of core operations is expected to continue to improve. According to the company's accounting depreciation rules, the vast majority of items such as machinery, furniture, and rental property renovation are depreciated over a 5-year period, while most Haidilao stores generally have a normal operating cycle of 8-10 years, which means that many stores can enter an empty depreciation window period starting in their 6th year of operation. As far as 2023 is concerned, nearly 200 new stores opened in 2018 will enter the depreciation window one after another; for 2024 and 2025, nearly 300/nearly 500 new stores opened in 2019-2020 will also enter one after another.

Profit forecasting and valuation

The company is the number one directly-managed restaurant brand in China. After 30 years of development, its influence has spread all over the country. Considering that the company's prospects for opening stores are still broad, and combined with current internal management improvements, the turnover rate, store opening, and profitability are expected to rise simultaneously again. We expect the company to achieve net profit of 4.6/5.2/5.6 billion yuan in 2024-2026, an increase of 3%/12%/7% year-on-year, respectively, and the corresponding PE valuation is 16/14/13 times, respectively. Considering the company's leading position, combined with a high dividend rate level, it should enjoy a valuation premium and maintain Haidilao's “buy” rating.

Risk warning: macroeconomic downturn, food safety, store expansion falling short of expectations, etc.