According to the research report released by Zheshang Securities, the cumulative year-on-year growth rate of social retail and dining industry in the first half of 2024 is 7.9%, which is about 121% higher than the recovery level in 2019, and the recovery is more moderate compared to the period of January to March. From the perspective of dining establishments above a certain scale, the cumulative year-on-year growth rate of social retail and dining industry in the first half of 2024 is 5.6%, which is weaker than the overall dining industry. From the perspective of average customer spending, it is expected that there will still be pressure on average customer spending from an industry perspective. Considering the monthly net store opening growth rate on the supply side, it is expected that the high base number issue for dining establishments above a certain scale will gradually ease in Q4 2024, while the problem of intensified industry competition still needs time to settle. Recommended stocks to watch: Haidilao (06862), Yum China (09987), Texhong International (09658), Dashen Shares (01405).

Zheshang Securities' main points of view are as follows:

Review of H1 2024: Moderate recovery, with the recovery of dining establishments above a certain scale weaker than the overall industry due to the high base number effect.

From a total perspective, the cumulative year-on-year growth rate of social retail and dining industry in the first half of 2024 is 7.9%, which is about 121% higher than the recovery level in 2019, and the recovery is more moderate compared to the period of January to March. From the perspective of dining establishments above a certain scale, the cumulative year-on-year growth rate of social retail and dining industry in the first half of 2024 is 5.6%, which is weaker than the overall dining industry. Zheshang Securities believes that the weaker growth rate of dining establishments above a certain scale compared to the overall industry is mainly due to the higher performance base number of dining establishments above a certain scale in H1 2023, and partly due to intensified industry competition this year. In H1 2023, the demand side showed a retaliatory consumption trend, while a large number of dining establishments below a certain scale on the supply side are still in a period of adjustment due to issues such as recruitment and relocation, which together contributed to the higher performance of most dining establishments above a certain scale.

In addition, the number of dining establishments continued to net increase in Q3-Q4 2023, and the number of new registrations for dining establishments in the first half of this year has consistently been higher than that of cancellations and revocations. The supply of dining establishments continues to rise, and the ongoing fierce industry competition further contributes to the weak recovery of the overall dining industry in H1 2024.

Outlook for H2 2024: Emphasizing management, under the trend of moderate recovery, high-quality brands can still stand out.

From the perspective of customer unit price, it is expected that the pressure on customer unit price will continue from the industry perspective. Combining the monthly net store opening growth rate on the supply side, it is expected that the high base problem of dining companies above the quota will gradually ease in the fourth quarter of 2024, and the problem of intensified industry competition still needs time to digest. Therefore, it is expected that the pressure on customer unit price in the industry will continue. The July data has already shown some signs. According to narrow gate data, from July of this year to July of last year, all tracks have shown a downward trend, and some tracks and brands have experienced double-digit declines, mainly due to the impact of intensified industry competition.

From the perspective of the brand itself, companies with strong brand strength and management capabilities such as Haidilao and Yum China are expected to achieve stability in customer unit price. From the perspective of July compared to March of this year, Haidilao and McDonald's and other premium brands have gradually stabilized their customer unit prices, mainly due to the brand strength and management capabilities of the companies themselves. For example, at the end of April, Haidilao issued a statement prohibiting improper profit-making activities, effectively curbing the disorderly use of benefits such as 69% discounts for college students, and reasonably improving the company's pricing control capabilities at the global level.

From the perspective of consumption trends, spiritual consumption is prevalent, and 'emotional value' remains an important focus. Currently, the main force of consumer spending, which is dominated by post-90s and post-00s, is no longer satisfied with purely material consumption, but prefers 'spiritual consumption' that can provide additional emotional value. During the summer vacation, Haidilao introduced a special late-night snack menu and collaborated with 'King of Glory', resulting in a 17% increase in orders delivered during the late-night period as of early August; in the middle of August, Luckin Coffee collaborated with 'Black Myth: Wukong' and sold out on the first day. ZheShang Securities believes that under the prevailing trend of spiritual consumption, companies such as Haidilao and Happy Lemon that have emotional value output as brand attributes, as well as companies like Luckin Coffee and KFC that are good at creating emotional value through collaborations, are more likely to stand out from the crowd.

Performance Overview: Leading companies with enhanced management capabilities lead in terms of operating quality.

Currently, the members of the first-tier dining companies have been identified, including Haidilao, Happy Lemon, Dashi Shares, and Yum China. These 'outstanding students' balance income growth and operational efficiency improvement, and their operating quality has achieved a leading position.

In terms of revenue, Dashi Shares, Happy Lemon, and Haidilao achieved double-digit growth in the first half of 2024, which is significantly faster than the overall growth rate of social retail and dining. They have achieved counter-growth in the intense competition, demonstrating strong brand power. Jiumaojiu and Yum China's KFC system's sales growth rate is slightly higher than the growth rate of dining companies above the quota. Among them, Dashi Shares, Jiumaojiu, and KFC are mainly driven by new store openings, while Happy Lemon and Haidilao are more driven by improvement in table turnover rate.

From the perspective of profit, Dashi Shares and Happy Lemon saw a year-on-year increase in restaurant-level profit margin in the first half of 2024, while Haidilao and Yum China's core operating profit saw a double-digit increase in the second quarter of 2024. Specifically, Dashi Shares, Happy Lemon, and Haidilao mainly promoted the improvement of store operation efficiency through strengthening the motivation of frontline employees, while Yum China mainly achieved profit improvement through cost reduction and efficiency enhancement at the headquarters level.

Investment Strategy: 'Real gold' has emerged in the tide of the industry, and leading companies with excellent performance are expected to continue their growth.

1) Stable growth + high dividend target: Embrace high dividends, Haidilao + Yum China

Haidilao (06862): The brand has emotional value, and management efficiency is gradually improving. Long-term substantial dividends are expected. It is expected that the performance in 24H2 will continue to grow. The table turnover rate is expected to remain flat or increase year-on-year. The customer unit price is expected to slightly increase year-on-year. The number of new store openings is expected to increase significantly compared to 24H1, and the decline in depreciation and amortization ratio will further drive up the operating profit margin. Over the next few years, performance growth in the high single digits and above is expected. In addition, the mid-term dividend ratio for 2024H1 is about 95%, with a dividend yield of nearly 6%. Long-term substantial dividends are expected in the future.

Yum China (09987): Accelerated expansion is timely, with high and sustainable shareholder returns. It is expected that accelerated store openings will drive high single to low double-digit revenue growth in the next 2 years; from 2024 to 2026, shareholder returns exceeding 3 billion USD are planned, corresponding to an annualized dividend yield (including repurchase) of over 6%.

2) High growth + large space target: Preferring high growth, Haidilao + Domino's

Techcombank International (09658): The only Chinese restaurant to go global, with a very wide space for opening new stores. It has achieved profit after exchange gains and losses for 4 consecutive half-year periods. It is expected that the income growth rate in 24H2 and the next few years will reach double digits under the accelerated store opening and improved table turnover rate. The scale advantage is expected to further improve the net margin.

Dasz Gaofen (01405): It is currently in a cycle of store efficiency and opening upwards, with more than double the space for opening stores compared to Pizza Hut. It is expected that the rapid store openings will drive around 30% revenue growth in 24H2 and the next few years, leading to gradual profit release under the scale advantage.

Risk warning: Macroeconomic fluctuations, food safety, and lower-than-expected store openings.