Management said that Tehai's long-term and stable development strategy and goals include actively improving the customer dining experience, continuously expanding the restaurant network, continuously improving restaurant business performance, actively developing and exploring new business formats, and eventually becoming a leading global integrated catering group. In our view, the company's strategic goals take into account the increase in turnover rate, the expansion of the store network, and the increase in store profitability, reflecting the management's optimistic outlook on future revenue and profit expansion. Corresponding to the 8.0x2025 EV/EBITDA valuation, we gave Techai International Hong Kong Stock (9658.HK) a new target price of HK$16.6 and US stocks (HDL.US) a new target price of $21.3, all maintaining a “buy” rating.

The turnover rate trend continues to improve, and 2H24 is expected to increase month-on-month: the company's 1H24 turnover rate increased sharply by 0.5 to 3.8x year over year, mainly due to the company strengthening employee KPI assessments and optimizing business processes, thereby effectively leveraging the enthusiasm of management at all levels to improve customer satisfaction.

With the improvement of services, the proportion of local customers in stores continues to increase, opening up huge space for the turnover rate to continue to increase. The customer unit price (in local currency) in most regions increased to varying degrees, but due to exchange rates, the unit price for reporting customers fell by 0.9 US dollars to 24.6 US dollars year over year. Based on current trends, we expect the 3Q24 turnover rate to rise further month-on-month compared to 2Q24, while 2H24 customer unit prices will be less affected by the exchange rate.

There is huge room to open stores for a long time, and the company will accelerate store expansion in 2025: the company opened 8 new stores in 1H24 (5 in Southeast Asia, 2 in North America, and 1 in East Asia). Currently, 70% of stores are concentrated in Southeast Asia, while there are only 13 stores in North America. Management said that at present, the company still has a lot of room to sink in Southeast Asia, and the opening of new stores is expected to achieve an ideal level of turnover and stable profits in the short term. Based on Southeast Asia's current average turnover rate of 3.7, we believe the Southeast Asian market is far from being saturated. At the same time, management also said that the North American restaurant market is huge, and there is room to open stores in the future. We expect the company to open no more than 5 new stores in 2H24, but the expansion of stores will be accelerated by 20%-30% in 2025-2026.

There is still plenty of room for increase in store operating margins: the company continued to optimize the supply chain, and 1H24 gross margin expanded slightly by 0.1ppt year-on-year. Despite a sharp increase in the turnover rate, the ratio of employee costs to revenue increased by 0.8 ppt. The main reason was that the company increased the number of employees in the store to improve service quality, and also raised the salary level of employees. As a result, the operating profit margin of 1H24 restaurants only increased by 0.4ppt to 8.7% year over year. We believe that the company is in a period of expansion and needs a larger number of single-store employees to enhance the customer dining experience, build a brand image, and establish a customer base. However, in the future, as the customer base of the store becomes more stable, there is still room for the number of employees in a single store to decline. Management said that long-term reasonable catering profit margins are between 10% and 15%. The company will continue to raise the turnover rate to drive the continuous increase in restaurant profit margins.

Seek long-term multi-brand development: Starting this year, the company plans to promote the Red Pomegranate Program, which is to research and incubate new catering brands and new business formats. Management believes that a multi-brand strategy can not only bring new growth drivers, but also form a synergy with Haidilao in the supply chain to maximize benefits. Management believes that the company has the ability to operate under multiple brands and can replicate this ability in different regions of overseas markets. We believe that a multi-brand strategy may provide some room for imagination for the company's long-term growth, but short-term revenue help can be largely ignored.

Investment risks: Increased competition in the industry; decline in Haidilao brand strength; sharp rise in labor costs.