Date
21 September 2018
Haidilao’s rumored valuation makes it much more expensive than other restaurant stocks in Hong Kong, and even higher than those of some internet plays. Photo: Haidilao
Haidilao’s rumored valuation makes it much more expensive than other restaurant stocks in Hong Kong, and even higher than those of some internet plays. Photo: Haidilao

Sichuan hotpot chain’s IPO valuation looks expensive

Xiabu Xiabu Catering Management Co. (00520.HK) has been by far the most expensive restaurant stock in the Hong Kong market. The firm has a market capitalization of HK$13.2 billion, equivalent to a price-earnings (P/E) multiple of 26. That could be taken to mean that each of the 780 outlets of the Chinese hotpot restaurant chain is worth around HK$16.9 million.

But that record is set to be broken soon as Haidilao International Holding, China’s biggest hotpot restaurant chain, has kicked off its IPO in Hong Kong.

Haidilao’s IPO pricing reportedly values the firm at more than HK$122 billion. That puts an average valuation of HK$340 million for each of the company’s 362 outlets.

Haidilao was founded by former factory worker Zhang Yong in Sichuan back in 1994. The chain then expanded into Shaanxi province in 1999.

The restaurant serves spicy Sichuan style hotpot and is popular for free services and entertainment such as manicures and board games offered to customers in the queue.

Spicy hotpot is nothing new in China, but Haidilao has successfully made it appealing to high-end customers.

Adopting a chef-free business model, the key of hotpot business is to source high-quality and fresh ingredients. Employees in the outlets just need to do simple procedures.

As such, it is relatively easy to expand quickly without having to be concerned about compromising on the food quality.

Average annual turnover of a Haidilao restaurant is around 33 million yuan. The company posted a net profit of 1.19 billion yuan last year, which makes it the biggest player in China’s hotpot market.

Haidilao intends to further scale up its business and add another 180 to 220 outlets within this year. That represents 56-69 percent increase from the existing store number. The IPO funds will be used to finance the expansion.

It is estimated that Haidilao’s net profit would reach 1.61 billion yuan and 2.77 billion yuan respectively in 2018 and 2019. That would represent forward P/E multiples of 66 and 38.

Haidilao’s valuation makes it much more expensive than other restaurant stocks, even higher than that of some internet plays.

It’s hard to justify such aggressive valuation even if we take into account the firm’s market-leading position, and huge growth potential at home and abroad.

The hotpot industry, in reality, has extremely low entry barrier. Hence, it’s not easy for any one single company to achieve monopoly and maintain the status for long, even with seeming brand and scale advantages.

This article appeared in the Hong Kong Economic Journal on Sept 5

Translation by Julie Zhu

[Chinese version 中文版]

– Contact us at [email protected]

RC

Hong Kong Economic Journal columnist

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