China Consumer

Growth on the menu

Sichuan hotpot king Haidilao taps IPO market for expansion cash


Hot stuff: a Haidilao restaurant in Singapore

Impeccable service is expected in first-class travel and at plush restaurants such as Eleven Madison Park in New York or Holborn Dining Rooms in London, which routinely research their guests on Google before their arrival. But a Chinese hotpot operator has made a name for itself by making more of a fuss of customers in the mass-market – with so much success that it is poised to become the biggest restaurant operator by market capitalisation on the Hong Kong bourse.

Known as Haidilao, the Sichuan-based hotpot chain filed for its first-time share sale in Hong Kong on May 17. According to GlobalCapital Asia, which cites one of the two lead managers, the deal is expected to fetch around $1 billion.

Based on the valuation of Beijing-based Xiabuxiabu Catering Management, the only hotpot chain listed in Hong Kong and trading at 30 times earnings, Haidilao is expected to be worth Rmb35.8 billion ($5.57 billion). Xiabuxiabu, by comparison, had a market value of $2.18 billion as of May 30.

Originating in Jianyang near Chengdu, Haidilao specialises in mala broth, which has the effects of numbing the lips and scorching the taste buds. But it also offers a slew of add-on services that have earned it loyal following from its diners. Staff offer ponchos to customers feeling chilly and teddy bears to people eating alone. For those queuing for tables (a common experience at Haidilao), there are options to kill time, including shoulder massages, shoe shines, manicures and snacking – all for free. Younger diners can enjoy themselves at indoor playgrounds overseen by Haidilao’s babysitters. And customers’ mobile phones are given just as much attention: small pockets to protect your iPhone X from food spillage, and chargers for when batteries run low.

Such services are sometimes described as nitian in Chinese netizen speak, meaning “highly unusual”, and they are gaining traction among more sophisticated Chinese consumers.

Haidilao’s attentive culture dates back 24 years, when founder Zhang Yong, now 47 and also a Singapore citizen, quit his unpromising job at a tractor factory and started a hotpot shop with just four tables.

“At the beginning I’d no idea how to mix ingredients [for the broth] at all, therefore I had to learn from scratch. Simultaneously reading and cooking – you could imagine that the taste of our hotpot [at the time] was just so-so. So, I guess, the only way for us to survive was to be nice to our customers,” Zhang told 36Kr, an online news platform.

Top-notch hospitality not only earned customer loyalty, but also tips from clients for improving the flavour of his mala broth, which spurred Zhang to expand Haidilao’s “tender” services further, making it part of the chain’s core offering.

Today, Haidilao is a food empire with businesses in catering training, supply chain management and ingredient supply. Alongside the main restaurant business there are offshoots in takeaway brands, shop renovation, real estate and even eSports.

In advance of the IPO, Haidilao’s major broth supplier Yihai International was spun off in a Hong Kong listing two years ago, while U-Ding-U Catering, which sells Sichuan maocai (a stew-like dish comprised of precooked meat and vegetables in mala broth) was listed on the NEEQ over-the-counter board last April.

The financial results of the pair were less impressive than Haidilao’s. It has seen its revenues grow at more than 35% a year since 2015, reaching Rmb10.64 billion in 2017 and making it the world’s largest Chinese cuisine player by revenue, according to Frost & Sullivan.

Yearly profits also jumped 70.5% over the same period to Rmb1.19 billion. The growth, as analysts have pointed out, was supercharged by an accelerated pace of shop openings over the last two years, with hot pot grabbing the largest share of China’s restaurant sector by revenue. Haidilao wants to add 180 to 220 new restaurants this year, some in international markets with sizable Chinese communities.

Ke Yan, analyst at Singapore-based online research firm Smartkarma, says that Haidilao could have expanded without raising new capital but that the market conditions in Hong Kong and Haidilao’s strong performance have created an excellent opportunity for an IPO.

“The company really has a good story, given their strong same-store sales growth, expansion and revenue growth. Their table turnover of above five is very impressive. And surprisingly their overseas expansion is successful. If they IPO at this moment, they have a very good story to tell investors, before a potential growth slowdown,” Ke told WiC.

Ke is also positive on Haidilao’s move beyond tier-one and tier-two cities in China, citing how the brand stands out in places where fewer quality dining options are available. Demand shouldn’t be a problem. “If you look at tier-three city numbers, their average spending and table turnover is similar to tier-one cities,” he adds.

Other analysts are warier of the pace of Haidilao’s expansion and its net liabilities: these have surged over 22 times to Rmb1.44 billion in three years. The rush to open restaurants can also put pressure on service standards.

Scandals at unhygienic kitchens in two of its Beijing stores – with rats running around – are still fresh in the minds of some diners (see WiC380).

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