Bottom fishing

Hotpot industry leader goes off the boil to investor dismay

China’s investors describe ‘bottom-fishing’ for stocks – i.e. buying at low valuations – as laodi. It’s a term inspired by the centuries-old hotpot culture, where diners dredge their soup for the best of what remains at the end of their meal. This also inspired Zhang Yong to name his hotpot chain Haidilao, which means ‘scooping from the bottom of the sea’.

For most investors, the question today is whether it’s a good time for bottom-fishing Haidilao’s battered stock in Hong Kong, following a 65% slide in the share price since February of China’s most valuable hotpot operator.

Last month Haidilao reported a Rmb94.5 million ($14.6 million) net profit for the first half of this year. That was a turnaround from a Rmb960 million loss in the same period of 2020 when sharing a hotpot meal was off-limits because of Covid.

In spite of the rebound – helped by relaxed dining restrictions – the company’s executives have confessed that the chain’s operating performance was not up to expectations – and that “internal management” needed to improve on a “best-effort basis”.

During the second half of last year, Haidilao actually went on an aggressive expansion push: the number of its outlets rose to 1,597 (of which 1,491 are in mainland China) from 935 in the prior June.

But as Haidilao pointed out in a statement, the restaurant sector is still struggling with the lingering impact of Covid-19. Table turnover rates – a key metric for value-for-money chains that need high volumes of diners – had fallen from 3.3 times a day to 3 during the first half of 2021 (and that was way down from 5 in 2018). Analysts also blamed the decline on the newer restaurants, which tend to have a lower table turnover soon after opening or else cannibalise the chain’s existing venues.

Average spending per guest dropped about 5% to Rmb107 during the period. As a result Haidilao said its new restaurants are taking longer to break even on the cash invested in them.

Despite the recent dumping of its shares, the hotpot chain was still worth $21 billion as of this week, which is nearly 100 times its 2020 earnings. And almost immediately after publishing its disappointing first-half results, the company also announced a revamp of its board. Shu Ping, wife of the founder, is resigning as a non-executive director. Shi Yonghong, another co-founder and the second biggest shareholder behind Zhang and his spouse, will also resign as an executive director.

Perhaps a bit of new thinking at the top is needed. Smaller rival Xiabuxiabu Catering also decided to bring in new blood after a 70% slide in its share price since February, although the Hong Kong-listed firm’s managerial revamp was conducted in a far less orderly manner.

Xiabuxiabu sacked its CEO Zhao Yi in June. She’s furious, reporting that she was informed of her ouster as part of an emergency meeting that she had to join from the toilet of a high-speed train. In more damaging revelations that have emerged since then, Zhao has accused her former employer of improper practices and called for an investigation by Hong Kong regulators.

By the end of last year, Xiabuxiabu operated a network of 1,061 eateries. This is about two-thirds of Haidilao’s national footprint but Haidilao is way out ahead in market value at about 22 times higher.

Haidilao’s founder Zhang may have retained the title of ‘China’s richest restaurant owner’ (see WiC428) but 21CN Business Herald says the 47 year-old is no longer the richest China-born tycoon with a Singaporean passport. In going public in 2018, Haidilao’s prospectus revealed that Zhang and his wife (both born in Sichuan province, the home of spicy hotpot) had become Singaporean nationals.

But the couple has slipped in the wealth rankings, according to the latest compilation by Forbes (the richest businessperson born in China with Singaporean citizenship is now Li Xiting of medical device maker Mindray; see WiC459.)

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