Haidilao Holdings (HKG: 6862) (OTCPK: HDALF) shares are up 13% today in Hong Kong on the back of a forecast about first half profits: “ Shares of Haidilao International Holding surged after the Chinese hotpot chain said it expects its net profit to have jumped nearly 3,000 percent in the first half of the year.” Yes, that's a stunning percentage rise. But it's from a very low base, around breakeven in fact: “Net profit likely totaled CNY2.2 billion (USD307.7 million) in the six months ended June 30, versus CNY72 million (USD10.1 million) a year earlier, the Beijing-based company announced yesterday. Revenue is expected to have risen at least 23.7 percent to CNY18.8 billion (USD2.6 billion).”
In those numbers is the classic problem with restaurants as investments. Pluck the old numbers out of that and they were making $10 million on $2 billion of turnover. So there are massive fixed costs to just being in business at all. Sure, an increase in turnover feeds through, nicely, to the bottom line but even then we're still looking at something a shade under 10% as the net profit margin as part of turnover. It's simply a difficult business in which to make very large margins. Just because there are so many people who can give it a go with a cooker and a few tables. This just always does compress potential margins.
Haidilao share price from Google Finance
We might want to think a little about this - $2.6 billion of hotpots is an awful lot of hotpots. It's also true that we're looking at a market valuation of some $13 billion and change. The explanation is, of course, this: “Haidilao International Holding Ltd., an investment holding company, engages in the restaurant chain operation and delivery businesses.” and “It owns and operates restaurants in Mainland China, Hong Kong, Macao, and Taiwan.” It's serving one of the local cuisines to 1.3 billion people. That's why the aggregate numbers can be so high. It's also true that hotpot is one of those dishes perhaps better appreciated commercially, given the complexity of the cooking.
A part of this revival is, of course, the absence of lockdown restrictions now. China was later than many other places in lifting them so we're seeing, now, the reactions in Chinese retail stocks that we saw a year and two back in Western. Those companies that survived - like Haidilao - are now able to get business back to normal. Without some of the competition that's no longer there.
