Haidilao (HKG: 6862) shares are down 13% in Hong Kong today on the back of a slightly odd looking deal for a hotel in Japan. Why would a Chinese hotpot restaurant chain - a Mainland Chinese that is - want to buy a hotel in Japan? We’re not exactly expecting to see a significant tourism business develop between the two countries after all. However, there is a possible explanation here, which is to tunnel some assets offshore. That is, as far as we can see, the only useful logic here. Strange in a company this large but still, that does seem to us to be how this is working.
We’ve talked before of Haidilao: “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.”
But here we think the importance is that the main restaurant chain is in Mainland China. The international operations are split off as Super Hi International.
Haidilao share price from Google Finance
To today’s deal: “Haidilao International's shares fell sharply after it announced plans to acquire a Japanese hotel company from Super Hi International in a connected transaction. The Chinese hotpot chain's shares declined 11% to 17.42 Hong Kong dollars (US$2.23) in early trade on Wednesday, on track for its biggest percentage drop since April.” And more detail: “Haidilao agreed to buy Japan Hai, which owns and manages a hotel, for 2.6 billion yen (US$17.1 million) from Super Hi, it said in an exchange filing after the market closed Tuesday. Haidilao spun off Super Hi, its international hotpot business, in 2022. Super Hi in turn owns Japan Hai which operates a hotel in Japan and holds a license to develop Japanese hot springs.”
We share that confusion - why a Japanese hotel for a Mainland Chinese hotpot restaurant operation? At which point we note that this is a related transaction. The effect of which is that $17 million moves out of China. Sure, the ownership of the hotel moves onshore to the Mainland. But the $17 million moves offshore. And one of the things about China is that rich people are limited to moving $50,000 a year offshore - unless it’s to buy some business asset.
Now, of course, we don’t know that this is the reason, we’re being cynics here. But being cynical is appropriate in a stock market. And thus also the fall in the share price - if the point actually is to tunnel capital offshore then that’s not a positive for the hotpot chain, is it?
