Hotpot Stock Jumping 78% Still Has Room to Run, Analysts Say

(Bloomberg) -- China’s largest hotpot chain is whetting the appetite of investors as well as diners.

Haidilao International Holding Ltd., one of the largest additions to the MSCI Emerging Markets Index by market capitalization, has surged more than 78% since its Hong Kong listing last September while the Hang Sang Index slipped about 8.5% in the same period. Analysts believe there’s still steam left in this rally: the 12-month consensus target price of HK$33 ($4.21) is about 4% above the stock’s current level.

The stock gained as much as 2.4% in early Hong Kong trading on Tuesday.

The Sichuan-based firm is the market leader in hotpot in China, a segment that accounts for almost 14% of the country’s $21 billion restaurant scene, according to data from Frost & Sullivan. Its lack of listed rivals -- there’s only one other hotpot stock, Xiabuxiabu -- has added to its lure, prompting comparisons with Kweichow Moutai Co., the world’s most profitable distiller whose fiery drink is coveted and hard to procure.

The projected rapid growth of hotpot in China is also expected to benefit Haidilao by shoring up its front-runner status, said analysts. Frost & Sullivan projects hotpot chains to grow 10.2% by 2022 to reach revenue of over 700 billion yuan ($99 billion), outpacing the restaurant industry as a whole.

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“The hotpot market in China is still extremely fragmented,” Arnold Tam, Hong Kong-based analyst at Bright Smart Securities, said in an email. “Haidilao’s market share is expected to rise as the industry evolves towards strengthening the strongest players.”

While the Chinese economy is growing at its slowest pace in three decades and consumer confidence is waning, the food industry is still relatively insulated. Amid a sluggish world economy and geopolitical uncertainty, Haidilao’s revenue is projected to grow 60% this year and 40% next year, according to analyst estimates compiled by Bloomberg.

Customers are willing to queue for hours to get a table at one of its over 500 outlets in China, encouraged by the chain’s provision of perks like free manicures, shoulder massages and dance performances. It also runs a delivery service that sends a pot, an induction cooker and fresh food to customers at home.

The restaurant chain’s revenue nearly tripled in the past three years to 17 billion yuan ($2.4 billion) in 2018, while profit climbed over 500% to 1.7 billion yuan in the same period, according to data compiled by Bloomberg.

In comparison, revenue at Xiabuxiabu Catering Management China Holdings Co. -- the other Chinese hotpot stock -- has doubled over the same period while profit rose 63%.

Haidilao purchases most of its food supplies and seasonings from affiliated companies, which demonstrates a strong control over its supply chain, China Securities Finance Corp Ltd. analysts led by Yanqing He wrote in a note last month. It has also managed to lower employee turnover through its incentive system, which includes paying out up to 2.8% of a restaurant’s profit to store managers.

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Its fortunes were also helped by a food safety scandal at rival Xiabuxiabu in September last year, when a Shandong province customer allegedly found a rat in a hotpot, causing shares to fall. Xiabuxiabu had contested that allegation after an internal preliminary probe.

Haidilao is also expanding overseas. In April, it opened a London outlet, bringing its tally of stores outside China to 46.

Still, the enthusiasm around its stock has made it increasingly expensive. It’s trading at around 57 times projected earnings for the next 12 months, while Xiabuxiabu is at 20 times. Guangzhou Restaurant Group, a Cantonese restaurant chain operator, trades at 28 times.

“At this expensive level, it’s easier for the stock to fall than to rise,” said Ruoyu Wen, Beijing HeirCastle Asset Management analyst.

©2019 Bloomberg L.P.