Hong Kong’s Top-Performing Stock This Year Has the Magic Ingredients

(Bloomberg) -- A Chinese condiment maker has been a rare winner for investors this year, riding high on the popularity of hotpot cuisine.

Yihai International Holding Ltd. supplies flavorings to Haidilao International Holding Ltd., which became Asia’s biggest listed restaurant operator after its initial public offering in Hong Kong. The growth in Haidilao’s hotpot business has helped drive a 151 percent rally in Yihai’s shares this year, making it easily the best performer on the Hang Seng Composite Index. The stock gauge, meanwhile, has fallen 18 percent, its worst slump in seven years.

Hong Kong’s Top-Performing Stock This Year Has the Magic Ingredients

Yihai’s sales to Haidilao -- which has nearly 400 restaurants in Greater China and several overseas -- accounted for over half of its revenue in the first six months of the year. Yihai also sells condiments under the Haidilao brand, whose popularity was underscored by the buzz surrounding its listing, which raised almost $1 billion. Haidilao has established a reputation among consumers for attentive service, even offering manicures and massages to customers waiting to be seated.

Hong Kong’s Top-Performing Stock This Year Has the Magic Ingredients

The company’s debut was ultimately something of a damp squib and its share price is below its initial price of HK$17.80 on Sept. 25. Yihai was spun off from Haidilao in 2014, a decision aimed at lowering costs and enhancing efficiency, according to the group’s founder Zhang Yong.

“Haidilao is a boon and strong guarantee for growth, but it may not stay that way three years from now as Haidilao matures,” said Li Yunyi, an analyst at Essence International. “There has been so much hype, the valuation upside for the company has been mostly depleted.” Yihai trades at 27 times 12-month forward earnings, while Haidilao is at 30 times.

Hong Kong’s Top-Performing Stock This Year Has the Magic Ingredients

For now, optimism toward Haidilao and Yihai is backed up by the popularity of hotpot, where diners cook meat and vegetables in a boiling broth at the table. Hotpot is the fastest growing Chinese cuisine in the country, according to SWS Research Co. analysts including Ma Xiaotian. It is also benefiting from the consumption upgrade in China’s smaller cities, they said.

Other food flavoring companies have notched up decent returns this year, though not to the same extent as Yihai. Foshan Haitian Flavouring & Food Co., whose products include soy sauce and vinegar, has advanced 26 percent in Shanghai, while Jonjee Hi-Tech Industrial and Commercial Holding Co. is up 19 percent.

Hong Kong’s Top-Performing Stock This Year Has the Magic Ingredients

Of the 10 analysts Bloomberg tracks covering Yihai, seven have buy ratings on the stock and three have hold or equivalent recommendations. The average 12-month price target is HK$22.09, implying 13 percent upside from Thursday’s close.

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