Increasing revenue without increasing profits and ineffective transformation, beware of falling into the "story" trap of HAIDILAO (06862).

Increased revenue but not increased profit, after HAIDILAO (06862) opened up franchising, the growth rate of revenue slowed down and profit margin decreased. What is the reason behind this? It has been revealed that in the first half of 2024, HAIDILAO's financial report showed a revenue of 21.491 billion yuan, a year-on-year growth of 13.8%, which is a decrease of 10.82 percentage points from the same period last year. The net profit attributable to shareholders was 2.08 billion yuan, a year-on-year decrease of 9.7%, with a net profit margin of 9.68%, a decrease of 2.28 percentage points year-on-year. As of June 2024, the company had 1,343 restaurants, a decrease of 39 compared to the previous year. The slowdown in revenue growth for HAIDILAO is attributed to the reduction of directly operated stores, with nearly 40 stores not contributing to revenue anymore. Additionally, the franchise model has just started and has not made a significant contribution. Another reason is the decrease in average spending per customer, but this impact is offset by an increase in table turnover to mitigate the decrease in average spending. In the first half of the year, the company's average table turnover was 4.2 times per day, an increase of 0.9 times per day from the same period last year, with an average per capita expenditure of 97.4 yuan, a decrease of 5.3% year-on-year. Looking at the company's performance history, from 2015 to 2019, both revenue and net profit maintained double-digit growth. The pandemic years of 2020-2022 saw continued revenue growth in the first two years, but in 2022, there was a decline. The company accumulated a net loss of 2.48 billion yuan over three years, with a loss of over 4 billion yuan in 2021. In 2023, with the end of the pandemic, the company benefited from the recovery of the catering industry, with significant growth in revenue and profit. However, the sustainability of this growth was poor, and in 2024, increased industry competition and ineffective transformation led the company into a situation of increased revenue but not increased profit. Loud thunder, small raindrops, the "Four Major Changes" failed to take effect In the first half of 2024, according to HAIDILAO's financial report, the company made four major changes to reverse the current situation: first, to promote the "three statements" work with each department doing its job well; second, to implement a multi-store management model for more benefits; third, to promote the franchise model and target the lower-tier markets; fourth, to promote the "Red Pomegranate Plan" to incubate more new brands. Among these four major changes, the franchise model and the Red Pomegranate Plan had a significant impact on performance. In March of this year, the company announced that it would start implementing a franchise model for HAIDILAO restaurants, trying to expand the restaurant network in lower-tier cities through a diversified operation model. However, HAIDILAO's requirements for franchisees are very strict. By introducing franchisees with the same rules, standards, assessment mechanisms, and processes as direct-operated stores, the company aims to maintain consistency. Since the announcement of the franchise model, the company has received over 10,000 franchise applications, mainly from lower-tier cities. However, only one franchise store was successfully opened in the first half of the year, showing a much slower progress than expected. While new franchise stores are slow to open, and the number of direct-operated stores continues to decrease, in the first half of 2024, compared to the first half of 2023, HAIDILAO closed a net of 7, 12, and 21 stores in first-tier cities, second-tier cities, and lower-tier cities, respectively. It is evident that the company closed more stores in lower-tier cities, raising questions among investors about the company's operational capability in these locations. The same requirements for franchisees and direct-operated stores in lower-tier cities are likely to dampen the enthusiasm of franchisees. In August of this year, the company appointed Zhang Junjie, a post-90s individual, as an independent non-executive director, primarily responsible for supervising the HAIDILAO board of directors and providing independent judgment. Zhang Junjie founded the Bawang Tea Princess brand in 2017 and quickly expanded through a franchise model. HAIDILAO's invitation to Zhang Junjie clearly shows its interest in exploring franchisees and diversified business strategies, hoping that Zhang Junjie can break the deadlock in this area. If the franchise model is HAIDILAO's vertical expansion, then the diversification and multi-brand strategy is its horizontal expansion. Named the "Red Pomegranate Plan," it encourages the incubation and development of more dining brands. In the first half of the year, the company had a total of five entrepreneurial projects, such as "Yanqing Barbecue Shop" and "Xiao Hai Hotpot," covering a variety of cuisines including barbecue, hotpot, and Chinese fast food. HAIDILAO's Red Pomegranate Plan differs from competitors' multi-brand strategies, such as Xiabu Xiabu's "Cou Cou" and Jiumaojiu's "Tai'er." Competitors' development of a diverse brand strategy is mainly driven by corporate investment, with a clear focus and development goals. In contrast, HAIDILAO's multi-brand strategy appears to be more loosely structured. While the Red Pomegranate Plan seems to integrate employee development with company growth, it carries significant risks for the company. As mainly entrepreneurial incubation projects, there is a high investment risk, and with no clear direction for new brands, the lack of focus in diversification brings about a high level of uncertainty in brand development, leading to the failure of the diversified strategy. The financial report shows that in the first half of 2024, HAIDILAO's other restaurant operating income was 182 million yuan, accounting for only 0.8% of total revenue, making minimal contribution to performance. In fact, even before the pandemic, HAIDILAO had already laid out a multi-brand operation strategy, exploring other subcategories of dining beyond hotpot, but to date, there have been no significant results. Considering the current lack of overall consumer demand and the intense competition in the catering industry, we believe that the space for HAIDILAO's multi-brand strategy in the short to medium term is limited, and its performance will still rely on its core business of HAIDILAO restaurants. Intensified competition, pressure on performance in the second half of the year Against the background of intensified competition in the catering industry, HAIDILAO's restaurant business, which forms the basis of its performance, will face significant challenges in the second half of the year in terms of average spending per customer, number of stores, table turnover rate, profit margin, and more. Data shows that from 2020 to 2023, HAIDILAO's overall average spending per customer was 110.1 yuan, 104.7 yuan, 104.9 yuan, and 99.1 yuan, respectively, with a decrease to 97.4 yuan in the first half of this year. As the catering industry enters the era of "9.9 yuan" consumption, HAIDILAO's sub-brand hotpot bases have also been priced at 9.9 yuan, and the prices of some dishes have been lowered. It is expected that the average spending per customer will continue to decline in the second half of the year. In terms of the number of stores, as of the end of June 2024, the company had a combinedWith a total of 1343 restaurants, the number of HaDiLao restaurants decreased by 31 compared to the end of 2023, and decreased by 39 compared to the first half of 2023. Although the management of the company has stated that they will accelerate the opening of new stores in the second half of 2024, the number of HAIDILAO stores has not shown significant growth since the mass closure of inefficient stores in 2022. Due to sluggish consumer demand, conservative franchise models, and relatively high average customer spending, GMTEight believes that the expansion and penetration space of HAIDILAO stores is limited.In terms of table turnover rate, HAIDILAO's average table turnover rate in the first half of 2024 rebounded to 4.2 times per day, compared to 3.3 times per day in the same period last year, driving growth in same-store revenue. However, entering the second half of the year, with the increase in the base of the table turnover rate and the perceived decline in dining service quality by consumers, it will be difficult for HAIDILAO to maintain the same momentum of table turnover rate expansion as in the first half of the year, with increased difficulty and higher uncertainty. HAIDILAO's core operating profit in the first half of the year was 27.99 billion yuan, an increase of 13.0% year-on-year, but compared to the 13.8% year-on-year revenue growth, it was 0.8 percentage points lower, leading to a slight decline in core operating profit margin year-on-year. Net profit margin was 9.68%, a decrease of 2.28 percentage points year-on-year. Pu Yin International research report believes that as we enter the second half of the year, with limited room for improvement in the table turnover rate and decreasing operating leverage, HAIDILAO's profit margin may face greater pressure than in the first half of the year. On September 4, Zhongyin International research report pointed out that HAIDILAO is expected to continue to face certain pressures in the second half of the year, including macroeconomic drag, high base of same-store sales, and increase in employee costs. Same-store sales growth is expected to be at most 5%, and the forecast for HAIDILAO's net profit for the years 2024 to 2026 has been respectively lowered by 7%, 1%, and increased by 4%, while the target price for HAIDILAO has been reduced from 21.52 Hong Kong dollars to 15.94 Hong Kong dollars. The valuation is still bottoming out, beware of falling into the "story" trap It is worth noting that as HAIDILAO faces increasing operational pressures, its balance sheet has also shown some "abnormalities" - the biggest change being a significant decrease in property, factory, and equipment, which is related to the company's significant depreciation and amortization each year. It can be seen that the company's fixed assets (property, factory, and equipment, and intangible assets) have been decreasing every year, from 196.28 billion yuan in 2020 to 64.63 billion yuan, while property, factory, and equipment have decreased from 120.64 billion yuan to 32.55 billion yuan, a decrease of more than 70%. Such depreciation and amortization are probably accounting tactics. From 2020 to the first half of 2024, HAIDILAO has accrued expenses of 14.789 billion yuan, accounting for 21.5% of fixed assets based on expenses in the first half of the year. During this period, the total number of the company's restaurants has consistently increased, with 1,343 stores in the first half of 2024, an increase of 45 stores from 2020. It should be noted that these are all directly operated stores, and if the equipment and assets of each store are consistent, the company's asset growth scale can be imagined. Currently, HAIDILAO has announced the active development of the franchise model, not only following industry trends but also offsetting this part of property, factory, and equipment assets on the financial statements. Moreover, the company will continue to reduce its directly operated stores in the later period, and the expense of depreciation and amortization will decrease gradually, which will lead to a return to normal profit levels. Therefore, HAIDILAO can continue to tell the market the story of low asset intensity, aiming to "sail smoothly" in the increasing operational pressure. In conclusion, HAIDILAO's performance has some volatility, and this year it is trying to turn the tide with the "Four Major Changes," but progress in new business is slow, making it difficult to create a new growth curve in the short to medium term. Coupled with the overall softness of social consumption and the catering industry, the uncertainty of its performance growth has increased. Although the valuation has shrunk by 80% from its peak, it may continue to bottom out, investors need to be vigilant and beware of falling into the "light asset" trap.