Hotpot chain Haidilao is Hong Kong's worst stock

Haidilao opened over 300 outlets in the first half of the year, but new store performance has been weaker than expected. PHOTO: BLOOMBERG

HONG KONG (BLOOMBERG) - While Chinese technology and private-education giants have been stealing the headlines this week when it comes to stocks in Hong Kong, the biggest loser in the market is a popular hotpot chain.

Shares of Haidilao International Holding, controlled by Singapore's richest couple,
have plunged 32 per cent over five days, turning them into this year's worst performer on the Hang Seng Index.

The rout comes as the company issued a first-half profit warning on Sunday (July 25), citing higher expenses due to new restaurant openings and negative impact from the pandemic.

Haidilao's stock plunged as much as 9.1 per cent on Friday before paring some of the loss. The Hang Seng Index fell as much as 2.6 per cent.

This week's losses have exacerbated a sell-off in Haidilao, best known for its string of Chinese spicy soup restaurants. The stock is now down 66 per cent from a February peak, a sharp reversal following an almost 250 per cent surge in the last two calendar years.

That reflects not just the challenges faced by the global restaurant industry because of changing consumer habits amid the pandemic, but also the company's struggle to replicate its past success despite significant new store additions, and a broader weakness in Hong Kong equities.

Haidilao opened over 300 outlets in the first half, but new store performance has been weaker than expected, while same-store table turnover recovery may have stagnated at 60-70 per cent of 2019 levels, according to Bloomberg Intelligence.

"Their business in top tier cities has been very good, but when they started to penetrate into lower tier cities, it becomes much more challenging because the spending power could be lower," said Angela Hanlee, a Bloomberg Intelligence analyst. "Lower tier cities are also not as densely populated so the population coverage of each restaurant is going down too."

The Beijing-based restaurant operator that serves up boiling soup broth with meat, seafood, vegetables, and noodles, went public in 2018 amid much fanfare, as many were captivated by the rag to riches story of the founders. The recent profit warning - which triggered a record 17 per cent slump in the stock on Monday - has fueled fears that the pandemic may cause further disruption to Haidilao's business model.

Tables Turned

China has adopted an aggressive approach when it comes to containing any outbreaks of Covid-19, moving quickly to conduct mass-testing and quarantining. Authorities in May locked down a neighborhood in Guangzhou to contain an increase in cases due to the delta variant.

Shares of Xiabuxiabu Catering Management China Holdings, another major hot pot restaurant operator that's not a part of the benchmark HSI gauge, are down 62 per cent this year, on course to erase almost all of their 2020 gains.

"From the industry's perspective, the habits of consumption have been changing a lot, especially for restaurants," said Ms Han. "In the past, people have been waiting for tables, but now it is tables waiting for people."

Citigroup continues to be cautious about some possible consumer behavioral changes post-Covid like fewer dining-out occasions and more home cooking and takeaways, analysts including Xiaopo Wei wrote in a July 26 note.

"If those consumer behavior changes are permanent post-Covid, HDL's investment case will be structurally and detrimentally impacted," they wrote.

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