Haidilao: Is hot pot giant's $963m IPO target too spicy?

China’s largest hot pot chain puts forward an implied valuation nearly five times that of McDonald’s China and Hong Kong business. It may prove too much for investors to stomach.

Chinese hot pot chain Haidilao is hoping an ambitious expansion plan will whet the appetite of investors as it begins serving up its HK$6.3 billion to HK$7.6 billion ($801 million to $963 million)  Hong Kong IPO.

The chain, set to list under the name of Haidilao International, started serving institutional investors on Monday, offering 424.5 million shares – 8% of its enlarged share capital on a pre-greenshoe basis – at an indicative price range of HK$14.8 to HK$17.8 per share. A retail tranche with 9% of those shares on the menu is set to commence on Wednesday.

As it stands, Haidilao’s IPO stands out among other recent deals in Hong Kong because the restaurant operator is a typical consumer business sitting on solid fixed assets, operating with a strong cash flow and has high visibility in earnings growth.

All these factors differentiate the company from the recent spate of IPOs from internet companies and early-stage startups that operate with negative cash flow and are yet to be profitable.

In addition, Haidilao will likely enjoy some rarity value being one of the few large Chinese restaurant brands to list on a stock market. As of the end of June, Haidilao ran 331 restaurants in China – mostly in first- and second-tier cities – and another 31 stores in Taiwan, Hong Kong, Singapore, South Korea, Japan and the US.

Haidilao is popular for its premium Sichuan-style spicy hot pot, as well as the value-added services its customers can enjoy during their meals, including massage, nail polishing and shoe polishing. 

The company has been expanding aggressively in recent years and more than tripled its store count from 112 at the beginning of 2015. From a brand perspective, Haidilao hardly faces any competition since there is no other premium hot pot chain in China.


Still, some investors are concerned over the company’s lofty valuation and its ability to further penetrate into low-tier cities where consumption power is significantly lower.

While there are limited comparable companies in the public market, Haidilao’s valuation is by no means cheap.

Even at a pre-shoe basis, Haidilao’s implied valuation will reach $10 billion to $12 billion depending on where the IPO price will be fixed across the price range.

That will put it fairly close to the $14 billion valuation of Yum China, the New York-listed operator of American fast-food brands such as KFC, Pizza Hut and Taco Bell in China, which is itself the subject of takeover talk.

Yum China is much larger than Haidilao in terms of store count. As of the end of March, Yum China operates 8,112 stores across 1,200 Chinese cities (although it has to be noted that their stores are not directly comparable since Haidilao’s are much larger). Yum China also enjoys a high operating margin of 33%, compared to Haidilao’s 21.1%.

And even at the lowest possible implied valuation, Haidilao will be worth nearly five times as much as McDonald’s China and Hong Kong franchise, which was sold to a Citic-led conglomerate for $2.08 billion early last year. McDonald’s operates about 1,750 stores in China and Hong Kong.


Syndicate analysts assume Haidilao’s implied valuation represents about 25.1 times to 30.2 times next year’s earnings of about $400 million. In order to reach that earning target, the company will have to increase its earnings by about 2.5 times from $174 million last year.

It is highly doubtful that Haidilao can achieve that target, particularly at a time when its earnings growth is showing signs of slowdown. Its net profit growth decreased to 22% last year from 138% in 2016, and is set to further fall to about 8.3% this year based on its first half earnings of about $94 million.

One equity analyst told FinanceAsia the company may face headwinds with plans to expand into lower-tier cities because of its market position as a premium hot pot chain.

Haidilao said average spending per customer in its Chinese restaurants is about Rmb96.6 – more than twice the Rmb47.7 recorded by Xiabuxiabu, a fast-food style hot pot chain, last year.

Still, Haidilao’s lofty valuation has not deterred big-name investors from subscribing to its shares.

The company secured $375 million worth of investment from five cornerstone investors including Hillhouse Capital and Greenwoods, which are buying $90 million of shares each. Morgan Stanley and Snow Lake will buy $80 million of shares and Ward Ferry will invest $35 million.

Haidilao is scheduled to close institutional and retail bookbuild on September 17 and list on September 26.

Joint sponsors of Haidilao’s IPO are CMB International and Goldman Sachs.

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