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Investors in Chinese companies must be glad this week is over. A regulatory crackdown in Beijing has hammered Hong Kong-listed Chinese stocks. Two of the biggest tech groups, Tencent and Alibaba, are among the losers, down more than 10 per cent in July. Even unrelated sectors are being drawn in.
Chinese hot pot stocks, including Haidilao, Jiumaojiu and Xiabuxiabu, are collateral damage in the wider sell-off. Shares of the biggest, Haidilao, are down 28 per cent in the past month.
Last year this would have made more sense. Chinese hot pot meals are social events in which diners gather close together while sharing a steaming pot of soup. This did not sit well with social distancing orders. The combination of fewer diners, higher ingredient costs and store disinfection expenses led Haidilao to report an 87 per cent decline in profit for the year. Operating margins more than halved to 4 per cent.
Yet shares of Haidilao began to fall only this year, dropping 54 per cent. They now trade at an enterprise value to forward sales ratio of three times, the lowest since the company listed in 2018. Meanwhile, demand is on the rise. Table turnover recovered to more than three-quarters of pre-pandemic levels by the second half of 2020. Full-year sales increased 8 per cent.
There is scope for further growth. Average spending per guest has been rising as dining out becomes a less frequent but more special event. Sales from Haidilao’s delivery business also increased by 60 per cent last year. It helps that the hot pot restaurant market in China, where Haidilao gets 96 per cent of its sales, is fragmented. Although it is the country’s biggest chain, it accounts for less than 3 per cent of the market, leaving room for expansion.
The Chinese catering industry has historically carried low regulatory risk. Amid changing government policy, this is rapidly becoming one of its greatest selling points.