Super Hi International: Strong Growth, Modest Profitability

seekingalpha07-20

Super Hi International is awarded a Hold rating with both its strong revenue growth potential and underwhelming net margin in mind.On the positive side of things, HDL has solid revenue growth ...

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SCQBJ-JZ Super Hi International Holding Ltd. (NASDAQ:HDL) [9658:HK] stock is assigned a Hold rating. HDL's revenue growth potential is strong with an expected mid-teens percentage top line CAGR for the next three years. But the company's net margin guidance at the mid-single digit percentage is underwhelming. Taking into consideration both its top line prospects and profitability outlook, I deem a Hold rating to be fair for Super Hi International. Company Description In its media releases, HDL calls itself an operator of \"hot pot restaurants in the international market\" (outside Greater China) under \"a leading Chinese cuisine restaurant brand\" known as Haidilao. A Brief Description Of Chinese Hot Pot Cuisine Super Hi International's IPO Prospectus How A Typical Hot Pot Meal Looks Like   Super Hi International's IPO Prospectus At the end of Q1 2024, Super Hi International ran 119 self-operated hot pot restaurants (source: Q1 results announcement) in total, of which 72 of them were located in Southeast Asia. HDL also operated 19, 18, and 10 restaurants in North America, East Asia, and other geographical markets, respectively. Super Hi International is dual listed on NASDAQ and the Stock Exchange of Hong Kong. The company's shares were listed in Hong Kong in December 2022, prior to its NASDAQ listing in May this year. HDL Has Strong Revenue Growth Potential A key investment merit for Super Hi International is the company's top line expansion outlook for the mid-to-long term. According to market research firm Frost & Sullivan's research cited in its IPO prospectus, HDL is \"the largest Chinese cuisine restaurant brand originating from China in the international market.\" The international hot pot market is projected to grow at an annualized rate of +8% for the 2022-2027 time frame as per Frost & Sullivan's forecasts disclosed in Super Hi International's listing prospectus. As a comparison, Super Hi International's consensus FY 2023-2026 sales CAGR estimate is better at +15% (source: S&P Capital IQ) supported by company-specific growth drivers. In my opinion, the two major growth engines for HDL will be opening new restaurants in other markets apart from Southeast Asia, and increasing the proportion of guests of non-Chinese ethnicity. As highlighted in the preceding section, roughly 60% of Super Hi International's hot pot restaurants are in the Southeast Asian region. As per Frost & Sullivan's research detailed in the company's IPO prospectus, the combined size of the hot pot markets in Singapore, Thailand, Indonesia, Malaysia, and Vietnam is around $2.4 billion. In contrast, Frost & Sullivan estimates that the U.S., Japan, and South Korea have hot pot markets as large as $13.8 billion, $1.9 billion, and $1.7 billion, respectively. In other words, HDL's current geographical mix in terms of restaurant locations is sub-optimal. Super Hi International's top line could potentially grow at a faster pace going forward, if the company steps up on new restaurant openings in under-penetrated markets like East Asia and North America. Separately, there is room for Super Hi International to attract more guests of non-Chinese ethnicity to its hot pot restaurants. At the company's earlier FY 2023 earnings call (transcript is not publicly available) in late-March, HDL shared that its current percentage of guests of non-Chinese ethnicity is around 50%, and outlined its goal of raising this ratio to 60% or higher in the intermediate-to-long term. It is reasonable that half of HDL's guests are of Chinese ethnicity, as hot pot is a Chinese cuisine. But there is certainly the potential for Super Hi International to grow its proportion of guests of non-Chinese ethnicity by promoting hot pot cuisine and its brand more aggressively. The number of ethnic Chinese living outside of China is estimated to be at least 60 million based on an old Nikkei Asia article. This is a big pool of potential customers for Super Hi International, but HDL's addressable market will certainly be much larger assuming that it is successful in attracting a greater number of guests of non-Chinese ethnicity. In summary, I think that HDL will be able to grow its top line at a mid-teens percentage going forward as per the sell-side's consensus forecasts, which is better than Frost & Sullivan's market projections. This is because Super Hi International has growth drivers lsuch as opening more new restaurants in North America and East Asia, and targeting non-Chinese guests. But Super Hi International's Profitability Is Inferior To That Of Its Peers An expected mid-teens percentage revenue growth rate for HDL is excellent, but Super Hi International's profitability isn't up to the mark. The current consensus FY 2024 and FY 2025 net profit margin estimates for Super Hi International are 4.0% and 5.1% (source: S&P Capital IQ), respectively. This is aligned with HDL's guidance of a mid-single digit percentage net margin for the current fiscal year as per the company's comments at the FY 2023 earnings briefing. In contrast, HDL's peers Yum China (YUMC) and Haidilao International Holding (OTCPK:HDALF) [6862:HK] are forecasted to deliver relatively higher net margins of 7.4% and 10.9%, respectively in 2024 according to S&P Capital IQ data. Note that Haidilao International Holding or HDALF operates Haidilao-branded hot pot restaurants in the Greater China region. I take the view that there are two key factors that are a drag on Super Hi International's profit margins. Firstly, HDL has yet to reach a sufficiently large revenue base to enjoy positive operating leverage effects. As a reference, Super Hi International's head office expenses are still a meaningful 3.5% of its revenue as per the company's FY 2023 earnings briefing disclosures. HDL's FY 2023 revenue was slightly below $700 million, while Yum China's and Haidilao International's revenues have exceeded $10 billion and $5 billion, respectively last year. Secondly, Super Hi International is still at the phase of investing in future growth, and such investments will inevitably hurt the company's profitability. Apart from the start-up costs pertaining to new restaurant openings, HDL also indicated in its 2023 annual report that it is taking actions to \"enhance the dining experience of customers\" and explore \"additional brands and business models.\" It is clear that Super Hi International is still at the stage in its corporate lifecycle where it is trying to optimize its existing operations and explore new opportunities at the same time. In a nutshell, HDL's mid-single digit net profit margin is inferior to that of its peers, and this is a key negative for the stock. Current Valuations Have Priced In Revenue Growth Potential Super Hi International is now valued by the market at 17 times consensus FY 2025 P/E as per S&P Capital IQ data. Both Yum China and Haidilao International trade at a forward YF 2025 P/E ratio of around 13 times. As highlighted above, the consensus FY 2023-2026 top line CAGR forecast for HDL is +15%, which is justified by growth drivers like new restaurant openings and a more diversified guest mix. On the other hand, Yum China's and Haidilao International's sales are expected to expand by CAGRs of +8% and +10%, respectively for the FY 2023-2026 time period based on S&P Capital IQ. It is reasonable that Haidilao International and Yum China will likely grow slower than Super Hi International. HDALF and YUMC are larger and more mature companies at the later stages of their respective corporate lifecycles. The market has rewarded HDL with a valuation premium of as much as 30% (17/13 - 1), considering the difference in P/E valuations between Super Hi International and its peers. An Improvement In Net Margin Is Needed To Trigger A Valuation Re-Rating A further re-rating of Super Hi International's valuations is only likely to materialize in the future, assuming that HDL's profitability improves in a meaningful way. Super Hi International's net margin has the potential to increase going forward. One driver is that HDL's revenue reaches a sufficient scale to benefit from positive operating leverage effects. Another driver is that HDL becomes more efficient in managing its operations over time. When HDL's net margin rises from a mid-single digit percentage level to the high-single digit/low-teens percentage that its peers can achieve, that will be the trigger for an upgrade to a Buy rating. Conclusion  I have a mixed view of Super Hi International's financials, taking into consideration both its robust top line growth outlook and modest profitability. HDL's current valuations are reflective of its superior revenue growth prospects as compared to peers. The stock will only deserving of a further valuation re-rating, in the event that its net margin expands to levels comparable to that of its peers.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2452725079"}