Super Hi: Bullish On Store Opening Plan, Profit Improvement Potential (Upgrade)

seekingalpha10-04

I have upgraded my rating for Super Hi International Holding Ltd. to a Buy, following an evaluation of the company's US restaurant opening plans and its potential to derive higher profit margins.HDL ...

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(NASDAQ:HDL) [9658:HK] shares from a Hold to a Buy. My earlier July 20, 2024, initiation article drew attention to HDL's financial prospects. In this write-up, I explain why I am positive about Super Hi International's new restaurant opening plans for the North American market and the company's potential to generate higher profit margins in the future. HDL Intends To Open New Restaurants In The US Super Hi International has the intention to proceed with new store openings in the US, according to a recent media interview. A Bloomberg News report published last month cited comments from HDL's CEO indicating that the company will “unveil more outlets in New York and Los Angeles” in 2025 considering that the US offers the “biggest potential globally.” North America accounted for 13% of Super Hi International's guest visits in the most recent Q2 2024 and 16% of HDL's total restaurants at the end of June this year. On the flip side, HDL's biggest market, Southeast Asia, contributed 71% of the company's latest second quarter guest visits and 61% of its stores as of June 30, 2024. I sourced these numbers from the company's Q2 2024 results press release. In the first six months of the current year, Super Hi International opened eight new restaurants. This included five new stores in Southeast Asia, two new stores in North America, and a single new outlet in East Asia. While it is perfectly reasonable for HDL to open more outlets in its biggest market, it actually makes a lot of sense for the company to place a greater emphasis on expanding its footprint in North America. In fact, there is a massive disconnect between HDL's current geographical profile and the growth potential of the Chinese cuisine segment (hotpot is a sub-segment) in different geographical markets. According to research conducted by Frost & Sullivan, the value of the Chinese cuisine industry in the US was around $55 billion in 2022, or almost two times larger than the $19 billion Southeast Chinese cuisine sector for the same period. It won't be far-fetched to think that Super Hi International should have more restaurants in the US or North America vis-à-vis its largest market, Southeast Asia. As such, it is encouraging to know that Super Hi International's CEO has highlighted the growth potential of the company in the US and disclosed plans for new store openings in certain US cities, as per the recent Bloomberg interview. HDL's top line is expected to grow at an impressive CAGR of +15.6% for the FY 2023-2026 time frame, based on the analysts' consensus forecasts taken from S&P Capital IQ. Taking into account Super Hi International's US market expansion plans, I am now more confident in HDL's ability to meet or exceed the market's expectations in terms of revenue expansion. Profitability Outlook Has Become Better The consensus fiscal 2024 normalized net margin forecast for HDL has been revised upwards from 4.0% in July to 4.4% now based on S&P Capital IQ's consensus data. The sell side currently anticipates that Super Hi International's net margin can expand to 6.1% in FY 2027, which is comparable with its peer Yum China's historical (YUMC) three-year (FY 2021-2023) average net margin of 5.9%. There is justification for having a more favorable view of Super Hi International's future profitability now. One factor is a potential improvement in Super Hi International's revenue mix. The Key Operating Metrics For HDL's Restaurants In Major Geographical Markets Super Hi International's Q2 2024 Earnings Presentation Slides As per the chart presented above, Super Hi International's stores in North America boast higher “spending per guest” and “daily revenue per restaurant” than the company's outlets in Southeast Asia and East Asia. In the preceding section, I mentioned that HDL is planning to expand in the US. This means that Super Hi International's profit margins could be boosted by a more favorable revenue mix in the future. This is because the company generates a larger proportion of its top line from the comparatively higher guest spending North American market going forward. As it stands now, North America represented 21% of HDL's 1H 2024 revenue. The other factor is that HDL has become more efficient, and this translates into expectations of an increase in the future profit margins for the company. HDL's restaurant-level operating profit margin expanded by +40 basis points from 8.3% for 1H 2023 to 8.7% in 1H 2024 as revealed in its 2024 interim results presentation slides. At its 1H 2024 earnings call, Super Hi International credited the operating margin improvement to “the increase in table turnover rate, which has led to enhanced business operating efficiencies.” As a reference, HDL's table turnover rate daily rose meaningfully from 3.3 times in Q2 2023 to 3.9 times for Q2 2024. More importantly, HDL shared at its 2024 interim results briefing that its restaurant-level margin has the potential to go up to the low-to-mid teens percentage level for the long run. In my opinion, the company's long-term margin improvement expectations are realistic, considering the favorable effects of operating leverage (with growing revenue base) and continued efficiency improvement. Key Risks The major risk factors relate to Super Hi International's growth in the US market and the company's cost control efforts. A key risk is that HDL expands at a much slower-than-expected pace in the US, which affects its top-line growth prospects and revenue mix. Another key risk is that Super Hi International doesn't manage its expenses well, and a sharp increase in certain costs hurts the company's profitability significantly. Final Thoughts My rating for Super Hi International is upgraded to a Buy. HDL is trading below my assessment of the stock's fair value, and I am bullish on the company's US store opening plan and its profit margin expansion potential.  I arrive at a target price of $22.50 for HDL by applying a 25 times P/E to the stock's consensus FY 2026 normalized earnings per ADS (American Depositary Share) estimate of $0.90 (source: S&P Capital IQ). The target P/E multiple of 25 times is pegged to the trailing twelve months' P/E ratio for HDL's peer YUMC. Super Hi International's last done share price was $16.81 as of October 2, 2024, so the stock's capital appreciation upside is around +34%.","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":"analysis","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/2472664191"}