October 5, 2021 8:00 AM

Haidilao's worst is over

buy

S&P revised its outlook on Haidilao (BBB / - / BBB) to negative, while maintaining its investment grade rating. As such, the negative outlook mainly reflects the risk that the company's debt burden could remain above 1.5x by 2022 if Haidilao fails to improve the efficiency of its newly opened restaurants and stores. The company is also rated BBB by Fitch, which we believe will be maintained, although we assume that the outlook could also be revised to negative. We believe the rating agencies will maintain the investment grade issuer ratings until the end of 2022. It is worth noting that S&P said it does not expect Haidilao to build up its debt burden to support business expansion in 2022, which will help the issuer reduce leverage to below 1.5x over the next year.

YTM

2.7%

RISK

BBB / - / BBB

DURATION

4

Haidilao's first half results are, as expected, weak. Table turnover dropped to 3x in 1H21 from 3.3x in 1H20 and 3.5x in FY20, mainly due to the low efficiency of newly opened stores. EBITDA declined 23% yoy despite a 7% yoy increase in revenues. The decline came amid rising operating costs due to new store openings and the continued negative impact of COVID-19. In addition, the company has significantly increased its employee pay levels to retain talented employees. The company did not disclose cash flow conditions in the preliminary results, but its adjusted net debt, including lease liabilities, increased by 3.6 billion yuan, so free cash flow was likely to remain negative during the period, while debt / EBITDA remained above 2x.

Haidilao's free cash flow could turn positive in 2022, while higher revenues should support its credit profile. We believe that restaurants that have opened in the past 12 months and have nearly doubled the Haidilao chain should start supporting EBITDA growth. In addition, more balanced store openings will help free cash flow move into positive territory compared to negative free cash flow over the past three years. Haidilao's only Eurobond issue maturing in 2026 (ISIN - XS2281463237) offers a dollar yield of 2.7% with a duration of 4 years. We believe that the current level still looks attractive compared to peers. We believe that the worst for Haidilao's business is over, so the fair yield on the Eurobond stands at 2.4%.

Haidilao International Holding Ltd. operates Chinese cuisine restaurant brand focusing on hot pot cuisine. The Company provides hot pots, soup bases, dipping sauces, drinks, prepared food, and other products. Haidilao International Holding opens restaurants in Taiwan, Hong Kong, Singapore, South Korea, Japan, and the United States.