HAIDILAO (06862) 2024 H1 performance meeting: It is expected that the number of franchise stores will steadily increase in the second half of the year and in the future.

Recently, HAIDILAO (06862) held a performance exchange meeting for the first half of 2024. HAIDILAO stated that since introducing the franchise model, they have made significant progress in various aspects. The market response has been enthusiastic, with a large number of applicants. HAIDILAO received over 10,000 franchise applications from across the country, demonstrating the wide appeal of the franchise model. In terms of data, most applicants come from third-tier cities and below, providing a good foundation for HAIDILAO's layout and location selection in lower-tier markets. Although the processing period for franchise stores is longer and involves contract confirmation, detailed negotiations, location selection, and business terms, HAIDILAO has already confirmed one franchise store in the first half of the year. It is expected that the number of franchise stores will steadily increase in the second half of the year and in the future. In terms of depreciation and amortization, HAIDILAO's depreciation mainly comes from one-time renovation investment at the store level, with capital expenditures for each store ranging from approximately 8 to 10 million RMB. These renovation costs are usually amortized over 5 years. As of the first half of this year, HAIDILAO's depreciation and amortization ratio decreased by 1.7 percentage points compared to the same period last year, mainly due to the depreciation period of some old stores exceeding five years, resulting in a decrease in depreciation. The normal service life of a store is about 8 to 10 years, after which renovation can extend its use. Specifically, in the first half of this year, over 200 stores reached the end of their depreciation period compared to the same period last year, leading to a decrease in the depreciation ratio. Looking ahead, investors can estimate the number of stores reaching the end of their depreciation period based on the number of new stores opened in the past five years, with the expectation that the number of stores reaching the end of their depreciation period each year will remain at the current level. This will affect HAIDILAO's depreciation and amortization ratio in the long term. According to the company's analysis, depreciation and amortization are expected to decrease overall in the next 3 to 5 years. Q&A Q: The company's business has stabilized compared to the epidemic, and in the past one or two years, the company's operational efficiency and financial performance have been significantly ahead of its peers. However, the macroeconomic background remains uncertain, so under these circumstances, will HAIDILAO's main brand's strategy change in the second half of the year? Where will the focus of the strategy be? General Gao has a lot of experience in digitalizing the supply chain, so I would like to ask what improvements can still be made in these two aspects for HAIDILAO's main brand? Can you elaborate on the specific goals and strategies of the Pomegranate Plan? In the medium and long term, for example 3-5 years, what percentage of new emerging brand stores and revenue will not be HAIDILAO's? A: Adherence to the core philosophy of the brand: HAIDILAO has always adhered to its core management philosophy, which is deeply rooted in the characteristics of the catering industry and the company's corporate DNA. As a highly fragmented and labor-intensive industry, the key to long-term stable development in the catering industry is to fully stimulate the initiative and enthusiasm of employees. The value of "changing fate with both hands" proposed by General Zhang 20 years ago has become the core values and foundation of HAIDILAO. This philosophy is based on a deep understanding of the industry and a far-reaching vision of the company's future, and it is unshakable. Market response strategy: While adhering to the core philosophy, HAIDILAO's management measures and business strategies will be flexibly adjusted according to changes in the market environment. The current market is full of challenges, with increasing competition and the limitations of a single business model becoming increasingly prominent. In order to provide employees with more development opportunities, HAIDILAO has proposed a diversified development strategy to meet the diverse market demands. Introduction of the Pomegranate Plan: The Pomegranate Plan is the core of HAIDILAO's multi-brand development strategy, based on a deep understanding and judgment of the market. In the current diversified and fiercely competitive market, a single business model is difficult to sustain. The Pomegranate Plan aims to create new growth points and provide employees with broader development opportunities. Leveraging HAIDILAO's rich experience in organizational management, supply chain, and business expansion, this plan explores new paths in the catering industry to ensure the healthy growth of the group's brands. Specific measures for the development of the main brand: In terms of brand development, HAIDILAO will adopt a stable strategy to increase the number of stores while continuously improving internal management. By optimizing the organizational structure and enhancing the capability of management reports, combined with data-driven methods, we will conduct in-depth research on the needs of different scenarios and demographics. We will take targeted measures to better meet customer needs and improve customer satisfaction. In terms of supply chain management, HAIDILAO has been committed to the digitalization of the supply chain. With the team's relentless efforts, we believe that digitalization of the supply chain will further develop and provide solid support for the continued growth of the brand. The development of new brands in the future will certainly not be smooth sailing, but we still expect, for example, for a brand like Banquet BBQ, we have a goal of four to five hundred stores within three years. This is the first brand within our entire Pomegranate Plan that has a relatively clear plan, and the opening plan for other brands is also in the continuous formulation process. Q: The gross profit margin in the first half of the year hit a historical peak, can we still maintain such a high level in the second half of the year under the situation of consumer downgrading? A: From 2019 to 2023, the group's overall gross profit margin has remained in the range of 56% to 59%. In the first half of this year, the gross profit margin reached 61%, a significant increase compared to the same period last year. This growth is mainly due to the decrease in raw material prices, optimization of menu structure, and cost reduction from fine-tuned store management. Reasons for the increase in gross profit margin: Scale procurement: With the expansion of the group's scale, the advantages of scale procurement are increasingly prominent. Through price locking and direct sourcing, we can effectively lower procurement costs while ensuring quality, leveraging the scale effect of the supply chain. Menu structure optimization: Hotpot, as a form of dining with diverse ingredients and flexibility, provides ample room for menu innovation for the company. By constantly introducing new dishes and processes, we not only meet customers' demand for freshness but also optimize the gross profit structure.Establish and ensure that the gross profit margin remains stable at a sustainable level.Fine management: During the epidemic, the company's management team, especially the store managers, conducted fine management of daily operations through data tools. The store manager predicts the number of diners, plans orders reasonably, effectively controls wastage, and improves the cost management level of the kitchen. Future prospects: We look forward to the second half of 2024, expecting that the gross profit margin of ingredients will remain stable and show a further upward trend. This is thanks to our continued scale procurement strategy, menu innovation, and the deepening implementation of fine management. Q: The company has many business objectives, and of course, turnover is hoped to be stable and increasing, while we also have plans to open new stores, whether it is the main brand or new formats. To achieve these goals, it may be necessary to motivate the employees, which may maintain the labor cost rate at a certain level. Will this limit our profit margin? So how to balance these long-term and short-term goals? And looking ahead to the second half of this year, given that the baseline in the second half of last year was not very low, how do we anticipate turnover and profit growth in the second half of this year? A: In the first half of this year, our labor costs increased compared to the same period last year. This change was mainly influenced by several factors: Last year, due to the impact of the epidemic, the company faced a shortage of manpower, leading to lower labor costs. As the epidemic eased, the company filled the corresponding positions to ensure the continuous improvement of service quality. Further optimization of the salary system, including piece-rate wages and bonus mechanisms, to stimulate employee enthusiasm and morale. Response measures: Despite the increase in labor costs, we have effectively controlled and optimized the cost structure through the following measures: Piece-rate wage system: Implemented a piece-rate wage system that rewards more work done, stabilizing labor costs during fluctuations in business volume. Fine management: Store managers arrange staff reasonably according to peak and off-peak seasons, introducing informal labor to meet high-demand periods on weekends and holidays. Multi-store mechanism: Through a multi-store model, we achieved employee sharing and optimal allocation of positions, effectively spreading labor costs. Based on the above measures, we observed that labor costs were relatively stable in the first half of this year and showed a gradual improvement trend. Looking ahead to the whole year, we anticipate that labor costs will be kept within a reasonable range. Turnover rate and profit target: In addition, since the first half of the year, including the overall revenue and profit performance in July, have shown a stable and positive trend. This indicates that our control measures on labor costs complement the overall business performance, providing a solid foundation for achieving turnover and profit targets. Q: The average spending per customer in the first half of this year showed a slight decrease year-on-year, but actually showed a slight increase compared to the second half of last year. In the future consumer environment and competitive environment, what is the outlook for ASP? A: In the first half of this year, our average spending per customer decreased by $5 compared to the same period last year. This change was mainly caused by two factors: changes in consumer structure, reflecting new market and customer demand trends. The company added discount measures to attract customers and enhance the consumption experience. Although the average spending per customer has decreased, our strategy and philosophy are to provide customers with a high-quality and cost-effective experience while ensuring the quality of the dishes. The company does not pursue excessively high per customer spending but focuses on serving customers as the core concept. By continuously adjusting and optimizing the menu structure, we can manage the average spending per customer flexibly to ensure it is within a controllable range. From the operational results in the first half of the year, although the average spending per customer has decreased, our gross profit margin has increased, contributing to the overall profit of the company. Looking ahead, the trend of the average spending per customer is as follows: Comparing the second quarter with the first quarter and the data for July, the average spending per customer is stable or showing signs of recovery. The company will continue to focus on providing excellent customer experience and maintaining a reasonable average spending per customer based on ensuring gross profit margin and profitability. Overall, HAIDILAO will continue to balance customer demand with the company's profit goals through fine management and strategic adjustments for a reasonable positioning and continuous optimization of the average customer spending. Q: The company has appointed Mr. Zhang Junjie, the founder of the King of Tea, as an independent non-executive director of the company. Will we have some imaginable business cooperation with the King of Tea in the future? Will we expand in the tea beverage track in this new area, or other specific foodservice categories, with more plans? A: The HAIDILAO board of directors is composed of management members, internal directors, and external independent directors. We are committed to building a diverse and rich background board of directors to ensure professional market analysis, judgment, and supervision and management advice from different perspectives. Our independent directors come from a wide range of backgrounds, including food safety, law, marketing, internet, and senior professionals in the banking and financial sectors. Mr. Zhang Junjie's joining further enriches the professional background and experience of the board of directors. His professional background and career experience, especially his rich experience in the tea beverage field, will provide valuable insights for HAIDILAO's development strategy. This move reflects the diversity and continuous optimization of our board of directors' composition. Each director supports HAIDILAO's development in different fields based on their professional backgrounds and career experiences. Their experiences and insights are not limited to specific business sectors like the tea beverage track but extend broadly to enterprise management, marketing, and market trend insights. These valuable opinions will help the company's sustained development and innovation in various fields. HAIDILAO has always adhered to the principles of marketization and commercialization in its business areas. Mr. Zhang Junjie's joining does not mean that the company will have a bias in business synergy but follows the same logic as the previous independent director's appointment, where each director's addition is based on their ability to bring an independent, professional perspective and advice to the company. In conclusion, Mr. Zhang Junjie, as the founder of the King of Tea industry, being appointed as an independent non-executive director of HAIDILAO, will provide valuable insights and contribute to the company's long-term development with his expertise in enterprise management and market analysis.The dividend rate in the first half of the year is still very high, but if we are under the current pomegranate plan, we also have investments in new formats. How can we look ahead to the sustainability of the high dividend rate in the future?A: HAIDILAO is committed to returning dividends to shareholders through a stable dividend policy. The company plans to implement a significant dividend payout in future years and mid-term periods based on cash flow conditions. Regarding concerns that a significant dividend payout may put pressure on the company's development, our internal calculations show that such concerns are unnecessary. The current mid-term dividend is distributed based on 95% of profits, and although cash flow may fluctuate compared to profits, the overall trend is stable. This year, the company has introduced a franchise mechanism, which will support the development of HAIDILAO and other multi-brand businesses. We believe that with the implementation of the franchise mechanism, combined with the company's stable operations and good cash flow, we have full confidence in the future's continued stable dividends. Q: Now that we are approaching the end of August, and the summer is coming to an end, can you share some recent operational situations, including your assessment of the business trends in the second half of the year? A: Looking back at July last year, we observed that the month's performance was built on a higher base. This July, despite having two fewer holidays compared to the same period last year, our turnover rate remained steady. This performance demonstrates our operational strategy and market adaptability. If we exclude the impact of holiday differences, the turnover rate in July this year actually increased compared to the same period last year. This upward trend indicates positive progress in attracting customers and improving service quality. Currently, turnover rate data shows stability, providing a positive signal for our operational performance. Q: Since announcing the franchise in March, this is the first time in the company's 30-year history to open up this kind of partnership business. What progress has been made in signing franchise agreements overall, including plans for opening stores in the second half of the year or in the medium to long term? A: Since introducing the franchise model, HAIDILAO has made significant progress in various areas. The market response has been enthusiastic, with over 10,000 franchise applications received from all over the country, demonstrating the widespread appeal of the franchise model. We hope to introduce strong partners who are aligned with HAIDILAO's values. Therefore, in selecting franchisees, we emphasize their compatibility with HAIDILAO's management philosophy and values, giving priority to institutions and experienced companies for a strong partnership. The introduced managed franchise model ensures that franchise stores are consistent with direct-operated stores in operation management, assessment, brand promotion, and food safety, providing a consistent experience for customers. Franchisees have shown high approval of this model, recognizing that maintaining and enhancing customer experience is the core of the catering industry and our core competitiveness. The franchise model will provide strong support for HAIDILAO's future development. After market testing and in-depth negotiations with franchisees, we are confident in the continued expansion of the franchise model and entering the lower-tier markets. Data shows that most applicants come from third-tier cities and below, providing a good foundation for our layout and location selection in the lower-tier markets. Although the process for franchise stores is longer, involving contract confirmation, detailed negotiations, location selection, and business terms, we have confirmed one franchise store in the first half of the year. It is expected that the number of franchise stores will steadily increase in the second half of the year and in the future. Q: Looking ahead, how will depreciation and amortization change in the future? A: HAIDILAO's depreciation and amortization mainly come from one-time decoration investment at the store level, with capital expenditures for each store ranging from approximately 8 to 10 million RMB. These decoration costs are usually amortized over a period of 5 years. As of the first half of this year, the proportion of depreciation and amortization has decreased by 1.7 percentage points compared to the same period last year, mainly due to the depreciation and amortization period exceeding five years for some older stores, leading to a reduction in amortization. The normal lifespan of a store is about 8 to 10 years, after which renovation can allow for continued use. In terms of numbers, in the first half of this year, more than 200 stores reached the end of their depreciation and amortization period compared to the same period last year, leading to a decrease in the amortization ratio. Looking ahead, investors can estimate the number of stores where depreciation and amortization will expire based on the number of new stores opened in the past five years, and it is expected that the number of stores with depreciation and amortization expiring each year will remain at the current level. This will impact our later depreciation and amortization ratio. According to company analysis, depreciation and amortization is expected to decrease overall in the next 3 to 5 years.