When the company anticipated a return to profitability, shares of China’s hotpot chain Haidilao International Holding Ltd. soared the most in a year, highlighting predictions for a resurgence in consumption in the world’s second largest economy.
On Monday, the stock outperformed all of its competitors on the benchmark Hang Seng Index by rising as much as 20% in Hong Kong. This was the highest percentage gain since March 2022. Late in the day on Friday, Haidilao said that the company anticipates it would have a net income of at least 1.3 billion yuan ($187 million) in 2022, compared to a loss of 4.2 billion yuan in the previous year.
The company attributes the improved outlook to efforts to streamline its operations as well as a gain of around 329 million yuan recognized on the cancellation of bonds due in 2026. This gain was achieved despite the fact that revenue is anticipated to drop by approximately 16%.
“This result suggests that operating efficiency driven by cost-control measures is even stronger and faster than we thought,” Morgan Stanley analysts including Hildy Ling wrote in a note. “We expect consensus to revise up 2023 earnings forecasts based on this margin surprise,” they added.
From November through early January, Haidilao saw its share price increase by 117%, and the company’s stock was among the best performers on the HSI for the entire year. Haidilao is considered to be one of the primary benefactors of China’s reopening.
The upbeat outlook is a turnaround in fortunes for a company that was one of the most impacted during the height of pandemic-era curbs due to China’s rigorous Covid Zero policy. The upbeat outlook represents a reversal of fortunes.
The estimates also speak to a wider confidence among reopened stocks, with analysts saying that cost restraint paired with the recovery of demand will bode good for China’s consumer sector. This bodes well for China’s consumption industry.
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In accordance with the so-called “Woodpecker plan,” Haidilao shut down 26 restaurants during the first half of the previous year. Moreover, in March of this year, the company’s founder Zhang Yong resigned from his position as chief executive officer.
“We expect its table-turn to further improve sequentially upon China’s re-opening,” Citigroup Inc. analysts including Xiaopo Wei wrote in a note. Given the new cost structure and more flexible staffing, “stores being reopened will have a much lower sales threshold to achieve break-even than in prior years”
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