China / Company Guide Haidilao International Holding Ltd Version 1 | Bloomberg: 6862 HK Equity | Reuters: 6862.HK Refer to important disclosures at the end of this report

DBS Group Research . Equity 1 Aug 2019

HOLD (Initiating Coverage) Priced in a blue sky Last Traded Price ( 31 Jul 2019):HK$30.50 (HSI : 27,778) • One of ’s leading and fastest growing hotpot player Price Target 12-mth:HK$28.70 (5.9% downside) with strong servicing reputation on going above and Analyst beyond for its customers Alison FOK+852 36684170, [email protected] Mavis HUI+852 36684188, [email protected] • Expect near-term positives priced in, now trading at 46x Alice HUI CFA+852 36684182, [email protected] FY20F PE; we expect downside risk on FY20F earnings on

margin dilution as a result of fast expansion

Price Relative • Initiate coverage with HOLD and TP of HK$28.7 One of the fastest-growing hotpot restaurant chains in China with inflated valuations. Haidilao is one of the fastest-growing and leading hotpot cuisine restaurant chains in China. We forecast the group to achieve an earnings CAGR of 34.5% in 2019-21F, on the back of a sales turnover CAGR of 36% supported by its ambitious store- expansion strategy, positive SSSG and above-industry table turnover ratio. We estimate the group’s net store openings at +210/+200/+195 in FY19-21, with stronger focus on tier 2 cities. Contrary to peers,

Haidilao presents itself as a premium service provider rather than sale Forecasts and Valuation FY Dec (HK$m) 2018A 2019F 2020F 2021F of products, supported by attractive employee profit-sharing and Turnover 16,969 26,225 36,628 48,362 incentive schemes. Bouyed by the inclusion into the Southbound index EBITDA 2,944 4,400 5,818 7,851 in Dec’18, Haidilao has now delivered a share price return in excess of Pre-tax Profit 2,347 3,454 4,541 6,247 78% YTD, and is the most expensive HK-listed restaurant play at 46x Net Profit 1,732 2,517 3,309 4,553 Net Pft (Pre Ex) (core profit) 1,646 2,517 3,309 4,553 FY20F PE. While we are positive on the Group’s outlook ahead, we Net Profit Gth (Pre-ex) (%) 68.5 45.4 31.5 37.6 believe near-term positives may have been priced in and there is EPS (HK$) 0.35 0.50 0.66 0.91 limited room for upside revision. Core EPS (HK$) 0.33 0.50 0.66 0.91 EPS Gth (%) 68.5 45.4 31.5 37.6 Where we differ: We are 7% below market consensus earnings in Core EPS Gth (%) 60.2 52.9 31.5 37.6 FY20F, as we expect fast store expansion can result in margin dilution. Diluted EPS (HK$) 0.33 0.50 0.66 0.91 We forecast a net margin contraction of 0.2ppt in FY19-21F on labour DPS (HK$) 0.11 0.14 0.19 0.24 BV Per Share (HK$) 1.73 2.06 2.48 3.06 and raw material pressures, versus consensus expansion of 0.3ppt. PE (X) 87.9 60.4 46.0 33.4 Other critical factors: Connected party transactions have amounted CorePE (X) 92.4 60.4 46.0 33.4 up to 38.4% of FY18 sales, which could be a concern in the medium P/Cash Flow (X) 63.0 41.5 36.8 28.3 P/Free CF (X) nm 117.1 81.1 48.1 run. Separately, in Mar’19, Haidilao acquired Youdingyou, with the EV/EBITDA (X) 50.4 33.6 25.3 18.5 Chairman’s brother as one of the key shareholders for Rmb204m, Net Div Yield (%) 0.3 0.5 0.6 0.8 equivalent to 1.96x P/NAV. The Company intends to leverage on P/Book Value (X) 17.6 14.8 12.3 10.0 Haidilao’s management capabilities to deliver a QSR formatted brand. Net Debt/Equity (X) CASH CASH CASH CASH ROAE(%) 35.7 26.6 29.3 33.0 Valuation: Earnings Rev (%): New New New Our TP of HK$28.7 is based on 1.1x FY20F PEG, a 20% premium to Consensus EPS (HK$) 0.50 0.71 0.90 XiabuXiabu, or equivalent to 43.4x FY20F PE. We initiate coverage Other Broker Recs: B:12 S: 1 H:5 on the stock with a HOLD call. Source of all data on this page: Company, DBS Bank (Hong Kong) Limited Key Risks to Our View: (“DBS HK”), Thomson Reuters Better than expected same-store sales growth and store expansion, coupled with margin expansion, and potential success in the development of a secondary brand

At A Glance Issued Capital (m shrs) 5,300 Mkt Cap (HK$m/US$m) 161,650 / 20,650 Major Shareholders (%) Zhang (Yong) & Shu (Ping) 57.6 Shi (Yonghong) & Li (Haiyan) 16.4 Free Float (%) 15.0 3m Avg. Daily Val. (US$m) 12.93 ICB Industry: Consumer Services / Travel & Leisure

ed-TH / sa- CS /DL

Company Guide

Haidilao International Holding Ltd

Table of Contents

SWOT Analysis 3 Company overview 4 Valuation and recommendation 7 Critical Factors 8 Financial summary and forecast 9 Appendix: Industry overview 12

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Company Guide

Haidilao International Holding Ltd

SWOT Analysis

Strengths Weaknesses

• Haidilao is one of the largest hotpot cuisine brands in China • Haidilao’s total operating costs as a percentage of with a total of 466 outlets as of December 2018, and is sales is lower than peers, thanks to its high table highly regarded for its impeccable services. turnover at >5x and above-industry same-store-sales growth (SSSG) generation (6-14%) in FY16-18. • Haidilao adopts a directly operated business model, which However, equipped with an aggressive store enables better quality control due to a complex operating expansion plan, Haidilao could face some execution environment in China. At the same time, Haidilao is well risks ahead. known to be generous in its compensation system to its employees all the way to the bottom, which supports a • Haidilao’s five largest suppliers, accounting for 38.4% higher-than-industry retention rate. For example, restaurant of total FY18 cost of purchases, are related to a managers can choose either to take up 0.4-2.8% of total number of connected parties. Besides carrying off- profits of their own managed stores, and/or a portion of balance sheet risk, the complexity of Haidilao’s their mentees (first and second generations) profits to business structure could also deter any means of third- encourage building internal talent. party M&As in the future.

• Haidilao’s labour cost as a percentage of sales is high relative to peers. As Haidilao may not want to compromise on its service quality, the group could face more labour cost pressures ahead.

• With the fast-growing pace of the delivery sector (projected to grow at a CAGR of 17.9% in 2017-22E [Source: F&S]), hotpot cuisine may lose out to other cuisines in the long run due to difficulties in replicating a similar order for delivery vs in-house dining.

Opportunities Threats

• The expansion in China’s catering industry should benefit • Slowdown in economic activities (e.g. trade war) will the company. According to Frost & Sullivan, China’s have a direct impact on eating-out spending catering market is expected to grow at a CAGR of 10% in 2018-22E. • The competitive landscape in the catering sector will remain challenging • Well positioned to benefit from a shift in consumption • Food safety concerns could be more difficult to upgrade towards eating out and delivery market. contain as the company expands its scale further. To • Haidilao’s brand name is synonymous with service capability boost customer confidence, Haidilao has installed live rather than purely just hotpot cuisine. This provides ample CCTV cameras available on the electric ordering pad opportunity for the group to cultivate or acquire new for customers to view the kitchens themselves. brands, such as Youdingyou (優鼎優), to drive the long- • The Haidilao trademark does not belong to the listco, term diversification of its portfolio. but to its controlling stakeholders.

Source: DBS HK

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Company Guide

Haidilao International Holding Ltd

Company overview Timeline

Founded in 1994 and listed in 2018, Haidilao was established Year Description in Jianyang, province. Today, Haidilao is a globally 1994 First hotpot restaurant in Jianyang, Sichuan Province leading and fast-growing Chinese cuisine restaurant brand opening focusing on hotpot cuisine. The group has a perpetual, 1999 Haidilao expanded network outside of Sichuan to royalty-free and exclusive licence to use the Haidilao brand, Xi'an, Shaanxi Province 2002 Expand restaurant network to Zhengzhou, granted by the founders’ private listco, Sichuan Haidilao. 2004 Expand restaurant network to

2006 Expand restaurant network to Shanghai In September 2018, Haidilao successfully launched its public 2007 Received HACCP quality management system offering at a higher-end pricing at HK$17.8 per share, with certification the issuance of 424.53m new shares, and raised net proceeds 2008 Awarded title of Chinese Famous by China of HK$7,299.3m. The cornerstone investors included Hillhouse Cuisine Association Capital, Greenwoods Asset Management, MSIM, Snow Lake 2010 Introduced self-operated hot pot delivery Capital and Ward Ferry which invested a total of US$375m, 2011 Haidilao is recognised as a well known trademark in and accounted for 3.1% of the company’s share capital. Note China by the State Adminstration for Industry & that co-founders Ms. Shu and Ms. Li hold approximately Commerce. 0.33%/ 0.08% interests in Greenwoods Asset Management 2012 Expand restaurant network to as limited partners. 2013 Expand restaurant network to US 2014 Expect restaurant to As of December 2018, Haidilao operated a total of 466 Opered 100th hot pot restaurant outlets (430 in China and 36 overseas). 2015 Opened first restaurant in & 2017 Opened first restaurant in Hong Kong Key founders of the company include Mr. Zhang Yong, Ms. 2018 Opened 300th hot pot restaurant Shu Ping (spouse of Mr. Zhang), Mr. Shi Yonghong and Ms. Li Successfully launched IPO on HKEX Haiyan (spouse of Mr. Shi Yonghong). Mr. Zhang holds the majority stake of 57.7% through a number of discretionary Source: Company data trusts with Ms. Shu Ping. Mr. Shi Yonghong and Ms. Li Haiyan together holds 27.3%. Other members of management hold around 7%, while the free float is at 8%. Within the free float, cornerstones such as Hillhouse Capital, Greenhouse Asset Management Mgmt, MSIM, Snow Lake Capital and Ward Ferry has not changed their holding position as of 2Q19.

Key shareholding structure

Source: Company data, DBS

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Company Guide

Haidilao International Holding Ltd

By revenue, Haidilao’s restaurant operations accounted for Haidilao operated a total of 106 outlets in Tier 1 cities, 207 97.6% of sales in FY18, while the delivery business outlets in Tier 2 cities and 117 in Tier 3 cities as of December 2018. In the overseas market, the group has around 36 contributed 2.1% and the sale of condiment products and outlets, with strong exposure in Singapore (10), and Taiwan food ingredients accounted for the remaining 0.3%. (10), as well as South Korea, Japan, , Hong Kong and others. Typically, Haidilao’s average store sizes stood at Haidilao began offering delivery services in 2010, and was the 800-1,000 sqm, 2-4x larger than other peers such as Xiabu first hotpot restaurant brand in China to launch such a service, Xiabu sizes of 200-500 sqm. according to Frost & Sullivan. The company currently offers delivery services in most of its stores through delivery hotpot, Store numbers by region breakdown (%) WeChat, Haidilao app and major delivery platforms (ele.me, Meituan). Overseas Revenue mix (%) – FY18 8% Tier 1 23% Delivery business Tier 3 2.1% 25%

Sale of condiment Tier 2 products and 44% Restaurant food operation ingredients 97.6% 0.3%

Source: Company data

Mid- to premium-end dining experience. Haidilao is Source: Company data, DBS HK considered as a mid- to high-end restaurant operator with average spending exceeding Rmb100 per guest. According to Frost & Sullivan, the price point of Rmb60-200 per guest is Restaurant revenue can be further broken down into Tier 1, expected to generate the fastest growth at a CAGR of 11.3% Tier 2, and Tier 3 and below cities which accounted for 24%, in 2017-22F, versus the ultra-premium category (>Rmb200) at 47% and 20% of FY18 restaurant revenue respectively. 10.3%, and mass market category (

Delivery business 2.1% Overseas 8% Tier 3 20% Restaurant Tier 2 operations 47% 97.6% Tier 1 24%

Others 0.3% Source: Company data Source: Company data, DBS HK

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Company Guide

Haidilao International Holding Ltd

Table turnover ratio. Since 2016-17, the group has extended Same-store-sales growth. In 2017/18, overall same-store-sales its outlets’ operating hours to “24 hours” to further boost its growth reached 6.2%, a slowdown versus 2016/17 due to table turnover. “24 hours” is defined as operating hours from maturing performance from earlier store expansions and also 9am-7am, with the remaining time used for cleaning. Such the introduction of extended operating hours starting in strategy attributed to the growth of table turnover in 2016- 2016/17. Overseas saw a drag in SSSG to -8.5% due to a 18. distortion of US outlets opened in 2017 which only provided bar-style service. Table turnover ratio (x) SSSG (%) by regions

Source: Company data Source: Company data

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Company Guide

Haidilao International Holding Ltd

Valuation and recommendation

The one that stands out. Haidilao is trading at 60x /46x /33x FY19-21F PE. YTD, Haidilao’s share price has risen by 78%, thanks to improved liquidity with the inclusion into Southbound stock connect in December 2018.

Peers comparison

Mk t EPS growth PE PE PEG Yield P/Bk P/Bk ROE Performance Price Cap F iscal 19F 20F 19F 20F 20F 20F 19F 20F 19F YTD Company Name Code Local$ US$m Yr % % x x x % x x % % Leading Greater China Restaurants and Food Ingredients Cafe De Coral Hdg.*# 341 HK 26.1 1,952 Mar 4.4 7.9 24.6 22.8 n.a. 4.0 4.3 4.2 17.9 37.5 Gourmet Master 2723 TT 185.5 1,071 Dec (5.0) 28.3 21.1 16.4 1.6 3.1 2.9 2.7 14.9 (10.0) Haidilao International Holding* 6862 HK 30.5 20,650 Dec 52.9 31.5 60.4 46.0 1.2 0.6 14.8 12.3 26.6 77.7 Xiabuxiabu Cater.Man. (China) Hdg.* 520 HK 11 1,518 Dec 14.2 17.2 19.5 16.6 0.9 2.4 4.1 3.6 22.2 (11.0) Yihai Intl.Hldg. 1579 HK 41.85 5,597 Dec 26.7 33.5 52.3 39.2 1.2 0.7 14.1 10.7 30.4 118.7 Yum China Holdings YUMC US 45.5 17,210 Dec 1.5 11.6 26.3 23.6 2.0 1.1 5.3 4.7 21.8 35.7 A v erage 15.8 21.7 34.0 27.4 1.4 2.0 7.6 6.4 22.3 41.4

Other H-shares Restaurants and Food Ingredients Ajisen(China)Holdings 538 HK 3.37 470 Dec (57.4) (5.6) 13.8 14.6 0.4 3.7 1.0 0.9 6.5 53.9 Fairwood Holdings# 52 HK 25.85 428 Mar 5.6 3.2 17.5 17.0 n.a. 5.0 4.1 3.9 24.0 (1.5) Hop Hing Group Holdings 47 HK 0.129 166 Dec n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 18.6 (16.8) Tang Palace (China) Holdings 1181 HK 1.23 169 Dec n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 7.0 Tao Heung Holdings 573 HK 1.48 192 Dec n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 13.0 Tsui Wah Holdings# 1314 HK 0.6 108 Mar n.a. 40.0 12.0 8.6 n.a. 10.0 n.a. n.a. 5.1 (17.8) A v erage (25.9) 12.5 14.4 13.4 0.4 6.2 2.5 2.4 13.6 6.3

International Restaurants and Food Ingredients Chipotle Mexn.Grill CMG US 795.53 22,054 Dec 119.5 29.2 59.6 46.1 2.0 0.0 13.7 11.8 20.8 84.2 Darden Restaurants# DRI US 121.56 14,962 May n.a. 7.2 19.0 17.7 2.1 3.2 5.4 4.9 32.1 21.7 Domino'S DPZ US 244.53 10,083 Dec 13.8 14.4 25.7 22.5 1.5 1.2 n.a. n.a. (10.7) (1.4) Dunkin Brands Group DNKN US 80.16 6,625 Dec 10.7 7.9 26.8 24.8 3.0 2.0 n.a. n.a. (40.3) 25.0 Jollibee Foods JFC PM 259 5,552 Dec (0.2) 15.3 33.9 29.4 1.9 1.2 5.2 4.7 16.5 (11.2) Mcdonalds MCD US 210.72 160,897 Dec 5.0 9.1 26.3 24.1 3.2 2.4 n.a. n.a. (84.6) 18.7 Restaurant Brands Intl. QSR US 97.2 34,916 Dec 9.9 10.7 27.3 24.7 2.1 3.0 8.3 7.5 46.4 36.3 'A' SHAK US 74.66 2,774 Dec 13.3 25.6 126.8 100.9 3.8 0.0 10.1 8.6 8.4 64.4 SBUX US 94.69 113,344 Sep 25.8 10.4 33.6 30.4 2.3 1.8 n.a. n.a. (113.2) 47.0 Wendy'S Class A WEN US 18.19 4,197 Dec (66.7) 21.6 28.9 23.8 2.6 2.4 7.9 9.6 24.2 16.5 Yum! Brands YUM US 112.52 34,428 Dec (14.8) 10.8 29.4 26.6 2.4 1.6 n.a. n.a. (14.8) 22.4 A v erage 11.6 14.7 39.7 33.7 2.4 1.7 8.4 7.9 (10.5) 29.4 # FY20: FY21; FY21: FY22

Source: Thomson Reuters, *DBS HK

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Company Guide

Haidilao International Holding Ltd

Critical Factors US top restaurant chains’ number of outlets per million Growth driver 1 - To increase store coverage. In FY19-21F, we population forecast Haidilao to deliver 210/200/195 new store openings, No. of outlets which implies growth of 45%/30%/22%. We could see Sales No of per million Haidilao exceeding 1,000 outlets by FY21F. Names (US$m) outlets population McDonalds 38,524 13,914 42.5 We expect Haidilao to record a net store expansion of 45% y- Starbucks 19,660 14,606 44.6 o-y in FY19F, with stronger penetration focused towards Tier 10,410 24,798 75.8 1 and 2 cities. Beyond China, Haidilao has opened outlets in 10,360 6,588 20.1 new countries such as , , and the UK. The Chick-fil-A 10,180 2,370 7.2 company plans to have a stronger focus on Southeast Asia in 9,939 7,330 22.4 the medium term given that the region has a strong Chinese Wendy's 9,405 5,810 17.8 population presence. Dunkin Donut 8,786 9,419 28.8 Dominos 6,591 5,876 18.0 Store numbers by region Panera Bread 5,760 2,074 6.3 5,526 7,482 22.9 No. of Store Chipotle Mexican Grill 4,805 2,452 7.5 1,200 Sonic 4,447 3,606 11.0 KFC 4,433 4,074 12.5 1,000 86 A pplebee 4,211 1,693 5.2 280 800 71 Olive Garden 4,082 855 2.6 225 Arby's 3,886 3,329 10.2 56 600 Little Caesars 3,820 4,350 13.3 170 420 36 Source: Company data, DBS estimate 400 117 350 19 280 200 9 69 207 29 285 83 120 170 230 Growth driver 2 - To sustain positive operating metrics 55 65 106 0 Haidilao recorded a slowdown in SSSG in 2017/18 at 6.2% 2016 2017 2018 2019F 2020F 2021F versus 14.0% in 2016/17. Of which, Tier 2 cities saw a Tier 1 Tier 2 Tier 3 Overseas slowdown to 4.3% (FY16/17: 14.5%) dragged by weaker table turnover. Tier 1 cities recorded SSSG of 10.9% in Source: Company data 2015/16, 12.7% in 2016/17 and 11.7% in 2017/18. This is attributed to a fast pace of store expansion and improved How many stores can Haidilao open? Based on our analysis on table turnover ratio due to longer operating hours. In the the US restaurant industry, the largest casual dining restaurant medium term, we expect Haidilao to sustain positive SSSG chains has 2.6-5.2 outlets per million population. Taking into through increased store traffic at non-peak hours, an increase consideration a lower disposable income per capita and more in average spending through higher menu prices due to fragmented nature of the restaurant sector in China, we increased commodity costs, and development of new assume Haidilao to expand from 0.31 outlets per million products (house-brand beer). population to 2.6. This suggests that at least >3,000 more outlets can be built to cater to the public. It was reported by Growth driver 3 - To envision Haidilao beyond the existing other news sources that Haidilao may open up to 5,000 brand. outlets worldwide in the longer run. Haidilao recently acquired Beijing’s Youdingyou from the founders’ brother, Mr. Zhang Shuoyi for Rmb204m. Youdingyou mainly operates under the brand U Ding (U 鼎冒 菜). As of December 2018, the brand operated about 45 outlets in China, in major cities like Beijing, Wuhan, Xian, etc. Youdingyou is loss-making and Haidilao is restructuring the brand by putting together a new management which will report directly to Haidilao’s COO, as well as readjusting its menu and business model to Quick Service restaurants (QSR).

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Company Guide

Haidilao International Holding Ltd

Store expansion forecast Financial summary and forecast

Revenue growth & projection No. of Store 1,200

1,000 86 280 800 71 225 56 600 170 420 36 400 117 350 19 280 200 9 69 207 29 285 83 120 230 106 170 0 55 65 2016 2017 2018 2019F 2020F 2021F Tier 1 Tier 2 Tier 3 Overseas

Source: Company data

Source: Company data Average spending. Tier 1/2 cities recorded a steady increase in ASP of 7.9%/2.4% y-o-y to Rmb106.1/Rmb94.8, respectively. Top-line growth. We expect Haidilao to deliver a sales CAGR Tier 3 cities and below recorded a decline of 2% y-o-y. Overall of 36% in FY19-21F, driven by store expansion. We expect China recorded a slight rise of 2.4% y-o-y to Rmb96.9 per the group to open 210/200/195 new outlets in FY19-21F, guest. Overseas spending recorded a fast pick-up in average while average spending should grow by 2-3% p.a. driven by spending to Rmb199.3 per guest, due to more new openings optimisation of menu and pricing adjustments. in developed nations. We expect overall ASP to rise by 2-3%

p.a. driven by menu optimisation and rising raw material As for delivery, we do not expect sales to grow as substantially costs. as other cuisine types as its price point is at the premium end and consumers may view hotpots as being more suitable for Average spending group gatherings. We currently forecast a CAGR of 35% for delivery sales in FY19-21F, and should remain at 2-3% of total Rmb

FY19-21F sales. 250 215

215 199

In FY18, Haidilao opened 200 new restaurants, with a total of 200 180 466 outlets at the end of 2018. Out of this figure, 430 outlets

were in 109 cities in China, while the rest (36) were in Taiwan, 150

106

101

98

98

97

95

95

95

95

95

93

93

93

93

92

91

90 89

Hong Kong, Singapore, South Korea, Japan, the US and 89 100 86 . The company recorded sales growth of 59.5% y-o-y to Rmb16,969m, where store expansion was the key driver. 50

0 Tier 1 Tier 2 Tier 3 PRC avg Outside Avg PRC spending 2015 2016 2017 2018

Source: Company data

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Company Guide

Haidilao International Holding Ltd

Raw material costs. The company primarily procures soup Other operating expenses. Labour, rental, utility and D&A base, food ingredients (meat, seafood and vegetables), and costs account for 41.2% of FY18 sales. Specifically, staff costs decoration materials and renovation and decoration project as a % of sales rose by 0.2ppt to 29.6% of FY18 sales, due to management services, equipment and consumables used in its net opening of new restaurants, and an increase in restaurants. compensation levels. We forecast staff cost as % of sales to rise by 0.7ppt to 30.3% in FY19F, as bulk of its new restaurant openings were in late 2018, and expectations on Estimated raw material cost breakdown (%) wages continue to rise y-o-y. As for other costs (rental, utility & depreciation & amortization), we forecast their cost ratios to remain stable in FY19-21F. Rental cost as % of sales is the lowest within the catering sector due to its strong bargaining Lamb & power and lack of need to procure high traffic locations. The Others Beef Company’s typical rental contract is of a mixture of fixed and 22% 20% turnover rent.

Pork Operating costs trend (%) 5% Seafood 15% Consumerables 50% 6% Vegetable Hotpot 3.9% 3.3% 3.2% 3.2% & others base 4.2% 1.0% 1.0% 1.0% 15% 17% 0.9% 40% 1.1% 4.1% 3.9% 3.7% 3.5% 3.4% 3.5% 3.5% 3.5% 3.3% 3.5% Source: Company data, DBS HK 4.1% 4.1% 4.1% 3.9% 4.0% 30%

We forecast gross margin to contract by 0.6ppt/0.8ppt, due to 29.3% 29.6% 30.3% 30.4% 30.4% rising raw material costs, specifically on lamb and beef, and then recover to 57.9% in FY21F. While Haidilao has diversified 20% its procurement sourcing platform, rising global commodity 2017 2018 2019F 2020F 2021F prices will likely have an impact on cost of sales starting into Other expenses 2H19. Travelling and expenses

Gross margin trend (%) Depreciation and amortisation Utilities expenses Property rents 60% Staff costs

Source: Company data, DBS HK 59%

Net profit. We expect Haidilao’s net profit to grow by 53% y- 58% o-y to Rmb2,500m in FY19. Excluding IPO expenses booked in FY18, we expect net profit to grow by 45% y-o-y.

57%

56% 2016 2017 2018 2019F 2020F 2021F

Source: Company data, DBS HK

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Company Guide

Haidilao International Holding Ltd

Net profit growth y-o-y

Source: Company data

Key assumptions

Store maturity profile 2015 2016 2017 2018 2019 2020 2021 F irst y ear Tier 1 9 5 10 41 64 60 55 Tier 2 10 12 37 87 73 70 70 Tier 3 15 11 40 48 53 55 55 Overseas 2 2 10 17 20 15 15 36 30 97 193 210 200 195 Second year Tier 1 20 9 5 10 41 64 60 Tier 2 30 10 12 37 87 73 70 Tier 3 1 15 11 40 48 53 55 Overseas 2 2 2 10 17 20 15 53 36 30 97 193 210 200 T hird y ear Tier 1 21 41 50 55 65 106 170 Tier 2 31 61 71 83 120 207 280 Tier 3 2 3 18 29 69 117 170 Overseas 3 5 7 9 19 36 56 57 110 146 176 273 466 676 Grand total: 146 176 273 466 676 876 1,071 Source: DBS estimates

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Haidilao International Holding Ltd

Appendix: Industry overview Number of hotpot restaurants Hotpot industry market size. The hotpot cuisine market size stood at Rmb436.2bn in 2017. Hotpot cuisine is expected to 1,000,000 achieve CAGR of 10.2% in 2017-22E, which is faster than 900,000 other Chinese cuisine CAGR of 8.7% over the same period. 800,000 This is driven by increasing demand to dining out, and a rise in disposable income per capita. 700,000 600,000 Hotpot cuisine market size 500,000

CA GR 400,000 2013-2017 2017-2022E 300,000 Total Chinese cuisine 9.90% 8.90% 200,000 Hot pot 11.60% 10.20% 100,000 Other Chinese cuisine 9.70% 8.70% 0 Rmb bn 2013 2017 2022E

6,000 Source: Company data

5,000

708 644

4,000 584

530 481

436 Average spending per guest. In 2013-17, the fastest-growing

3,000 396 356

317 price category in hotpot cuisine stood at Rmb60-200, with a 281

2,000 CAGR of 13.9%. The premium market grew at 11.4% CAGR

4,181

3,871

3,567 3,276

1,000 3,004 while the mass market grew at a 10.7% CAGR over the same

2,756

2,508

2,285 2,065 1,903 period. In 2017-22E, the mid- to high-end market is expected 0

to remain as the dominant category, and is expected to post a

2013

2014

2015 2016

2017 CAGR of 11.3%.

2018E

2019E

2020E

2021E 2022E Hot pot Others Average spending per guest

Source: Frost & Sullivan, Company data CA GR A v erage spending per 2013-17 2017-22E The number of hotpot restaurants. The number of hotpot guest restaurants in China had risen from 406,000 in 2013 to Premium Market Over RMB200 11.4% 10.0% Mid to High-end 601,000 in 2017 (Source: F&S). Hotpot cuisines’ scalable and RMB60 - RMB200 13.9% 11.3% Market standardised model should continue to drive strong growth Mass Market Below RMB60 10.7% 9.7% ahead. The number of hotpot restaurant outlets is expected to increase to 896,000 by 2022E. Rmb bn 800 8.7 700 600 211.6 500 5.4 400 124 3.5 300 73.7 487.4 200 306.8 100 204.1 0 2013 2017 2022E Mass Market Mid to High-end Market Premium Market

Source: Frost& Sullivan

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Haidilao International Holding Ltd

Appendix: Business model

Haidilao has a largely flat structure with four key categories, namely headquarters, coaches, groups and restaurants as shown in the below picture:

Organisation structure

Title Description

Headquarters Maintain control over critical aspects of restaurant management, including food safety, supplier selection, management, legal, IT, finance, and restaurant expansion strategy

Coaches & Coaches may have prior experience as restaurant managements. In total, the Group has 12 coaches who report directly Coaching team to Ms. Yang Lijuan, COO. These coach teams help to offer guidance on the following categories: - Strategic expansion - site selection and lease negotiation - Staff development and promotion - Performance assessment - Construction - coordinating decoration and renovation - Product development - development of new menu items and improvement of existing menu items - Finance - responsible for planning, organising and accounting for finance - Performance enhancement - providing guidance to restaurants that are C-rated (poor) - New restaurant support - Human resources Groups Restaurants within a region are required to form a group with neighboring restaurants, which typically consist of 5-18 restaurants. This is formed through mentor and mentee relationship. On average, there were over 41 groups covering 350 restaurants Restaurant level Restaurants are generally managed by restaurant managers who are responsible for - Staff assessment - Promotion - Development of talented mentees - Management of bussers, janitors, dishwashing staff, food preparation, servers and food safety personnel Source: prospectus

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Company Guide

Haidilao International Holding Ltd

Bottom-up approach talent model. Haidilao adopts a bottom- How does Haidilao assess its employees? One of the KPIs of up driven model, where it aligns the financial interests of the Haidilao’s employees is measured from customer experience. restaurant managers with (i) existing restaurant profits, (ii) Every quarter, Haidilao will send at least 15 mystery diners training of new restaurant managers (mentees), and (iii) (along with their guests) to each restaurant to rate their expansion of new restaurants. Haidilao encourages restaurant experiences. The restaurant will be rated based on the managers to propose new restaurant manager candidates, following aspects (i) quality of service, (ii) dedication of staff team and potential sites for new restaurants. They are servers, (iii) quality of food, and (iv) restaurant environment. encouraged to find 1-2 new restaurant sites every two years. The mystery guests are third parties who are allocated a By empowering and giving ownership to employees, Haidilao certain budget to be spent at the designated Haidilao can retain them more successfully. restaurant.

After taking into consideration each restaurant manager’s Compensation. As mentioned earlier, restaurant managers are proposal, Haidilao will monitor closely through its compensated in line with the profitability of their restaurants, headquarters and direct its strategy expansion coaching team and the performance of their mentees to incentivise them to to help conducting site selection and lease negotiation. train new talent.

As for new restaurant manager selection, Haidilao will Restaurant managers’ compensation normally pick the mentee as their first choice for manager of the new restaurant. If the new restaurant is not the one Selection Description selected by an existing manager, then Haidilao will pick a Option A - 2.8% of the profits of the restaurant that he/she manager; or manager based on past performances and KPIs, proposed Option B - 0.4% of the profits of the restaurant that he/she staffing of new restaurants, and geographic location. manages; - 2.8%-3.1% of the profits of its first generation Selection process mentee manages, depending on the location; and - 1.5% of the profits of the restaurants that his/her Selection of restaurant manager second generation mentee manages Source: Company data Site selection

Lease arrangement

New restaurant project execution

Restaurant opening and review

Source: Company data

Site selection. Haidilao directly manages site selection at its headquarters and coach team level. To improve the quality of sites selected, the company has developed an AI platform with Alibaba-Cloud, which helps to screen for suitable locations that meet its criteria. These include:

- GDP per capita, and population density of the local community - Presence of activity centres (offices, shopping complexes, schools and residential areas) - Popularity of other restaurants in the vicinity - Presence of nightlife (bars and KTVs)

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Company Guide

Haidilao International Holding Ltd

Key risks: Related-party transactions The reduction in the purchase of food ingredients from third- Haidilao’s top 5 suppliers accounted for 38% of FY18 cost of party suppliers resulted from Haidilao’s shift towards purchase. The connected party transaction spans from human ingredients that do not require processing (meat, vegetables). resource consulting and training of staff, to the purchase of Haidilao has also appointed independent parties for logistic food ingredients (processed), soup base and condiments, and services in Fujian, Shandong, Hebei and Yunnan. renovation of new stores. Haidilao does not have its own central kitchen, but outsources this function to the Shuhai Group.

Connected party transaction FY17-18

Title (Rmb mn) 2017 2018 Engagement of related parties Purhcase of food ingredients 2,743 1,905 Jarud Qi Haidilao, Sichuan Haidilao, now owned by Shuhai Group Purchased of PPE 1,244 659 Shuyun Dongfang and Honghuotai Purchased of condiment products and instant 902 1,162 Yihai hot pot products Decoration project management service 46 79 Shuyun Dongfang Human resource consulting service 36 60 Weihai Consulting Purchase of software 18 25 Purchase of software 0 1 Rental expenses 5 5 Management service 4 1 Storage service 2 80 Rental expenses 1 1 Financial advisory service 0 1 Software maintenance service 0 1 Rental expenses 0 0 Purchase of instant hotpot products 0 1 Software maintenance service 1 0 Project management services 0 0 Transportation service 0 0 5,002 3,981 Income from related parties Sale of food ingredients 0 21 Interest income 3 0 Sale of financial asset at FVTPL 7 0 Logistics services 1 0 Market development services 0 0 11 21

Source: Company data

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Haidilao International Holding Ltd

Connected parties’ description

Company Shareholding structure Key business function(s) related to Haidilao Sichuan Sichuan Haidilao is 33.5% directly held by Mr. Holding Company of Haidilao trademark Haidilao Zhang & Ms. Shu, 50% by Jingyuan Investment (68% held by Mr. Zhang & Ms. Shu) Jarud Qi Wholly-owned subsidiairy of Sichuan Haidilao Procurement of lamb supply products based on historical Haidilao purchase price, supply and demand conditions in the market, and market prices Shuhai 50% held by Leda Haisheng, 30% by Jinghai Engaged in supply chain services (including warehouse Investment (wholly-owned subsidiary of Jingyuan storage, logistics, and sale of food products) to catering Investment) service providers. Starting Jan'18, food ingredients that do not require processsing, including meat and vegetables, Haidilao now enters into purchase agreements directly with third-party suppliers. Shuhai provides storage and logistics services for Commodity Ingredients. Besides this, the Company has now entered into such services with independent parties (logistic providers) in Fujian, Shandong, Hebei and Yunnan. For processed ingredients, Haidilao selects the supplier of raw materials, while Shuhai Group purchases and processed such food materials.

Yihai Publicly listed under 1579.HK Yihai is engaged in the manufacturing, distribution and sale, research and development of hotpot soup flavouring under Haidilao brand and overseas locations, and has been a supplier to Haidilao for over 12 years. Shuyun Wholly owned by Leda Haisheng and a connected Shuyun Dongfang is engaged in providing decoration Dongfang party of the Company. materials, renovation services and decoration project management services. Weihai 50% held by Leda Haisheng, and 45.27% held by The Company provides the provision of human resource Consulting Mr. Shi Yonghong (ED). management and consulting services business, and is experienced in providing employment recruitment and training for catering business. Leda Haisheng Leda Haisheng is held 62.696% by Beijing Yihan Consulting Management which is controlled by Mr. Zhang, Ms. Shu and their children and 14.852% by Mr. Shi Yonghong Honghuotai 44% held by Shanghai Haiyue Investment Provides cloud based technology management and relevant Management, a wholly-owned subsidiary of Leda installation, testing, maintenance service Haisheng Source: Company data

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Haidilao International Holding Ltd

Appendix: Key management

Key management

Name A ge Position Description Zhang Yong 47 Chief Executive One of the key founders, Zhang Yong is the chief executive officer of the Company. He is Officer responsible for overseeing the management and strategic development of the Group. Mr. Zhang has completed the MBA and finance master of business adminstration program hosted by Cheung Kong Graduate School of Business in 2011 and 2012 respectively. Yang Lijuan 39 Chief Operating Yang Lijuan is the chief operating officer. Ms. Yang served as a manager of Sichuan Haidilao Officer from June'97 to Mar'01, thereafter served as a director of Sichuan Haidilao. In Jan'18, Ms. Yang was re-designated as a non-executive director. Ms. Yang has completed the PRC Entities CEO and Finance CEO Program, hosted by Cheung Kong Graduate School of Business in 2016. Shao Zhidong 42 Chief Information Mr. Shao is responsible for the technology innovation and development of the Group with Officer nearly 20 years of experience in IT. Previously, Mr. Shao served as the general manager of Beijing Nanbeixing Cultural Development Tong Xiaofeng 44 Chief Financial Mr. Tong is the chief financial officer of the Group. Prior to Haidilao, Mr. Tong held various Officer positions in multinational corporations such as SPX Filtran (SPW:NYSE), and the general manager of finance of UPC Renewable. Mr. Tong joined Sichuan Haidilao in June 2014, and served as financial controller from Dec'14 to Dec'16. Zhou 45 Chief Strategy Mr. Zhou is the chief strategy officer responsible for the growth strategy and food safety Zhaocheng Officer and PR of the Group. Mr. Zhou previously served as a journalist of Economic and Trade Reporter from Sept'14 to Jun'97, a reporter of Xinhua Daily from Jun'97 to July'98, Zaobao Online, Lianhe Zaobao and Singapore Press Holding. Mr. Zhou also served as a director of CulCreative International Pte and ZBJ-SPH in 2017- 2018. Source: Company data

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Company Guide

Haidilao International Holding Ltd

CRITICAL FACTORS TO WATCH Industry growth vs. Haidilao sales growth (%)

70% Critical Factors 60% Most recognisable restaurant brand in China. Haidilao is one of 50% the most recognisable restaurant brands in China, known for 40% 30% its reputable services. We expect Haidilao to deliver faster-than- 20% industry growth (10% p.a. in 2018-22F [Source: Frost & 10% Sullivan]), supported by aggressive store opening plans, and 0%

sustainability of operating metrics.

2016

2017

2018

2019F 2020F 2021F Industry growth (%) Sales growth (%) Store coverage expansion. Haidilao operated a total of 466 Store outlet expansion outlets as of December 2018. We expect the domestic market No. of Store to remain as the core contributor, accounting for c.92% of 1,200 restaurant revenue, while the group will actively seek stronger 1,000 86 Chinese-populated areas for long-term expansion. In China, we 800 71 280 225 expect Haidilao’s store openings to deliver a CAGR of 26% in 600 56 170 36 420 FY19-21F, with increased penetration in tier 1 & 2 cities. In the 400 117 350 19 280 overseas market, we expect the group to post a store 200 69 207 299 285 83 120 170 230 expansion CAGR of 24% in FY19-21F, with a greater focus in 0 55 65 106 Southeast Asia. In 2019 YTD, Haidilao has launched stores in 2016 2017 2018 2019F 2020F 2021F Vietnam, Indonesia and the UK. Tier 1 Tier 2 Tier 3 Overseas Raw material cost trend

Commodity cost fluctuation. Food materials is the largest cost 42% component in Haidilao, and accounted for 40.9% of FY18 42% sales. Lamb and beef prices have risen by 12%/ 7% y-o-y. We 41% expect this to begin having a negative impact on commodity costs starting 2H19 as inventory costs begin to rise. We 41% estimate that a 5% change in meat cost would have a 4% 40% impact on FY19F net profit. 40%

2016

2017

2018

2019F 2020F Managing operating costs. Labour, rental, depreciation & 2021F amortisation, and utility expenses accounted for a total of Operating cost as % of sales trend 50% 29.6%/4.0%/4.1%/3.5% of FY18 sales respectively. Apart 4.2% 3.9% 3.3% 3.1% 3.2% from wage pressure (7% y-o-y growth), we expect other costs 0.9% 1.0% 1.0% 1.0% 40% 1.1% 4.1% 3.9% 3.5% to remain largely stable. We estimate that every 2% increase in 3.4% 3.6% 3.3% 3.5% 3.5% 3.5% 3.5% 4.1% 4.0% wages could have a 4% impact on net profit in FY19F. 30% 3.9% 4.0% 4.0% 29.3% 29.6% 30.0% 29.6% 29.9% Southbound connect plays an important role. Southbound 20% interest has been a major share price driver for Haidilao since 2017 2018 2019F 2020F 2021F Staff costs Property rents joining the stock-connect linkage in Dec’18. As of 23rd of July, Utilities expenses Depreciation and amortisation Southbound shareholding reached 1.3%, or 16% of free float. Travelling and expenses Other expenses Source: Company, DBS HK

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Haidilao International Holding Ltd

Appendix 1: A look at Company's listed history – what drives its share price?

Event chart

HK$ 40

35

30

25 Mar'19: 20 Haidilao recorded strong earnings 15 Dec'18: growth of 60% y-o- Haidilao to join y; also the lockup 10 southbound stock link expiry date ends 5

0

8-Jul-19

7-Jan-19

1-Oct-18

4-Feb-19

1-Apr-19

22-Jul-19

4-Mar-19

21-Jan-19

10-Jun-19

24-Jun-19

15-Oct-18

29-Oct-18

18-Feb-19

15-Apr-19

29-Apr-19

10-Dec-18

24-Dec-18

12-Nov-18

26-Nov-18

18-Mar-19 13-May-19 27-May-19 Source: Company, Bloomberg Finance L.P., DBS HK

Share price vs. Southbound trading % of share capital

HK$ % 40 1.6

1.4 35 1.2 30 1.0

25 0.8

0.6 20 0.4 15 0.2

10 0.0

Jul-19

Jan-19

Jun-19

Oct-18 Feb-19

Sep-18 Apr-19

Dec-18

Nov-18

Mar-19 May-19

Last Price (LHS) % of Southbound trading (RHS)

Source: Company, Bloomberg Finance L.P., DBS HK

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Company Guide

Haidilao International Holding Ltd

Balance Sheet: The company stood in a net cash position of Rmb3,708m as of Leverage & Asset Turnover (x) December 2018, boosted by IPO proceeds of HK$7,299.3m. As of December 2018, the company had utilised c.19.3% of proceeds for financing store expansions, partial repayment of bank loans of Rmb850m, working capital and other purposes. We expect the company’s annual capex spending to remain high at >Rmb2bn+ over the next few years to fuel store expansion. Payback period remains better than peers at an average of 6-13 months’ span. The company’s dividend policy stands at no less than 20%. In FY18, the company paid out 20.9% of its profits. Capital Expenditure

Share Price Drivers: Store expansion and better-than-expected SSSG. We expect any faster-than-expected store expansion and better-than- expected SSSG to boost its share price.

Key Risks: Execution risk. Haidilao’s premium valuation is subjected to the company’s pace of store openings and same-store-sales growth. Execution risks could have an impact on its share price. ROE

Raw material costs. Haidilao is subjected to commodity cost fluctuations, especially pertaining to beef and lamb prices.

Operating cost pressure. Haidilao is subjected to operating cost pressures, such as rental and labour costs.

Connected party transactions and trade mark. About 38.4% of Haidilao’s total purchases in FY18 was from connected party transactions. Any disruption could have an impact on Forward PE Band Haidilao’s operations. On a separate note, the trade mark also does not belong to the company.

Liquidity risks. The Company’s management holds roughly 92% of shares, which we believe there could be placement risks in future.

Environment, Social, Governance: To guarentee overall food safety, the Company has developed HACCP modelled after ISO22000 to identify, prevent and eliminate any hazards. This includes over 100 food safety, PB Band hygiene and quality control policies and procedures set up for cleaning, inspecting each type of food ingredients.

Company Background Haidilao is a globally leading and fast-growing hotpot restaurant chain, with a strong reputation for offering above- and-beyond customer service. Serving over 160m customers a year, Haidilao operates 430 outlets in China and 36 outlets overseas (as of December 2018). Source: Company, DBS HK

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Haidilao International Holding Ltd

Segmental Breakdown (HK$ m)

FY Dec 2017A 2018A 2019F 2020F 2021F Revenues (HK$ m) Restaurant operation 10,388 16,491 25,431 35,408 46,668 Delivery business 219 324 485 680 883 Sales of condiment 30 154 309 540 810 products and others Total 10,637 16,969 26,225 36,628 48,362 Source: Company, DBS HK

Income Statement (HK$ m) FY Dec 2017A 2018A 2019F 2020F 2021F Revenue 10,637 16,969 26,225 36,628 48,362 Cost of Goods Sold (4,313) (6,935) (10,884) (15,505) (20,284) Gross Profit 6,324 10,034 15,341 21,123 28,078 Other Opng (Exp)/Inc (4,721) (7,825) (12,015) (16,731) (22,020) Operating Profit 1,603 2,209 3,326 4,392 6,058 Other Non Opg (Exp)/Inc 26 18 18 18 18 Associates & JV Inc 0 28 36 47 61 Net Interest (Exp)/Inc (5) 7 74 85 110 Dividend Income 0 0 0 0 0 Exceptional Gain/(Loss) 0 86 0 0 0 Pre-tax Profit 1,625 2,347 3,454 4,541 6,247 Tax (431) (613) (933) (1,226) (1,687) Minority Interest (166) (3) (4) (6) (8) Preference Dividend 0 0 0 0 0 Net Profit 1,028 1,732 2,517 3,309 4,553 Net Profit before Except. 1,028 1,646 2,517 3,309 4,553 EBITDA 1,989 2,944 4,400 5,818 7,851 Growth Revenue Gth (%) 36.2 59.5 54.5 39.7 32.0 EBITDA Gth (%) 21.6 48.0 49.4 32.2 35.0 Opg Profit Gth (%) 19.8 37.8 50.5 32.0 37.9 Net Profit Gth (%) 39.8 68.5 45.4 31.5 37.6 Margins & Ratio Gross Margins (%) 59.5 59.1 58.5 57.7 58.1 Opg Profit Margin (%) 15.1 13.0 12.7 12.0 12.5 Net Profit Margin (%) 9.7 10.2 9.6 9.0 9.4 ROAE (%) 108.7 35.7 26.6 29.3 33.0 ROA (%) 31.7 22.1 19.3 21.3 24.4 ROCE (%) 75.0 31.0 24.6 27.3 31.0 Div Payout Ratio (%) 0.0 30.5 27.6 28.8 26.2 Net Interest Cover (x) 354.8 NM NM NM NM Source: Company, DBS HK

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Haidilao International Holding Ltd

Interim Income Statement (HK$ m) FY Dec 1H2017 2H2017 1H2018 2H2018

Revenue 4,756 5,881 7,343 9,626 Cost of Goods Sold (1,949) (2,364) (3,066) (3,869) Gross Profit 2,807 3,517 4,276 5,758 Other Oper. (Exp)/Inc (2,051) (2,666) (3,370) (4,417) Operating Profit 756 851 906 1,341 Other Non Opg (Exp)/Inc 0 0 0 0 Associates & JV Inc 0 0 0 0 Net Interest (Exp)/Inc 2 2 19 19 Exceptional Gain/(Loss) 0 0 0 86 Pre-tax Profit 758 853 925 1,446 Tax (205) (226) (254) (359) Minority Interest (128) (38) (1) (2) Net Profit 425 589 671 1,085 Net profit bef Except. 425 589 671 999

Growth Revenue Gth (%) N/A N/A 54.4 63.7 Opg Profit Gth (%) N/A N/A 19.9 57.6 Net Profit Gth (%) N/A N/A 57.9 84.1

Margins Gross Margins (%) 59.0 59.8 58.2 59.8 Opg Profit Margins (%) 15.9 14.5 12.3 13.9 Net Profit Margins (%) 8.9 10.0 9.1 11.3 Source: Company, DBS HK

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Haidilao International Holding Ltd

Balance Sheet (HK$ m) FY Dec 2017A 2018A 2019F 2020F 2021F

Net Fixed Assets 2,085 4,000 5,419 6,807 8,194 Invts in Associates & JVs 4 100 100 100 100 Other LT Assets 184 2,109 2,109 2,109 2,109 Cash & ST Invts 282 4,119 4,659 5,399 7,067 Inventory 95 457 717 1,022 1,337 Debtors 942 1,046 1,063 1,305 1,526 Other Current Assets 143 114 114 114 114 Total Assets 3,736 11,945 14,181 16,857 20,447

ST Debt 348 410 410 410 410 Creditors 1,636 2,041 2,456 2,874 3,427 Other Current Liab 635 855 1,027 1,191 1,315 LT Debt 9 0 0 0 0 Other LT Liabilities 17 9 9 9 9 Shareholder’s Equity 1,089 8,625 10,270 12,358 15,263 Minority Interests 2 5 9 15 22 Total Cap. & Liab. 3,736 11,945 14,181 16,857 20,447

Non-Cash Wkg. Capital (1,091) (1,278) (1,588) (1,624) (1,766) Net Cash/(Debt) (75) 3,708 4,248 4,989 6,657 Debtors Turn (avg days) 17.1 18.2 12.0 11.0 10.0 Creditors Turn (avg days) 14.3 38.4 35.0 32.0 30.0 Inventory Turn (avg days) 8.0 24.1 24.1 24.1 24.1 Asset Turnover (x) 3.3 2.2 2.0 2.4 2.6 Current Ratio (x) 0.6 1.7 1.7 1.8 1.9 Quick Ratio (x) 0.5 1.6 1.5 1.5 1.7 Net Debt/Equity (X) 0.1 CASH CASH CASH CASH Net Debt/Equity ex MI (X) 0.1 CASH CASH CASH CASH Capex to Debt (%) 347.9 612.1 577.0 550.8 538.2 Z-Score (X) NA NA NA NA NA Source: Company, DBS HK

Cash Flow Statement (HK$ m) FY Dec 2017A 2018A 2019F 2020F 2021F

Pre-Tax Profit 1,625 2,262 3,454 4,541 6,247 Dep. & Amort. 360 694 949 872 822 Tax Paid (468) (583) (933) (1,226) (1,687) Assoc. & JV Inc/(loss) 0 0 0 0 0 (Pft)/ Loss on disposal of FAs (10) (14) 0 0 0 Chg in Wkg.Cap. (110) 64 128 (131) (119) Other Operating CF 5 (7) 69 80 105 Net Operating CF 1,400 2,416 3,667 4,136 5,369 Capital Exp.(net) (1,243) (2,512) (2,368) (2,260) (2,209) Other Invts.(net) 0 0 0 0 0 Invts in Assoc. & JV 0 0 0 0 0 Div from Assoc & JV 0 0 0 0 0 Other Investing CF (322) (1,355) (414) (608) (799) Net Investing CF (1,565) (3,867) (2,782) (2,868) (3,007) Div Paid 0 (461) (345) (528) (694) Chg in Gross Debt 474 (663) 0 0 0 Capital Issues 0 6,632 0 0 0 Other Financing CF (434) (221) 0 0 0 Net Financing CF 40 5,288 (345) (528) (694) Currency Adjustments 0 0 0 0 0 Chg in Cash (125) 3,837 540 741 1,668 Opg CFPS (HK$) 0.30 0.47 0.71 0.86 1.10 Free CFPS (HK$) 0.03 (0.02) 0.26 0.38 0.63

Source: Company, DBS HK

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Company Guide

Haidilao International Holding Ltd

DBS HK recommendations are based on an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps) FULLY VALUED (negative total return, i.e., > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable share price catalysts within this time frame)

*Share price appreciation + dividends

Completed Date: 1 Aug 2019 10:29:38 (HKT) Dissemination Date: 1 Aug 2019 17:13:03 (HKT)

Sources for all charts and tables are DBS HK unless otherwise specified.

GENERAL DISCLOSURE/DISCLAIMER

This report is prepared by DBS Bank (Hong Kong) Limited (“DBS HK”). This report is solely intended for the clients of DBS Bank Ltd., DBS HK, DBS Vickers (Hong Kong) Limited (“DBSV HK”), and DBS Vickers Securities (Singapore) Pte Ltd. (“DBSVS”), its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBS HK.

The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS Bank Ltd., DBS HK, DBSV HK, DBSVS, its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively, the “DBS Group”) have not conducted due diligence on any of the companies, verified any information or sources or taken into account any other factors which we may consider to be relevant or appropriate in preparing the research. Accordingly, we do not make any representation or warranty as to the accuracy, completeness or correctness of the research set out in this report. Opinions expressed are subject to change without notice. This research is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group, may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies.

Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments. The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed, it may not contain all material information concerning the company (or companies) referred to in this report and the DBS Group is under no obligation to update the information in this report.

This publication has not been reviewed or authorized by any regulatory authority in Singapore, Hong Kong or elsewhere. There is no planned schedule or frequency for updating research publication relating to any issuer.

The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that: (a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and (b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments stated therein.

Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets. Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies) mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the commodity referred to in this report.

DBS Vickers Securities (USA) Inc (“DBSVUSA”), a US-registered broker-dealer, does not have its own investment banking or research department, has not participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months and does not engage in market-making.

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Haidilao International Holding Ltd

ANALYST CERTIFICATION The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her compensation was, is, or will be, directly or indirectly, related to specific recommendations or views expressed in the report. The research analyst (s) primarily responsible for the content of this research report, in part or in whole, certifies that he or his associate1 does not serve as an officer of the issuer or the new listing applicant (which includes in the case of a real estate investment trust, an officer of the management company of the real estate investment trust; and in the case of any other entity, an officer or its equivalent counterparty of the entity who is responsible for the management of the issuer or the new listing applicant) and the research analyst(s) primarily responsible for the content of this research report or his associate does not have financial interests2 in relation to an issuer or a new listing applicant that the analyst reviews. DBS Group has procedures in place to eliminate, avoid and manage any potential conflicts of interests that may arise in connection with the production of research reports. The research analyst(s) responsible for this report operates as part of a separate and independent team to the investment banking function of the DBS Group and procedures are in place to ensure that confidential information held by either the research or investment banking function is handled appropriately. There is no direct link of DBS Group's compensation to any specific investment banking function of the DBS Group.

COMPANY-SPECIFIC / REGULATORY DISCLOSURES

1. DBS Bank Ltd, DBS HK, DBSVS or their subsidiaries and/or other affiliates do not have a proprietary position in the securities recommended in this report as of 29 Jul 2019.

2. Neither DBS Bank Ltd nor DBS HK market makes in equity securities of the issuer(s) or company(ies) mentioned in this Research Report.

3. Compensation for investment banking services: DBS Bank Ltd, DBS HK, DBSVS, their subsidiaries and/or other affiliates of DBSVUSA have received compensation, within the past 12 months for investment banking services from Singapore Press Holdings Limited (SPH SP) as of 30 Jun 2019.

4. DBS Bank Ltd, DBS HK, DBSVS, their subsidiaries and/or other affiliates of DBSVUSA have managed or co-managed a public offering of securities for Singapore Press Holdings Limited (SPH SP) in the past 12 months, as of 30 Jun 2019.

DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively.

5. Disclosure of previous investment recommendation produced: DBS Bank Ltd, DBSVS, DBS HK, their subsidiaries and/or other affiliates of DBSVUSA may have published other investment recommendations in respect of the same securities / instruments recommended in this research report during the preceding 12 months. Please contact the primary analyst listed in the first page of this report to view previous investment recommendations published by DBS Bank Ltd, DBS HK, DBSVS, their subsidiaries and/or other affiliates of DBSVUSA in the preceding 12 months.

1 An associate is defined as (i) the spouse, or any minor child (natural or adopted) or minor step-child, of the analyst; (ii) the trustee of a trust of which the analyst, his spouse, minor child (natural or adopted) or minor step-child, is a beneficiary or discretionary object; or (iii) another person accustomed or obliged to act in accordance with the directions or instructions of the analyst. 2 Financial interest is defined as interests that are commonly known financial interest, such as investment in the securities in respect of an issuer or a new listing applicant, or financial accommodation arrangement between the issuer or the new listing applicant and the firm or analysis. This term does not include commercial lending conducted at arm's length, or investments in any collective investment scheme other than an issuer or new listing applicant notwithstanding the fact that the scheme has investments in securities in respect of an issuer or a new listing applicant.

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Company Guide

Haidilao International Holding Ltd

RESTRICTIONS ON DISTRIBUTION General This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation. This report is being distributed in Australia by DBS Bank Ltd, DBSVS or DBSV HK. DBS Bank Ltd holds Australian Financial Services Licence no. 475946. DBSVS and DBSV HK are exempted from the requirement to hold an Australian Financial Services Licence under the Corporation Act 2001 (“CA”) in respect of financial services provided to the recipients. Both DBS Bank Ltd and DBSVS are regulated by the Monetary Authority of Singapore under the laws of Singapore, and DBSV HK is regulated by the Hong Kong Securities and Futures Commission under the laws of Hong Kong, which differ from Australian laws. Distribution of this report is intended only for “wholesale investors” within the meaning of the CA.

Hong Kong This report is being distributed in Hong Kong by DBS Bank Ltd, DBS Bank (Hong Kong) Limited and DBS Vickers (Hong Kong) Limited, all of which are registered with or licensed by the Hong Kong Securities and Futures Commission to carry out the regulated activity of advising on securities.

Indonesia This report is being distributed in Indonesia by PT DBS Vickers Sekuritas Indonesia. This report is distributed in Malaysia by AllianceDBS Research Sdn Bhd ("ADBSR"). Recipients of this report, received from ADBSR are to contact the undersigned at 603-2604 3333 in respect of any matters arising from or in connection with this report. In addition to the General Disclosure/Disclaimer found at the preceding page, recipients of this report are advised that ADBSR (the preparer of this report), its holding company Alliance Investment Bank Berhad, their respective connected and associated corporations, affiliates, their directors, officers, employees, agents and parties related or associated with any of them may have positions in, and may effect transactions in the securities mentioned herein and may also perform or seek to perform broking, investment banking/corporate advisory and other services for the subject companies. They may also have received compensation and/or seek to obtain compensation for broking, investment banking/corporate advisory and other services from the subject companies.

Wong Ming Tek, Executive Director, ADBSR Singapore This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) or DBSVS (Company Regn No. 198600294G), both of which are Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd and/or DBSVS, may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, DBS Bank Ltd accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact DBS Bank Ltd at 6327 2288 for matters arising from, or in connection with the report. This report is being distributed in Thailand by DBS Vickers Securities (Thailand) Co Ltd. United This report is produced by DBS HK which is regulated by the Hong Kong Monetary Authority

Kingdom This report is disseminated in the by DBS Vickers Securities (UK) Ltd (“DBSVUK”). DBSVUK is authorised and regulated by the Financial Conduct Authority in the United Kingdom.

In respect of the United Kingdom, this report is solely intended for the clients of DBSVUK, its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBSVUK. This communication is directed at persons having professional experience in matters relating to investments. Any investment activity following from this communication will only be engaged in with such persons. Persons who do not have professional experience in matters relating to investments should not rely on this communication. Dubai This research report is being distributed by DBS Bank Ltd., (DIFC Branch) having its office at units 608-610, 6th Floor, Gate International Precinct Building 5, PO Box 506538, Dubai International Financial Centre (DIFC), Dubai, United Arab Emirates. DBS Bank Financial Ltd., (DIFC Branch) is regulated by The Dubai Financial Services Authority. This research report is intended only for Centre professional clients (as defined in the DFSA rulebook) and no other person may act upon it.

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Company Guide

Haidilao International Holding Ltd

United Arab This report is provided by DBS Bank Ltd (Company Regn. No. 196800306E) which is an Exempt Financial Adviser as defined Emirates in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. This report is for information purposes only and should not be relied upon or acted on by the recipient or considered as a solicitation or inducement to buy or sell any financial product. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situation, or needs of individual clients. You should contact your relationship manager or investment adviser if you need advice on the merits of buying, selling or holding a particular investment. You should note that the information in this report may be out of date and it is not represented or warranted to be accurate, timely or complete. This report or any portion thereof may not be reprinted, sold or redistributed without our written consent. United States This report was prepared by DBS HK. DBSVUSA did not participate in its preparation. The research analyst(s) named on this report are not registered as research analysts with FINRA and are not associated persons of DBSVUSA. The research analyst(s) are not subject to FINRA Rule 2241 restrictions on analyst compensation, communications with a subject company, public appearances and trading securities held by a research analyst. This report is being distributed in the United States by DBSVUSA, which accepts responsibility for its contents. This report may only be distributed to Major U.S. Institutional Investors (as defined in SEC Rule 15a-6) and to such other institutional investors and qualified persons as DBSVUSA may authorize. Any U.S. person receiving this report who wishes to effect transactions in any securities referred to herein should contact DBSVUSA directly and not its affiliate. Other In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is intended only for qualified, jurisdictions professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions. DBS Bank (Hong Kong) Limited 13 th Floor One Island East, 18 Westlands Road, Quarry Bay, Hong Kong Tel: (852) 3668-4181, Fax: (852) 2521-1812

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Company Guide

Haidilao International Holding Ltd

DBS Regional Research Offices

HONG KONG MALAYSIA SINGAPORE DBS Bank (Hong Kong) Ltd AllianceDBS Research Sdn Bhd DBS Bank Ltd Contact: Carol Wu Contact: Wong Ming Tek (128540 U) Contact: Janice Chua 13th Floor One Island East, 19th Floor, Menara Multi-Purpose, 12 Marina Boulevard, 18 Westlands Road, Capital Square, Marina Bay Financial Centre Tower 3 Quarry Bay, Hong Kong 8 Jalan Munshi Abdullah 50100 Singapore 018982 Tel: 852 3668 4181 Kuala Lumpur, Malaysia. Tel: 65 6878 8888 Fax: 852 2521 1812 Tel.: 603 2604 3333 Fax: 65 65353 418 e-mail: [email protected] Fax: 603 2604 3921 e-mail: [email protected] e-mail: [email protected] Company Regn. No. 196800306E

INDONESIA THAILAND PT DBS Vickers Sekuritas (Indonesia) DBS Vickers Securities (Thailand) Co Ltd Contact: Maynard Priajaya Arif Contact: Chanpen Sirithanarattanakul DBS Bank Tower 989 Siam Piwat Tower Building, Ciputra World 1, 32/F 9th, 14th-15th Floor Jl. Prof. Dr. Satrio Kav. 3-5 Rama 1 Road, Pathumwan, Jakarta 12940, Indonesia Bangkok Thailand 10330 Tel: 62 21 3003 4900 Tel. 66 2 857 7831 Fax: 6221 3003 4943 Fax: 66 2 658 1269 e-mail: [email protected] e-mail: [email protected] Company Regn. No 0105539127012 Securities and Exchange Commission, Thailand

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