Chinese restaurant stocks are underpriced as Morningstar, Essence see Yum China, Haidilao doubling in value
- Yum China and Haidilao have lost US$16.1 billion in market value over the past 13 months, making them super bargains, Morningstar and Essence Securities
- There is still room for market leaders in China’s restaurant business to grow their market dominance based on examples in developed market
Yum China’s chain of KFC and Pizza Hut fast-food outlets and hotpot purveyor Haidilao are likely to gain market share on consumption rebound in mainland China, while also enhancing their appeal as a shield to rising geopolitical risks, according to Ivan Su, an analyst in Hong Kong at Morningstar.
Haidilao is favoured by analysts at Essence Securities, who argue that a recovery in consumer spending will benefit the biggest players in the industry. Smaller peers like Jiumaojiu International and Xiabuxiabu Catering Management “sit comfortably” in his rating, Su added.
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“We are still confident in the ability of large chain operators to gain market share in the growing restaurant market in the long run,” Su said in an email to the Post. Restaurant operators are “the safest ways to gain exposure to the growth of the Chinese middle class” on top of their cash flow and safe-harbour quality, he added.
Yum China rose 0.9 per cent to HK$275 last week, while Haidilao tumbled 4 per cent to HK$12.56.
The former, which also has restaurants operating under Little Sheep and East Dawning brands, should be worth HK$626 per share, implying a potential 129 per cent upside from the current level, according to Morningstar’s Su. The stock trades at 17.2 times earnings multiple versus a record-low 17 times seen on January 22.
Haidilao, which is controlled by billionaire founder Zhang Yong, trades at rock-bottom 14.6 times and is worth HK$13.70, according to Morningstar’s valuation. Essence Securities said the hotpot chain is worth HK$25.30.