China Hotpot Chain Surges 20% as Covid Cost Cuts Bear Fruit

(Bloomberg) — Shares of China’s hotpot chain Haidilao International Holding Ltd. jumped the most in a year after the firm forecast a return to profitability, underscoring bets for a revival in consumption in the world’s no. 2 economy.

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The stock rose as much as 20% in Hong Kong, the most since March 2022, to outperform all its peers on the benchmark Hang Seng Index on Monday. Haidilao said late Friday it expects to post a net income of no less than 1.3 billion yuan ($187 million) in 2022, versus a loss of 4.2 billion yuan in the previous year.

The company attributed the better outlook to efforts to streamline its operations, as well as a gain of around 329 million yuan recognized on cancellation of bonds due in 2026, even as revenue is expected to fall by about 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.

Seen as one of the major beneficiaries of China’s reopening, Haidilao saw its shares rally 117% from November through early January, with the stock ranking among the best performers on the HSI last year.

The rosy sentiment is a reversal of fortunes for a firm that was among the most heavily hit during the height of pandemic-era curbs due to China’s strict Covid Zero policy. The projections also speak to wider optimism among reopening stocks, with analysts believing that cost discipline coupled with the return of demand will bode well for China’s consumption sector.

Under the so-called “Woodpecker” plan, Haidilao closed 26 restaurants in the first half of last year, while its founder Zhang Yong stepped down as chief executive officer in an overhaul last March.

“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,” they added.