Ser Jing Chong of Galilee Investment Management presented his in-depth investment thesis on Haidilao (Hong Kong: 6862) at Best Ideas 2021.

Thesis summary:

Haidilao runs a namesake chain of mid- to high-end hotpot restaurants. As of mid-year 2020, the company had 868 restaurants in China and 67 in other places, including Australia, Singapore, Taiwan, the UK, and the U.S. What differentiates Haidilao from competitors are the company’s incredible service standards. For example, many Haidilao restaurants are equipped with a seated waiting area, with free board games, fruit, snacks, and tea or other beverages.

The company was founded in 1994 with the meagre personal savings of RMB 8,000 by the now-husband and wife teams of Zhang Yong and Shu Ping as well as Shi Yong Hong and Li Haiyan. Today, Haidilao is a business with RMB 25 billion in global revenue. It grew the top and bottom line at 50+% and 40+%, respectively, in 2019. Over the four years from 2015 to 2019, Haidilao’s revenue and profit compounded at annual rates of 47% and 55%, respectively.

Zhang Yong has led Haidilao since its founding. He has an unusual way of managing the company, stemming from his unique worldview and characterized by extreme trust and compassion toward others. Examples of Haidilao’s unusual methods include (1) evaluating restaurant managers primarily on customer satisfaction, (2) giving restaurant staff a high level of autonomy to provide better service, and (3) allowing restaurant managers to share in the profits of the restaurants they directly manage and an even larger share of the profits from restaurants managed by their first- and second-generation mentees. It appears likely that Haidilao will remain one step ahead of the competition when it comes to delighting customers with excellent and innovative service standards.

With the Chinese cuisine market in China amounting to RMB 3.2 trillion in 2017, there is plenty of market share for Haidilao to gobble up, despite the fact that it is already the largest Chinese cuisine restaurant operator in the country.

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About the instructor:

Ser Jing Chong graduated in 2012 from the National University of Singapore’s Engineering Science Programme. From January 2013 to October 2019, Ser Jing served in The Motley Fool Singapore as a writer as well as a co-leader of the investing team. One of his career highlights with Fool Singapore was to help its flagship investment newsletter, Stock Advisor Gold, outperform a global stock market benchmark by nearly 2x over a 3.5 year period. In mid-2020, he co-founded and launched Compounder Fund, a long-term focused global equities investment fund.

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