Special Sea International (09658), which has been struggling desperately on the path to profit and loss, finally handed over a “report card” that turned losses into profits once again.

As the leader of the Haidilao brand in the international market, Tehai International's “continuous praise” in overseas markets is also reflected in its performance — on November 25, Tehai International disclosed its financial results for the third quarter of 2024. During the period, the company achieved revenue of 0.199 billion US dollars, an increase of 14.6% over the previous year, and realized net profit of 37.7 million US dollars, which was a significant reversal of losses over the same period in 2023.

Regarding turning a loss into a profit this time, Tehai International explained in its financial report that the company's operating efficiency has improved mainly due to continued business expansion driving revenue growth and efforts to increase passenger traffic and turnover rates. In particular, net exchange earnings increased by 34.6 million US dollars over the same period in 2023.

In fact, since entering overseas markets, Tehai International's performance has not been stable when it comes to profit issues.

Until now, the company has been in a state of loss. Although it successfully turned a loss into a profit last year, it lost money again in the first half of this year, and has now been profitable again in Q3. Specifically, in 2019-2022, Tehai International achieved operating income of 0.233 billion US dollars, 0.221 billion US dollars, 0.312 billion US dollars, and 0.558 billion US dollars, respectively, and annual net losses of 33.019 million US dollars, 53.76 million US dollars, 0.151 billion US dollars, and 41.248 million yuan, respectively. In 2023, Tehai International's revenue was 0.668 billion US dollars, and net profit was 25.653 million US dollars.

However, along with the unstable state of profits, the market is also skeptical about the high growth story of Te Hai International's overseas expansion. So, what should investors think about Tehai International turning a loss into a profit in Q3 this time?

Getting out of the profit dilemma under the “sharp rise in volume and price”?

Q3 2024 was the first quarter since Yang Lijuan, the former CEO of Haidilao, was transferred to CEO. She went from being a waiter to CEO. Once known as the “best working girl” in history, she once again reversed Tehai International's profit dilemma.

In 2022, Yang Lijuan was ordered to take over the position of CEO of Haidilao from Zhang Yong. This was a tense time when Haidilao was mired in a “no increase in revenue or profit” situation due to crazy expansion. In 2021, due to the crazy opening of stores, although Haidilao's revenue increased by 43.7% to 41.11 billion yuan, it lost 4.16 billion yuan, of which 3.65 billion yuan came from loss accrued from the disposal of long-term assets due to the closing plan.

In March 2022, Yang Lijuan succeeded founder Zhang Yong as CEO of Haidilao and began leading the reform. In the second half of the year, the “Hard Bone Plan” was launched. The main method was to reopen some restaurants that had been shut down in the past. Under Yang Lijuan's operational planning, Haidilao's profit dilemma was promptly resolved. In the year it took office, that is, in 2022, Haidilao reversed losses and achieved a profit of 1.373 billion yuan during the period.

This time, Yang Lijuan once again “turned the tide” on Te Hai International's profit issue. However, an in-depth investigation of the company's earnings report for the current quarter revealed that this increase in performance may not be unrelated to its “increase in volume and price.”

2024Q3, the overall average turnover rate of Haidilao restaurants was 3.8 times, an increase of 0.1 times over the previous year, mainly due to the increasing influence of the Haidilao brand, the continuous expansion of the consumer group, and the operation of various consumption scenarios in more detail; by region, the average turnover rate in Southeast Asia/East Asia/North America/other regions was 3.6/4.3/3.9/3.8 times, respectively, +0.1/+0.4/+0.0/ -0.1 times compared with the previous year.

In addition, the company's customer unit price also increased during the period: in Q3 2024, the overall average customer unit price of Haidilao Restaurant was US$25.8, an increase of US$2.1 over the same period in 2023, mainly due to the company's continuous optimization of brand marketing and exchange rate influence; by region, the average customer unit price in Southeast Asia/East Asia/North America/other regions was US$20.4/29.2/43.5/43.0, respectively, or +1.4/+3.3/+4.2 USD.

(Data source: Tehai International Financial Report)

However, it is worth noting that along with the increase in “volume” and “price,” Haidilao's cost of opening a store also began to rise.

In Q3 2024, the company's employee costs were 65.9 million US dollars, up 15.2% year on year, accounting for 33.1% of revenue, up 0.2 pct year over year, mainly due to the company's business strategy to ensure that a sufficient number of employees provide a superior customer experience, and the increase in the legal minimum wage in the individual countries where it operates. Furthermore, the cost of raw materials and consumables during the period was 65.5 million US dollars, up 9.9% year over year, accounting for 33% of revenue.

In Q3 2024, no new Haidilao stores were opened, and 1 store in Southeast Asia was temporarily closed, and it is planned to reopen it as a second-brand restaurant in the future; there was a cumulative net increase of 6 Haidilao stores in the first three quarters. By the end of September 2024, there was a total of 121 Haidilao stores.

Overall, the improvement in Tehai's international performance in Q3 2024 is mainly reflected in the increase in “volume” and “price” and refined operation, and I'm afraid there is still a “unknown” way to how long this “human intervention” growth will last.

Seeking a “new curve”, there is no shortage of challenges in expanding overseas

After the dual listing, whether Te Hai International can draw a healthy new growth curve is undoubtedly a major focus of attention for many investors.

As the Haidilao brand, “overseas expansion” is the biggest “bright card” offered by Te Hai International, and this is obviously also a move in line with industry trends.

In 2023, the country's food and beverage revenue was 5.3 trillion yuan, an increase of 20.4% over the previous year. More than 3 million new restaurant registrations were added in the same year, forming a number of “10,000 store” brands, and the market competition is fierce. Many enterprises have reached the ceiling in terms of store layout. In order to further increase revenue and increase profits, enterprises need to “go overseas”. Currently, both Xiabuxiabu and Xiaolongkan are entering overseas markets.

As one of the most popular tracks for Chinese food to go overseas, Frost & Sullivan released a forecast that by 2026, the overseas Chinese restaurant market is expected to reach nearly 3 trillion yuan, and the hot pot category alone is expected to exceed 200 billion yuan. The prospects for the track are bright, and barriers to competition are difficult to establish. Special Sea International will definitely have to run faster in order to secure its dominant position.

However, in addition to running faster, there are still many uncertainties surrounding the “overseas expansion route” of Special Sea International.

On the one hand, there is the issue of high costs. There is already an undeclared consensus within the industry that labor costs are high in overseas markets. According to the Zhitong Finance App, labor costs are high in overseas markets, especially in North America. For example, labor costs in American restaurants may reach 30% or even 35%-40%. In addition, there are problems with high costs and limited supply of raw materials. For example, the cost of raw materials in some overseas regions is higher than in China, and there are trade restrictions. Under the pressure of high costs, it will undoubtedly also put some pressure on TEHAI's profit margins.

On the other hand, there are still certain problems with market competition and expansion. The international restaurant market is fiercely competitive, with many rivals and strong strengths. As a Chinese restaurant brand, Tehai International not only competes with local food brands, but also competes with other international restaurant chain brands for market share. Furthermore, consumer culture and habits in different regions are very different, and localization problems have yet to be broken through. No new Tehai International stores opened in the third quarter of 2024, and also temporarily closed a Southeast Asian restaurant, indicating that there are also certain difficulties in expanding overseas stores.

In addition to this, there is also a certain risk of exchange rate fluctuations. Special Sea International operates in many overseas places, and exchange rate fluctuations will affect its financial status and profitability. For example, exchange rate fluctuations will lose in the first half of 2024.

Overall, thanks to Q3 results that turned losses into profits, Tehai International's stock price rose one after another on November 28 and 29, recording increases of 22.31% and 0.12%, respectively. It should be noted, however, that despite the impressive performance of TEHAI International's three-quarter report, there are still many uncertainties about the company's long-term growth potential, which obviously also prompts investors to remain skeptical about the company's medium- to long-term prospects.