S&P assigns BBB rating to China's Haidilao with stable outlook

S&P Global Ratings on Jan. 4 assigned a BBB long-term issuer credit rating to Haidilao International Holding Ltd. and a BBB long-term issue rating to the company's senior unsecured notes, with a stable outlook.

Ratings expects Haidilao to maintain its leadership in China's hot-pot market because of its strong brand recognition and profitability, posting an average table turnover rate of 4.8x in 2019.

However, Ratings said Haidilao's aggressive plan to increase its new store footprint faces the risk of existing store cannibalization and lack of disciplined execution. Its plan of international expansion also comes with a challenge as service culture may not translate well in new markets.

Haidilao's business strengths are also moderated by its geographic concentration, with more than 90% of its revenue coming from mainland China, the agency said.

New entrants into the hot-pot market offering different concepts also pose competition challenges to the Beijing-based company, Ratings added.

Meanwhile, the stable outlook reflects the agency's expectations that Haidilao will gain market share and have double-digit annual revenue growth over the next two years.

The agency said it could lower Haidilao's rating if its debt-to-EBITDA ratio goes past 1.5x for a sustained period due to a weakening in free operating cash flow, which may result from substantial debt-funded acquisitions without meaningful cash flow contribution or longer-than-expected COVID-19 recovery.

A downgrade is also likely if Haidilao's competitive advantages weaken due to missteps in its expansion plan execution, among other factors.

Conversely, Ratings can upgrade Haidilao's rating if the company generates meaningful revenue from non-Haidilao brands and from overseas operations.

This S&P Global Market Intelligence news article may contain information about credit ratings issued by S&P Global Ratings. Descriptions in this news article were not prepared by S&P Global Ratings.