Better Buy Now: Haidilao or Xiabuxiabu?

Haidilao International Holding Ltd (HKG: 6862) and Xiabuxiabu Catering Mgt Chn Hldgs Co Ltd (SEHK: 0520) are hot pot chain operators in China.

The former focuses on the mid and high-end hot pot market in China and overseas. The latter caters mainly to the low to mid-end market in China.

In his article, we will look at both company profits and price to decide what company is a better buy currently.

Which company is more profitable?

Let’s start by comparing the business quality of both companies using one simple metric: return on equity (ROE.)

ROE is a useful metric since it gives investors insight into a company’s ability to generate a profit using the shareholders’ capital. For example, an ROE of 20% means that the company generates HK$0.20 in profit for every dollar of shareholders’ capital invested. In general, the higher the ROE, the higher the profitability.

And now the verdict on our two companies.

In 2018, Haidilao generated a net profit of RMB 1.6 billion with RMB 8.6 billion in equity, giving it an ROE of 19%. Xiabuxiabu’s net profit and equity for 2018 were RMB 462.5 million and RMB 2.2 billion, giving it an ROE of 21%.

While both companies had a strong ROE of around 20%, Xiabuxiabu comes out ahead with 21%.

Which company is cheaper?

The next thing to consider is the valuation of these companies. The two-valuation metrics I will focus on are the price-to-book (PB) ratio and price-to-earnings (PE) ratio.

Haidilao and Xiabuxiabu have PB ratios of 16.7 and 3.3, respectively. The lower PB ratio for Xiabuxiabu suggests it has a lower valuation.

Next, Haidilao and Xiabuxiabu have PE ratios of 77.8 and 18.1, respectively. Xiabuxiabu has a lower valuation based on its low PE ratio, making Xiabuxiabu the cheaper of the two companies.

Conclusion

In sum, Xiabuxiabu is the better buy considering its higher ROE and lower valuation. That said, investors should still consider other factors (such as a company’s long-term prospects) before investing.

The information presented in this article is not a recommendation to take action on the stocks mentioned. Rather, this information is intended as a useful starting point for further research.

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