Investment Rating - The report indicates a positive investment outlook for the Chinese catering industry, highlighting the acceleration of chain operations and the dominance of the franchise model in industry development [6][22][60]. Core Insights - The Chinese catering industry is transitioning from "incremental competition" to "stock competition," with lower entrepreneurial barriers and a significant increase in the number of legal entities and employees in the sector [15][17]. - The market is characterized by a strong recovery post-pandemic, with a notable increase in revenue and a shift towards high-quality development driven by brandization and digitalization [20][33]. - The franchise model is becoming the primary growth driver, with a significant rise in chain penetration rates, particularly in the fast-food segment [60][62]. Summary by Sections Current State of the Chinese Catering Industry - The industry is experiencing a shift towards stock competition, with a notable increase in the number of legal entities from 26,359 in 2016 to 74,664 by 2024, and employees rising from 221.1 million to 360.5 million [17][20]. - The catering revenue reached approximately 57,982 billion yuan in 2025, accounting for 11.6% of the total retail sales, reflecting a 3.2% year-on-year growth [10][20]. Industry Chain Overview - The catering industry value chain includes upstream suppliers, food processing, and downstream service delivery, with a focus on ensuring food freshness and timely delivery [39][40]. - The supply chain is evolving towards quality enhancement and precision delivery, driven by increased competition in retail channels [44]. Fast Food Industry Status - The fast-food segment is witnessing accelerated chain development, with the chain penetration rate increasing from 19% in 2021 to 23% in 2024 [26][60]. - The market for Chinese fast food is projected to grow from 5,296 billion yuan in 2020 to 8,097 billion yuan in 2024, with a compound annual growth rate (CAGR) of 11.2% [57][58]. Consumer Spending Trends - The average consumer spending in the catering sector is dominated by low-price segments, with the 11-20 yuan range accounting for 32.7% of total outlets [30][32]. - The overall catering market is expected to grow from 39,527 billion yuan in 2020 to 83,348 billion yuan by 2030, with a CAGR of approximately 7.7% [33][35]. Challenges in Cost Management - The cost structure of catering businesses is heavily reliant on raw material procurement (42.1%), labor costs (22.2%), and rent (9.7%), which together account for nearly 75% of total revenue [49]. - The industry is facing new challenges in cost management, shifting focus from traditional hard costs to managing rising labor and digital channel expenses [47][49].

Core Viewpoint - Haidilao's strategic decision to expand its franchise model is a calculated move aimed at enhancing operational efficiency and market penetration, rather than a reaction to financial pressures [9]. Group 1: Franchise Expansion - As of June 30, 2025, Haidilao operates 1,363 self-operated restaurants and 41 franchise restaurants, with 25 new self-operated and 3 franchise restaurants opened in the first half of the year [1]. - The franchise business generated revenue of 90.849 million yuan in the first half of 2025, a significant increase from 1.899 million yuan in the same period of 2024 [3]. - Haidilao has received over 20,000 franchise applications since opening its franchise model in 2024, indicating strong interest in the brand [1][9]. Group 2: Franchise Model Characteristics - Haidilao employs a "strong management" franchise system, ensuring uniformity in operations, training, performance evaluation, and brand building across franchise and self-operated restaurants [4]. - Franchisees are required to first acquire an existing restaurant before opening new ones, which helps them quickly understand the brand's management and culture [5]. - The initial investment to open a Haidilao franchise is considered to be around 10 million yuan, with actual costs potentially higher due to various operational expenses [8]. Group 3: Strategic Rationale - The franchise model is seen as a way to leverage local resources and insights, particularly in lower-tier cities where direct management may not be as effective [9]. - Haidilao's management emphasizes that the franchise expansion is not a desperate measure for cash flow, as the company has the capability to continue opening restaurants independently [9]. - The combination of old and new store franchises is designed to enhance franchisee understanding of the brand and reduce the time needed for training [3][5].

Core Viewpoint - The rapid expansion of chain restaurant brands in China, primarily through franchising, has led to significant food safety issues, with several brands facing severe criticism and negative publicity due to poor management and quality control [1][2][4][5]. Group 1: Food Safety Issues - Brands like Yang Mingyu Huang Wen Ji and Wallace have been repeatedly exposed for food safety violations, including the use of expired ingredients and unsanitary practices in their kitchens [2][4][5]. - During the 3.15 Consumer Rights Day, multiple reports highlighted serious food safety problems, such as the reuse of leftover food and the lack of health certificates among staff [2][4]. - Complaints against these brands on consumer platforms have surged, with Yang Mingyu Huang Wen Ji receiving over a hundred complaints related to food quality and safety [5]. Group 2: Franchise Model and Management Challenges - The low entry barriers for franchisees have led to a "wild growth" of chain restaurants, with a focus on rapid expansion rather than stringent management practices [6][13]. - The franchise model often results in a disconnect between brand owners and franchisees, leading to conflicts in priorities, where franchisees prioritize short-term profits over long-term brand integrity [14][16]. - The management of franchise operations is often outsourced, resulting in a lack of effective oversight and accountability, which exacerbates food safety issues [11][17]. Group 3: Financial Performance and Business Strategy - Wallace's parent company reported revenues of 4.6 billion yuan with a net profit of only 90 million yuan, indicating a low profit margin of around 5%, significantly below the industry average [9][10]. - The rapid expansion of brands like Wallace and Yang Mingyu Huang Wen Ji has been driven by low investment costs and high potential returns, but this has come at the expense of food safety and quality control [7][9]. - Yang Guofu's business model relies heavily on selling ingredients to franchisees, which can lead to inconsistent quality and safety standards across locations [10][11].

Core Insights - Haidilao International Holding Ltd. reported a revenue of 42.755 billion yuan for the year ending December 31, 2024, representing a year-on-year increase of 3.1% [1] - The net profit for 2024 was 4.7 billion yuan, showing a growth of 4.6% compared to the previous year [1] - Core operating profit reached 6.23 billion yuan, up 18.7% year-on-year, marking two consecutive years of growth in revenue and net profit [1] Industry Overview - The restaurant market in China continued to grow in 2024, with national restaurant revenue increasing by 5.3% to 55.718 billion yuan, outpacing GDP growth by 0.3 percentage points and retail sales growth by 1.8 percentage points [1] - Revenue from above-designated size restaurants rose by 3% to 15.298 billion yuan [1] Company Expansion - As of the end of 2024, Haidilao operated a total of 1,368 restaurants, including 1,332 self-operated locations in mainland China, 23 in Hong Kong, Macau, and Taiwan, and 13 franchise restaurants [1] - The company served 415 million customers throughout the year, with an average daily customer flow exceeding 1.1 million, an increase of 4.5% from the previous year [1] - The average table turnover rate was 4.1 times per day [1] Membership Growth - By the end of 2024, Haidilao's membership exceeded 180 million, with over 52 million active members, reflecting an 8.8% increase from the previous year [1] Franchise Business Development - In 2024, Haidilao officially launched its franchise business, completing the review and establishment of 13 franchise stores by the end of the year [2] - The franchise model has shown strong demand in lower-tier markets, with over 70% of franchise applications coming from third-tier cities and below, including many from county-level cities [2]