HAIDILAO: WILL THE TREND CONTINUE?

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Technicals

Looking at the 4H chart we can see that a hanging man candle has formed at the top of the chart which signifies a short term drop in price and rsi was almost 70 before dipping. When a hanging man forms in an uptrend, it indicates that buyers have lost their strength. While demand has been pushing the stock price higher, on this day, there was significant selling. While buyers managed to bring the price back to near the open, the initial sell-off is an indication that a growing number of investors think the price has peaked.

Recognition criteria for Hanging Man:

The long lower shadow is 2-3 times of real body

Little or no upper shadow

The real body is at the upper end of the trading range.

The colour of the body is not important, though a red body is more bearish than a green body.

The long-term direction of the asset is usually unaffected, as hanging man patterns are only useful for gauging short-term momentum and price changes. Even though traders often count on candlestick formations to detect the movement of individual stocks, it is also appropriate to look for candlestick patterns in indexes, such as the S&P 500 or Dow Jones Industrial Average. Candlesticks can be also be used to monitor momentum and price action in other asset classes, including currencies or futures.

How to trade the hanging man

When seeing such a pattern, consider initiating a short trade near the close of the down day following the hanging man. A more aggressive strategy is to take a trade near the closing price of the hanging man or near the open of the next candle. Place a stop-loss order above the high of the hanging man candle. The following chart shows the possible entries, as well as the stop-loss location.

One of the problems with candlesticks is that they don’t provide price targets. Therefore, stay in the trade while the downward momentum remains intact, but get out when the price starts to rise again. Hanging man patterns are only short-term reversal signals.

Things to look out for when trading the hanging man pattern.

Average volume, longer lower shadows and selling on the following day. By looking for hanging man candlestick patterns with all these characteristics, it becomes a better predictor of the price moving lower. Stick to trading only these strong types of patterns.

Fundamentals

Founded in 1994 and listed in 2018, Haidilao International Holding Ltd (“Haidilao”) (HKG:6862) is a global fast-growing Chinese cuisine restaurant brand focusing on hotpot cuisine. In this article, we will take a closer look at the industry and business model of the group to better understand if it is worth an investment.

The hot pot restaurant industry is a highly fragmented, saturated and highly competitive market. The top five players in the industry represent just 5.5% of the total market share. Haidilao has a mere 2.2% market share — which is more than double the second largest player who has a 0.9% market share. That being said, Haidilao is considered a mid-to-high-end restaurant operator with average spending of around RMB100 per guest. According to an report by Frost & Sullivan, the price point of RM60-200 per guest is expected to generate the fastest growth at a compounded annual growth rate (CAGR) of 11.3% in 2017-2022, versus the ultra-premium category (RMB200) at 10.3%, and mass-market category (<RMB60) at 9.7%.

Haidilao also enjoys a competitive advantage compared to its competitors due to its paramount importance placed on customer service. The staff attention to the customers is unmatched to its peers in the industry. Complimentary drinks and snacks, card and board games, and even delicate manicure services by professional nail stylists are provided whilst in the waiting area. Hot face towels, bib covers, protective cell phone bags etc. are offered just prior to dining are what makes Haidilao stand out in this fierce competition. In an famous interview on Jeff Bezos in 1999 on Amazon just before the dot-com bubble, the world’s richest man have emphasised the importance of customer service many times, and Haidilao seems to have ticked all the boxes.

Having rallied 20% in Dec 2020 alone and up by more than 300% from its IPO in 2018, Haidilao is no doubt growing significantly, which propelled its founder, Zhang Yong to be the richest man in Singapore. Haidilao’s three-year median payout ratio to shareholders is 20% while company is retaining 80% of its profits to drive growth, which can be seen in its growing number of outlets. Also something worthy to take note, Haidilao started paying out dividend in FY2019, albeit a mesely 0.6%, it is rather uncommon for such strong growth stock to pay out dividend.

One important thing to take note is the rising middle to high income earners in China. Consulting firm McKinsey predicts that the number of middle class households could reach 550 million in 2022. This phenomenon will be well capitalised by Haidilao growing number of outlets in Tier 2 and Tier 3 cities as its citizens are able to afford to dine at the once “high-end” restaurant to them. Also, as Chinese New Year is approaching, the short term outlook for Haidilao seems bright, as millions of Chinese will be dining out at restaurants to have their reunion dinner. With the pandemic somewhat in control in China, we could see major spike in earnings in the next quarter.

Conclusion : Looking at the technicals you may like to open a short position for a short term dip, but in the long term it may be viewed as a good time to wait for an appropriate point of entry such as areas of resistance turned support or the 50/200 EMA. Considering the fundamentals it is a good buy for long term investments.