Key Takeaways:
- As of the top of final 12 months, Guming had 9,001 shops nationwide, however all however six of the shops have been franchised
- The corporate’s income greater than tripled to 990 million yuan within the first 9 months of final 12 months, primarily on account of sharply diminished losses from fair-value adjustments
By Fai Pui
China’s craze for stylish tea retailers has introduced a mess of flavors to the market and is now brewing up a wide range of beverage shares for buyers to pattern.
Nayuki Holdings (2150.HK) and Heytea kicked off a brand new style for tea consuming a number of years in the past by interesting to younger shoppers. The frenzy shortly unfold, and the market boomed, with operators attracted by low limitations to entry and the advantages of extremely standardized, replicable merchandise. Nayuki rode the brand new wave of tea consumption all the way in which to an inventory on the Hong Kong Inventory Trade in 2021.
With a profusion of comparable merchandise, value has change into a essential issue for these youthful tea-drinkers. Amid a raging value warfare, extra tea store chains have turned to the inventory markets to boost battle funds. Chinese language fruit tea chain Sichuan Baicha Baidao filed to checklist on the Hong Kong Inventory Trade in August final 12 months, and now two different tea store manufacturers are taking the identical path. Mixue Group, generally known as the Pinduoduo of the tea enterprise after the moderately priced ecommerce platform, and Guming Holdings Ltd., a less expensive various to the premium Heytea model, formally utilized for Hong Kong listings in early January.
Each firms have used aggressive pricing to enchantment to shoppers in China’s smaller, much less prosperous cities.
In November final 12 months, we reported on this technique in our article “Mixue Bingcheng brews up success with age-old components: low costs”. Guming, which makes a speciality of promoting freshly made fruit tea, milk tea and occasional, has employed comparable techniques, specializing in increasing its franchise community to seize market share in China’s second- and third-tier cities.
On the finish of final 12 months Guming had 9,001 shops and described itself in its prospectus as China’s largest mid-priced retailer model for freshly made tea. However the market-leading distinction is just legitimate for that very particular slice of the bubble tea enterprise.
Guming divides China’s retail enviornment for freshly brewed teas into three value classes. Within the high-priced market, the common tea price is 20 yuan ($2.79) or extra, whereas retailers promoting merchandise priced between 10 yuan and 20 yuan belong within the center class, and people under 10 yuan land within the lower cost band. By this classification, Guming solely ranks high within the mid-priced market, coming second throughout all value ranges based mostly on its 19.2 billion yuan in gross merchandise worth (GMV) and the variety of shops final 12 months.
The tea maker’s total GMV grew 37.2% final 12 months in contrast with 2022, and its variety of shops rose 35%. Nevertheless, solely six of its 9,001 retailer shops are self-operated whereas the remaining are franchised companies. Nearly 79% of the shops are in cities ranked as second tier and under.
The truth is, the teas themselves are usually not the revenue driver. The franchise mannequin is the true cash spinner, whereby Guming sells items and gear to franchisees and collects service charges from them. The corporate logged 4.38 billion yuan in income in 2021, rising 26.9% to five.56 billion yuan in 2022. Within the first 9 months of final 12 months income climbed to five.57 billion yuan, 33.9% increased than within the earlier 12 months’s equal interval. About 4.48 billion yuan of that income derived from gross sales of products and gear to franchisees, whereas 1.08 billion yuan got here from service charges from franchisees. Gross sales from self-operated shops accounted for less than 9.47 million yuan of revenues. In a nutshell, the extra franchisees the corporate can enlist, the higher the revenue.
The enterprise could also be extremely depending on franchisees, however they’re changing into extra worthwhile. The prospectus stated that every franchisee with greater than two years of expertise with Guming manages a mean of three.1 shops. Guming’s GMV per retailer has grown from about 2.2 million yuan in 2021 to 2.3 million yuan in 2022 and round 2.5 million yuan final 12 months.
Guming stated the working revenue on a single franchised retailer was 376,000 yuan final 12 months, with an working revenue margin of 20.2%. That’s increased than the common of about 10% to fifteen% in China’s mid-priced tea store market throughout the identical interval, in line with a examine cited within the prospectus. No surprise the franchise community is rising quick.
Worth warfare heats up
In China’s so-called “sinking market” of decrease tier cities, the battle for tea drinkers is intensifying. Guming faces a stiff problem from Mixue’s 30,000 Chinese language shops on the one facet and incursions from the initially upscale suppliers Nayuki and Heytea on the opposite. Nayuki lower the value of all its merchandise to lower than 30 yuan in 2022 and launched a brand new “Lite” vary costing between 9 and 19 yuan per cup. It even launched a 9.9 yuan marketing campaign final August, later joined within the value warfare by Heytea. Different beverage makers are piling in, as Luckin Espresso LKNCY and Cotti Espresso battle it out with a 9.9 yuan per cup promotion.
With a rumored IPO fund-raising goal of $300 million, Guming seems to be looking for to bolster its probabilities of victory by, for instance, investing in additional environment friendly digital programs, provide chain administration, advertising and marketing and model promotion, or by deepening franchise relationships.
The corporate attracted capital in 2020 from the likes of Lengthy-Z Non-public Fairness Funding Fund, Sequoia Capital, US-based hedge fund buyers Coatue and Abbey Avenue, which held 8%, 4%, 1% and 0.2% of the corporate’s shares previous to the IPO submitting. Guming founder Wang Yun’an holds 43.2% of the corporate’s shares and controls 79.5% of the voting rights by an settlement to behave in live performance.
An inflow of franchisees has helped Guming to remain constantly worthwhile lately. The tea store chain posted 20.14 million yuan in full-year revenue in 2021, surging to 387 million yuan the next 12 months. Within the first 9 months of final 12 months the corporate’s income greater than tripled to 990 million yuan. The leap was primarily on account of a whopping discount in fair-value adjustments from 310 million yuan within the first 9 months of 2022 to only 21.67 million yuan in the identical interval final 12 months. However even with out this windfall, working revenue nonetheless rose 63.3%.
Whereas the rival chains jostle to change into the second tea store inventory on the Hong Kong alternate, the agency that blazed the share path has been feeling the chilliness from a harsh fairness local weather. Nayuki listed in Hong Kong on the finish of June 2021 at HK$19.8 per share, incomes a market worth of HK$32.3 billion. However the value has since spiraled to only HK$3, leaving the corporate value a bit over HK$5 billion.
Based mostly on Nayuki’s ahead price-to-earnings (P/E) ratio of about 25 occasions, Guming may get pleasure from a market worth of as much as 32.8 billion yuan, or about HK$36 billion. The calculation assumes a full-year revenue of 1.32 billion yuan, extrapolated from the corporate’s nine-month determine of 990 million yuan.
Nevertheless, as extra tea firms compete for IPO funds in a weak Hong Kong market, Guming could discover it troublesome to steer buyers to partake at such a excessive value.
This text is from an exterior contributor. It doesn’t characterize Benzinga’s reporting and has not been edited for content material or accuracy.