China's leisure tea market appears to be eyeing a breakout this year.
Zhengzhou, Henan province-based Mixue, a specialist in ice cream and tea beverages with 36,153 stores at home and abroad, has applied for an IPO in Hong Kong on Tuesday.
On the same day, Zhejiang province-based Guming, another tea-based beverage seller with more than 9,000 stores, applied for an IPO, also in Hong Kong.
Four months ago, Chengdu, Sichuan province-based ChaPanda, a tea beverage firm with about 5,000 stores, applied for an IPO in Hong Kong.
Market sources said all these three players hope to join Shenzhen, Guangdong province-based Nayuki as successful listed companies in the new tea beverage segment. Nayuki listed in Hong Kong in 2021.
Tea-based beverage players' IPO plans, they said, confirm that the already fierce competition among China's on-premise tea beverage players is intensifying further. The IPO plans also highlight the industry's emphasis on franchising and supply chain management, experts said.
Mixue mainly offers teas priced at an average 6 yuan (84 cents).
In December 2020, its A round investment attracted three investors — Longzhu Capital, the venture capital arm of Chinese internet giant Meituan Dianpin, Hillhouse and CPE-Fund.
At that time, the company's valuation was estimated at 23.3 billion yuan, giving the collective stake of 85.56 percent of Mixue's founder brothers Zhang Hongchao and Zhang Hongfu a valuation of nearly 20 billion yuan.
When he was still a student at the Henan University of Economics and Law in 1997, Zhang Hongchao founded the first Mixue store that sold ice cream.
The turning point came in 2005 when Mixue's ice cream, priced 1 yuan, became popular. In 2013, its introduction of iced lemonade priced 3 yuan was also received well as the drink used fresh fruits. The brothers invested in a supply chain to secure their own ingredients, thereby exercising quality control and adopting a strategy that made their products affordable.
Mixue has five production bases, covering ingredients like sugar, milk, tea, coffee and fruit. As of Sept 30, the company's annual production capacity reached about 1.43 million metric tons.
Mixue has seen strong growth in revenue and profit in the past two years. In the first nine months of last year, revenue reached 15.4 billion yuan, up 46 percent year-on-year, generating a net profit of 2.5 billion yuan, up 51 percent. In 2022, revenue was 13.6 billion yuan, up more than 31 percent over 2021, yielding a profit of 2 billion yuan, up 5.3 percent.
Mixue said its strengths lie in standardization and scale. With a menu of 35 items, it focuses on teas with lemon and coconut ingredients, which helps lower costs.
Adoption of the franchise model helped Mixue to grow and achieve scale. By Sept 30, almost all of its stores ran as franchises, helping Mixue to penetrate 90 percent of China's county-level markets.
Jason Yu, general manager of Kantar Worldpanel, a marketing research provider, said: "Mixue's business model primarily relies on franchise operations, with the majority of its revenue generated from selling goods and equipment to franchise stores, profiting from supply rates. This approach effectively mitigates the risks associated with directly operating individual stores."
Mixue differentiates itself through efforts like consistently strengthening its supply system, which enables the brand to expand its product categories from fresh ice cream and teas to coffee, achieving scalable expansion across regions and product categories, Yu said.
China Insights Consultancy predicted that the global on-premise beverage market will grow from $721.8 billion in 2022 to $1.11 trillion in 2028. The market potential has driven more established brands to eye IPOs.
Kenny Tang, chairman of the Hong Kong Institute of Financial Analysts and Professional Commentators, said that given Mixue's high brand recognition and its affordable beverages, its biggest advantage, its IPO application is expected to be approved by Hong Kong Exchanges and Clearing Ltd, which operates the local stock exchange.
Once listed, Mixue's shares are expected to perform well initially, but long-term prospects will depend on the overall development of the beverage industry, Tang said.
Kenny Ng, securities strategist at Everbright Securities International, said the investor community appears to be undervaluing leisure beverage categories like tea drinks and different types of coffee, compared to two or three years ago, as reflected in the stock performance of Nayuki.
Ng further said that with competition intensifying and brands expanding their stores, gross profit margins will likely decline more.
Looking ahead, the Chinese mainland, which is home to numerous leisure beverage brands, is expected to see market dynamics change as the pressure on consumption growth increases. Companies that fail to effectively implement unique branding or product differentiation strategies are expected to face more competition in the long term, Ng said.
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