A tea party resumes and the allure of Nvidia

Bubble tea listings on the Hong Kong Stock Exchange have resumed and a small Chinese maker of fasteners surges after a new tie-up with Nvidia.

By Doug Young & Rene Vanguestaine

Earlier this year, the Hong Kong market was poised for a wave of bubble tea IPOs, with several major chains, including industry leader Mixue, filing applications. However, initial enthusiasm quickly cooled after the dismal post-IPO performance of Chabaidao, which lost three-quarters of its value at one point. This led to what appeared to be an informal ban on further listings within the sector by China’s securities regulator. Now, the tap seems to be turning back on, with Guming receiving regulatory approval to proceed with its listing. This raises a critical question: What has truly changed?

Short answer: market sentiment. The Chinese government has been actively trying to prop up the market, with varying degrees of success. The poor performance of Chabaidao likely triggered a regulatory response, a knee-jerk reaction to prevent further market instability. Now, with the market showing signs of recovery, especially since late September, regulators appear more comfortable allowing these listings to proceed. While this might be good news for the companies awaiting IPO approval, it also raises some concerns about the stability and predictability of the regulatory environment.

Moreover, the fundamentals of the bubble tea industry itself paint a concerning picture. The market is quite saturated, with most chains operating thousands of stores across China. Adding to this is a “consumption downgrade” trend, where consumers are cutting back on discretionary spending, including on everyday treats like bubble tea. While stock markets might be doing better, these companies face significant headwinds. Stark warnings are coming from publicly listed coffee companies like Luckin and Starbucks’ China business, particularly Luckin, whose margins have been shrinking despite revenue growth due to continuous store openings and competitive pressure.

The retail sales figures further reinforce this concern, with recent figures showing the slowest pace of growth in three months, falling below expectations despite stimulus measures. This doesn’t bode well for discretionary spending in 2025, a year when other bubble tea companies, like Mixue and Auntea Jenny, are also expected to try their luck at the market.

ZJK and Nvidia: The Allure of Big Tech Tie-Ups

Shifting gears, the story of ZJK provides a contrasting but equally insightful perspective. This company, a manufacturer of fasteners for high-tech products, saw its stock nearly triple after announcing that Nvidia had requested samples of its fasteners for potential use in the chip giant’s next-generation cooling systems. While the stock has since given back some of those gains, it remains significantly higher than before the announcement. This highlights the immense power of association in the tech world. However, it’s crucial to understand the context: a request for samples is not a guarantee of future business. It’s akin to a prom invitation — marriage isn’t guaranteed from there.

This situation reeks of what we often see as “capital market management.” Companies often capitalize on hype, particularly when it involves a prominent name like Nvidia and a hot sector like AI, to generate positive market sentiment. While ZJK has existing relationships with other major clients like BYD, Foxconn, and DJI, the new Nvidia connection, at this stage, is purely speculative.

This leads us to a broader discussion about investing in the tech supply chain. These companies, often operating in the background, can reap significant rewards by aligning themselves with successful tech giants. The example of Foxconn’s rise alongside Apple is a prime illustration. If you can hitch your wagon to a very successful company that sells millions of units of high-demand products, you’ve got something going for you.

However, these investments are inherently risky. These suppliers are often forced to offer significant discounts to secure contracts with their larger clients. They are also vulnerable to losing contracts due to various factors, including quality issues, production problems, or changes in the client’s strategy. There’s always the risk of losing a major client. Discovering these “upstream” companies can be lucrative, but thorough due diligence is paramount.

Whether it’s a trendy beverage or a humble fastener, you must look beyond the surface.

About China Inc

China Inc by Bamboo Works discusses the latest developments on Chinese companies listed in Hong Kong and the United States to drive informed decision-making for investors and others interested in this dynamic group of companies.

Subscribe to China Inc on your favorite app:

Apple Podcasts

Spotify