Chabaidao files for IPO

The country’s third-largest premium tea chain operator has grown rapidly using a franchise model, and outperforms its peers in terms of gross margin

Key Takeaways:

  • Chabaidao’s revenue grew 34.8% to 5.7 billion yuan in 2023, as the company has been consistently profitable over the last three years
  • The premium tea chain operator plans to keep growing through greater penetration in lower-tier cities, expanding overseas and by diversifying into coffee


By Hugh Chen

Add yet another newcomer to the increasingly crowded party of premium tea makers hoping to whet investor appetites in Hong Kong with yet another rapid growth story.

This time it’s Baicha Baidao Industrial Co. Ltd., which filed a new IPO prospectus with the Hong Kong Stock Exchange on Friday, following its initial filing last August. The move puts Baicha Baidao into direct competition with a growing list of chains to file for Hong Kong IPOs since the start of this year, alongside Mixue Group, Guming, and Auntea Jenny (Shanghai) Industrial.

Founded in 2008 and based in Southwest China’s Sichuan province, Baicha Baidao, which operates its stores under the Chabaidao name, is one of China’s largest tea drink chains. According to third-party data cited in its prospectus, it ranked third in the country’s market for freshly-made tea chains in terms of retail sales with 6.8% of the industry’s 247.3 billion yuan ($34.8 billion) in sales last year.

Chabaidao’s position as a top-three player could certainly attract investors, though they will also be paying close attention to how the company navigates its next growth phase in the highly competitive market. Staying ahead of the competition is increasingly important, given signs that China’s premium tea market is quickly becoming saturated, filled with dozens of chains selling products in a variety of flavors at a wide range of price points. Growing consumers caution with China’s slowing economy is throwing a new ingredient into the mix.

Chabaidao is controlled by founder Wang Xiaokun and his wife, who hold 18.02% and 5.74% of the company’s shares, respectively. They also jointly control Hengsheng Herui, the company’s largest shareholder with 67.67% ownership.

After completing its latest fundraising round last June, the company attained a valuation of 17.5 billion yuan, according to financial media Caixin, meaning it could get a market cap of more than $2 billion if it completes its IPO this time. The company conducted two rounds of fundraising during the year totaling 970 million yuan.

Like many of its competitors, Chabaidao has rapidly expanded its store network by using a franchising business model, allowing it to grow rapidly by leveraging franchisee investments rather than relying solely on its own funding.

Chabaidao’s store count reached 7,927 at the end of 2023, covering most of China in both large and smaller cities. According to a recent report from the research group Zhaimen Canyan, this count made Chabaidao the third-largest tea chain in China after Mixue and Guming, which had over 36,000 and 9,028 stores as of January, respectively.

Chabaidao’s sales have expanded rapidly in recent years with its growing store network, including a 34.8% rise to 5.7 billion yuan last year from 4.2 billion yuan in 2022 and 3.6 billion yuan in 2021.

The company primarily targets the mid-range tea market, with most products priced between 10 yuan and 20 yuan, or the equivalent of $1.50 to $3. That segment happens to be one of the most competitive, also served by Guming, Auntea Jenny and Shuyi Shaoxiancao, among others, which have all posted similarly rapid growth using a franchised business model.

Gross margin outperformer

Franchised locations account for nearly all of Chabaidao’s footprint, as well as those of Auntea Jenny and Shuyi Shaoxiancao – the fourth and fifth largest chains in China with 7,613 and 6,843 stores respectively, according to Zhaimen Canyan. Companies using the franchising model mainly generate revenue by selling equipment and materials for tea production to their franchisees, making cost control paramount to be competitive.

One key metric shows Chabaidao may be outperforming its rivals in that regard. Its gross profit margin consistently exceeded 34% between 2021 and 2023, ahead of Auntea Jenny at 31.2% for the first nine months of 2023, and Guming at a similar 31% over the same period.

Chabaidao has also consistently been profitable over the past few years despite pandemic-related challenges. Its net profit reached 1.1 billion yuan in 2023, while the figure for the previous two years was 756 million yuan and 954 million yuan, respectively. Guming and Auntea Jenny have also remained profitable, with Guming earning 990 million yuan and Auntea Jenny 324 million yuan for the first nine months of 2023.

With the market quickly saturating, all of the chains will feel pressure to show investors how they can continue growing while also remaining profitable.

Chabaidao detailed several such strategies in its prospectus, including boosting its penetration into China’s smaller, underserved cities and expanding overseas. The company cited third-party data saying freshly-made tea shop sales in lower-tier Chinese cities reached 179.8 billion yuan in 2023, comprising over 70% of the total premium tea market, and is expected to grow to 408 billion yuan by 2028.

Chabaidao said it plans to bolster its presence in such smaller cities through incentives for its franchisees, such as discounted franchise fees and complimentary operations and management training courses.

On the overseas front, a major priority for Chabaidao would be Southeast Asia, where the market is expected to grow from 32.9 billion yuan in 2023 to 78.3 billion yuan in 2028, according to third-party research cited in the prospectus.

Another strategic priority for the company to maintain its growth involves expanding its product mix into the coffee segment that is also quickly becoming saturated with players like Starbucks (SBUX.US) and Lavazza at the high end, and Luckin (LKNCY.US) and Manner at the lower end. Last month the company launched its first self-operated coffee shop branded Coffree. Chabaidao said it plans to progressively offer freshly-made coffee products under that independent sub-brand, aiming to leverage its operational expertise to diversify beyond tea.

At the end of the day, the crowded state of the market means that execution will determine whether Chabaidao’s strategies can succeed. After all, the company is hardly alone in pursuing growth by expanding in smaller cities, diversifying its product mix, and moving overseas.

The lower-tier markets Chabaidao is targeting are already focus areas for Guming, Auntea Jenny, Shuyi Shaoxiancao and even premium brands like Nayuki Holdings (2150.HK) and Heytea. All of those must also contend with entrenched leader Mixue, which targets the super low-end of the market. Southeast Asia remains a crowded priority destination as well.

And as we’ve noted, a move into the coffee space will just take Chabaidao into another highly competitive realm. The bottom line is that China’s separate but similar coffee and tea parties are rapidly boiling over, making consolidation almost inevitable in the crowded market.  

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