Guming joins China’s tea market party with IPO bid

The tea chain that sells fruity and milky brews in China’s smaller cities has been dubbed a cheaper version of the upmarket Heytea brand

Key Takeaways:

• As of the end of last year, Guming had 9,001 outlets nationwide, but all but six of the stores were franchised
• The company’s profits more than tripled to 990 million yuan in the first nine months of last year, mainly due to sharply reduced losses from fair-value changes

By Fai Pui

China’s craze for trendy tea shops has brought a multitude of flavors to the market and is now brewing up a variety of beverage stocks for investors to sample.

Nayuki Holdings (2150.HK) and Heytea kicked off a new fashion for tea drinking a few years ago by appealing to young consumers. The frenzy quickly spread, and the market boomed, with operators attracted by low barriers to entry and the benefits of highly standardized, replicable products. Nayuki rode the new wave of tea consumption all the way to a listing on the Hong Kong Stock Exchange in 2021.

With a profusion of similar products, price has become a critical factor for those younger tea-drinkers. Amid a raging price war, more tea shop chains have turned to the stock markets to raise battle funds. Chinese fruit tea chain Sichuan Baicha Baidao filed to list on the Hong Kong Stock Exchange in August last year, and now two other tea shop brands are taking the same path. Mixue Group, sometimes called the Pinduoduo of the tea business after the reasonably priced ecommerce platform, and Guming Holdings Ltd., a cheaper alternative to the premium Heytea brand, officially applied for Hong Kong listings in early January.

Both companies have used competitive pricing to appeal to consumers in China’s smaller, less affluent cities.

In November last year, we reported on this strategy in our article “Mixue Bingcheng brews up success with age-old formula: low prices”. Guming, which specializes in selling freshly made fruit tea, milk tea and coffee, has employed similar tactics, focusing on expanding its franchise network to grab market share in China’s second- and third-tier cities.

At the end of last year Guming had 9,001 outlets and described itself in its prospectus as China’s biggest mid-priced store brand for freshly made tea. But the market-leading distinction is only valid for that very specific slice of the bubble tea business.

Guming divides China’s retail arena for freshly brewed teas into three price categories. In the high-priced market, the average tea cost is 20 yuan ($2.79) or more, while shops selling products priced between 10 yuan and 20 yuan belong in the middle category, and those below 10 yuan land in the lower price band. By this classification, Guming only ranks top in the mid-priced market, coming second across all price ranges based on its 19.2 billion yuan in gross merchandise value (GMV) and the number of stores last year.

The tea maker’s overall GMV grew 37.2% last year compared with 2022, and its number of stores rose 35%. However, only six of its 9,001 store outlets are self-operated while the rest are franchised businesses. Almost 79% of the stores are in cities ranked as second tier and below.

In fact, the teas themselves are not the profit driver. The franchise model is the real money spinner, whereby Guming sells goods and equipment to franchisees and collects service fees from them. The company logged 4.38 billion yuan in revenue in 2021, rising 26.9% to 5.56 billion yuan in 2022. In the first nine months of last year revenue climbed to 5.57 billion yuan, 33.9% higher than in the previous year’s equivalent period. About 4.48 billion yuan of that revenue derived from sales of goods and equipment to franchisees, while 1.08 billion yuan came from service fees from franchisees. Sales from self-operated stores accounted for only 9.47 million yuan of revenues. In a nutshell, the more franchisees the company can enlist, the greater the income.

The business may be highly dependent on franchisees, but they are becoming more profitable. The prospectus said that each franchisee with more than two years of experience with Guming manages an average of 3.1 stores. Guming’s GMV per store has grown from about 2.2 million yuan in 2021 to 2.3 million yuan in 2022 and around 2.5 million yuan last year.

Guming said the operating profit on a single franchised store was 376,000 yuan last year, with an operating profit margin of 20.2%. That is higher than the average of about 10% to 15% in China’s mid-priced tea shop market during the same period, according to a study cited in the prospectus. No wonder the franchise network is growing fast.

Price war heats up

In China’s so-called “sinking market” of lower tier cities, the battle for tea drinkers is intensifying. Guming faces a stiff challenge from Mixue’s 30,000 Chinese outlets on the one side and incursions from the initially upscale providers Nayuki and Heytea on the other. Nayuki cut the price of all its products to less than 30 yuan in 2022 and introduced a new “Lite” range costing between nine and 19 yuan per cup. It even launched a 9.9 yuan campaign last August, later joined in the price war by Heytea. Other beverage makers are piling in, as Luckin Coffee (LKNCY.US) and Cotti Coffee battle it out with a 9.9 yuan per cup promotion.

With a rumored IPO fund-raising target of $300 million, Guming appears to be seeking to bolster its chances of victory by, for example, investing in more efficient digital systems, supply chain management, marketing and brand promotion, or by deepening franchise relationships.

The company attracted capital in 2020 from the likes of Long-Z Private Equity Investment Fund, Sequoia Capital, US-based hedge fund investors Coatue and Abbey Street, which held 8%, 4%, 1% and 0.2% of the company’s shares prior to the IPO filing. Guming founder Wang Yun’an holds 43.2% of the company’s shares and controls 79.5% of the voting rights through an agreement to act in concert.

An influx of franchisees has helped Guming to stay consistently profitable in recent years. The tea shop chain posted 20.14 million yuan in full-year profit in 2021, surging to 387 million yuan the following year. In the first nine months of last year the company’s profits more than tripled to 990 million yuan. The leap was mainly due to a whopping reduction in fair-value changes from 310 million yuan in the first nine months of 2022 to just 21.67 million yuan in the same period last year. But even without this windfall, operating profit still rose 63.3%.

While the rival chains jostle to become the second tea shop stock on the Hong Kong exchange, the firm that blazed the share trail has been feeling the chill from a harsh equity climate. Nayuki listed in Hong Kong at the end of June 2021 at HK$19.8 per share, earning a market value of HK$32.3 billion. But the price has since spiraled to just HK$3, leaving the company worth a little over HK$5 billion.

Based on Nayuki’s forward price-to-earnings (P/E) ratio of about 25 times, Guming could enjoy a market value of up to 32.8 billion yuan, or about HK$36 billion. The calculation assumes a full-year profit of 1.32 billion yuan, extrapolated from the company’s nine-month figure of 990 million yuan.

However, as more tea companies compete for IPO funds in a weak Hong Kong market, Guming may find it difficult to persuade investors to partake at such a high price.

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