IPO tea party set to resume with Guming’s regulatory nod from China?

The bubble tea chain’s stalled Hong Kong listing plan could resume following its official registration by the China Securities Regulatory Commission

Key Takeaways:

• The China Securities Regulatory Commission has officially registered the Hong Kong IPO plan by Guming, indicating the listing can go forward after a lengthy delay
• The move could show the regulator will allow other delayed bubble tea listings to resume, including one by industry leader Mixue

By Doug Young

The temperature in China’s bubble tea has blown hot and cold this year, reflecting the market’s huge potential but also intense competition that’s boiled up to meet demand. Compounding the situation is rapidly weakening consumer sentiment that’s causing many Chinese to cut back their spending, especially on more discretionary items like premium teas that can cost as much as 30 yuan per cup, similar to the price of a latte from Starbucks.

The year got off to a hot start, with four of the industry’s top bubble tea chains filing to make Hong Kong IPOs in January and February alone. But then things quickly cooled when Chabaidao (2555.HK) became the first of the group to list in May, and saw its shares tank. Sentiment towards the group got so bad that Mainland China’s securities regulator, the China Securities Regulatory Commission (CSRC), reportedly intervened in September by informally banning new bubble tea IPOs in Hong Kong.

Now, it appears that ban is quietly being lifted with the CSRC’s formal registration on Monday of the Hong Kong IPO plan from Guming Holdings Ltd., one of the other three companies besides Chabaidao to file IPO applications in January and February.

For those less familiar with the situation, Hong Kong and Mainland China each has its own separate securities regulator. The CSRC is Mainland China’s regulator, and in theory doesn’t have any direct say over the Hong Kong IPO process. But Chinese companies that want to list in Hong Kong or the U.S. must all officially register with the CSRC, which can use that process to effectively delay or even kill a company’s overseas listing plan.

The CSRC was using that mechanism to hold up the listings of Guming, as well as those from the other two applicants, industry leader Mixue and the smaller Auntea Jenny. Thus, its new formal registration of Guming’s IPO application appears to show it has lifted its ban on such bubble tea listings, and we may soon see Guming file an updated IPO prospectus.

A check of the Hong Kong Stock Exchange website shows Guming’s original application in early January lapsed after it failed to make its IPO within six months of the filing. It has yet to make any updated applications since that original one, similar to Mixue, whose original IPO application in January has also lapsed.

So, why the regulatory change of heart? It certainly isn’t due to improvement in the bubble tea market, where conditions have become even worse in the last few months due to rapidly weakening consumer spending. Instead, the CSRC appears to have become the latest weapon in Beijing’s arsenal to try and stimulate the nation’s slumping economy.

A Reuters report, also on Monday, revealed that the CSRC held two meetings in October attended by more than 10 major investment banks and law firms, both Chinese and foreign. At those meetings, it told the group it was working to speed up its approvals for some offshore listings, and also asked the group to assist in that process.

Funding drought at home

The regulator’s motivation for speeding up offshore listing approvals appears to be its desire to help stimulate the Chinese economy by providing companies with funding that’s recently much harder to obtain from domestic sources. The CSRC has sharply limited new IPOs in Mainland China’s own A-share markets in Shanghai and Shenzhen over concerns about weak investor sentiment.

At the same time, many private equity investors have also scaled back their activity over concerns about the slowing economy and geopolitical tensions between China and the U.S. The limited amount of new funding that’s still available, both from domestic IPOs and private equity investors, has mostly been going to emerging sectors like autonomous driving, new energy and semiconductor chips.

That’s left more mundane consumer companies like bubble tea makers out in the cold, even as many are coming under extreme pressure due to the intense competition combined with weakening consumer sentiment.

A case in point is Nayuki (2150.HK), which was China’s lone Hong Kong-listed bubble tea chain for three years after its 2021 IPO. In its latest financial report, Nayuki said its revenue fell 1.9% year-on-year to 2.54 billion yuan ($350 million) in the first half of 2024, as its average order value fell 15% to 27.5 yuan from 32.4 yuan a year earlier. As its business sagged, the company swung into the red with 440 million yuan loss, reversing a 65 million yuan profit a year earlier.

Chabaidao looked even weaker, reporting its revenue fell 10% year-on-year in the first six months of the year to 2.4 billion yuan, even as its store count rose by about 20% to 8,385 outlets. Its profit also tumbled by more than half to 237 million yuan from 588 million yuan a year earlier.

In one slightly encouraging sign, Chabaidao last week announced a special dividend of HK$0.36 per share. That came five months after it abruptly canceled its previously announced annual dividend of 0.28 yuan per share, which not only angered investors but also signaled the company might be worried about its financial condition.

Both Chabaidao and Nayuki shares rallied on Monday, rising 9% and 4.5%, respectively. But even after the rally Chabaidao is still down about 40% from its IPO price, while Nayuki is also down around 50% this year.

We can’t really say much about Guming’s current financial situation, since the company hasn’t filed any updated information since its original IPO submission in January. The company was still doing relatively well in 2023, reporting in the original IPO application that its revenue rose 34% year-on-year to 5.57 billion yuan in the first nine months of last year as its profit more than tripled to 990 million yuan, mostly on non-operational factors.

The new registration of Guming’s IPO looks encouraging in one sense, since it means the listing can now go ahead in Hong Kong, and could be followed by the other listings by Mixue and Auntea Jenny. But it’s far from clear that investors will be interested in these companies due to their deteriorating business. That means most may be forced to dramatically downsize their fundraising targets from previous plans, and even then they may have a tough time convincing investors to buy into their shares.

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