Bubble tea will test limits of China’s consumers

Nayuki Holdings

08/08/2023 02:39

(The author is a Reuters Breakingviews columnist. The opinions
expressed are his own. Refiles to add link in fourth paragraph.)
    By Thomas Shum
       HONG KONG, Aug 8 (Reuters Breakingviews) - Bubble tea
may be the new bellwether for the Chinese consumer. At least
half a dozen boba-drink makers, including China’s largest chain
by store count, Mixue Bingcheng, are planning initial public
offerings in Hong Kong or the United States, Bloomberg reports.
Margins are low in a market that generated $20 billion in sales
in 2021, per research firm Momentum Works. But the sector can
thrive – even if Beijing holds back on much-needed stimulus.
    It’s an awkward time to pitch global investors the cheap
sugary beverage popular among China’s Gen Z. Shoppers in the
world’s second-largest economy are tightening their belts as
confidence weakens and youth unemployment hits a record-high
21%. Total returns at once-popular consumption plays like Yum
China  9987.HK , which operates mainland KFC and Pizza Hut
stores, and the $16 billion hotpot restaurant operator Haidilao
International  6862.HK  are just 4% and 1.3% respectively since
the start of the year, far below the 17% at the S&P 500  .SPX .
Shares in Hong Kong-listed Nayuki  2150.HK , the country’s only
publicly traded bubble tea chain, have dropped 70% since their
debut in 2021.
    Still, there are promising signs for the public market
wannabes. Nayuki, known for its cheesy foam toppings, is
currently worth roughly $1 billion, or around 16 times its
forecast earnings for the next 12 months, according to analysts
polled by Refinitiv. That’s higher than e-commerce giant
Alibaba’s  9988.HK ,  BABA.N  multiple of 11 times and on par
with Tencent  0700.HK . And even though its full-year operating
profit margin is estimated to be a razor-thin 6% in 2023,
revenue growth is on track to hit 63%.
    One reason is that Chinese consumers may be paring back in
big-ticket discretionary items like luxury goods and cars, but
they are still willing to spend in other areas. July data from
research firm China Beige Book show strong growth in
restaurant-chain and travel sales; Starbucks  SBUX.O  reported
an impressive 46% year-on-year jump in comparable China revenue
in the quarter ending July 2. As consumption shifts to lower-end
products, that bodes well for sellers of the tapioca ball-packed
beverage: one of Mixue’s drinks retails for 8 yuan on average,
roughly a quarter of the price of a cup of coffee.
    With Beijing unlikely to roll out meaningful stimulus – such
as cash handouts to households – bubble-tea makers can still
deliver a potent brew for investors.

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    CONTEXT NEWS
    At least six bubble tea companies are looking to go public
in either Hong Kong or the United States, Bloomberg reported on
July 24 citing people familiar with the matter. 
    In 2022, China’s biggest bubble tea chain by store count,
Mixue Bingcheng, filed for a $918 million initial public
offering in Shenzhen. The deal has been on hold, sources told
Bloomberg, and the company has yet to make a final listing
location. 

 (Editing by Robyn Mak, Katrina Hamlin and Pranav Kiran)
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