China tea IPO bubbles up on skinny consumers

Nayuki Holdings

28/09/2022 02:59

(The author is a Reuters Breakingviews columnist.  The opinions
expressed are her own.)
    By Yawen Chen
       HONG KONG, Sept 28 (Reuters Breakingviews) - A cup of
bubble tea usually costs as much as $5 in Shanghai or Beijing.
One company is pouring them for roughly a fifth of the price
with staggering success. Mixue Bingcheng, which means “ice
castle built with sweet snow” in Chinese, is floating in one of
the country’s biggest initial public offerings this year. As the
economy stalls, spending habits are likely to shift in its
direction.
    Founder Zhang Hongchao started his business with a humble
stall selling shaved ice in 1997. He and his brother, who now
own the majority of Mixue, have since expanded into bubble tea
and coffee, retaining a low-price strategy. Mixue sells most of
its drinks for just six to eight yuan ($0.8). It uses cheaper
ingredients like milk powder and frozen fruit, and targets small
rural towns. 
    Mixue doubled its footprint in the last two years and now
boasts over 20,000 outlets across China, four times the store
count of Starbucks  SBUX.O . Its pitch is a sharp contrast to
the premium appeal of the U.S. coffee brand and others like Hong
Kong-listed domestic bubble tea rival Nayuki  2150.HK  which has
a flagship outlet on the Asian city’s Victoria Peak. Despite
catering to a lower spending crowd, Mixue’s IPO implies an
up-market valuation. 
    Assuming the same 120% year-on-year revenue growth and 18%
net profit margin as last year, Mixue’s expected $9 billion
market capitalisation would be 29 times its earnings in 2022.
The same as Starbucks, per Refinitiv forecasts. 
    There are some key differences in the business models:
whereas Starbucks is protective about its brand and operates its
own stores in China, Mixue works as a franchise and 70% of its
revenue in 2021 came from supplying raw material to its outlets.
The company saves on rent and labor, and focuses on improving
its supply chains. Loss-making Nayuki also operates most of its
stores and has lost 70% of its market value since its debut last
year. 
    Mixue’s rise is particularly impressive against the frequent
Covid-19 related lockdowns hampering consumption and the
services sector. As China’s Generation Z worries about
stagnating income and job cuts, Mixue, like Alibaba-rival
Pinduoduo  PDD.O , may be benefiting from a consumer downgrade. 
  
    Follow @ywchen1 on Twitter
    CONTEXT NEWS
    Chinese teahouse and ice cream chain Mixue Bingcheng on
Sept. 22 filed for a proposed 6.5 billion yuan ($908 million)
initial public offering in Shenzhen. 
    Mixue plans to offer up to 40 million new shares, or 10% of
the enlarged capital. 
    The company posted a 2021 net profit of 1.9 billion yuan,
according to its prospectus.
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 (Editing by Una Galani and Thomas Shum)
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