Hong Kong's largest IPO this year loses its luster

Despite being touted as the largest IPO in Hong Kong this year, Chabaidao has become the second successful new tea beverage company to list on the Hong Kong Stock Exchange. However, it could not escape the cold wind blowing from the capital market.

On April 23, Chabaidao (02555.HK) officially listed on the Hong Kong Stock Exchange, becoming the "second milk tea stock" in Hong Kong stocks. However, on the first day of trading, Chabaidao's stock price experienced a break, dropping more than 30% from the IPO price of 17.5 Hong Kong dollars. As of the close of trading on April 23, Chabaidao's stock price closed at 12.8 Hong Kong dollars, a decrease of 26.86% from the IPO price, with a total market value of 18.9 billion Hong Kong dollars.

Chabaidao's "fall from grace" in the capital market is due to its slightly high IPO pricing and also reflects the fading popularity of new tea beverages in the market. According to sources in the capital market, there were other new tea beverage brands scheduled to go public this quarter, but considering various factors, the current listing schedule has been postponed.

Of course, compared to other new tea beverage brands that have yet to go public, Chabaidao is relatively fortunate. It also needs to find a way to stay in the game after the hype around new tea beverages subsides.

Disappointment

Nearly three years after the listing of Naixue's Tea, the "first milk tea stock" in Hong Kong, Chabaidao seems unable to break the fate of new tea beverage companies experiencing a break on their first day of trading.

On June 30, 2021, Naixue's Tea (2150.HK) was listed on the main board of the Hong Kong Stock Exchange at a price of 19.8 Hong Kong dollars per share. However, the halo of being the "first new tea beverage stock" did not attract much attention to Naixue's Tea in the capital market. On the contrary, on the first day of trading, Naixue's Tea fell below the IPO price, closing at 17.12 Hong Kong dollars, a 13.54% drop from the IPO price.

Looking at the performance of Chabaidao and Naixue's Tea at the time of listing, they should have been two completely different stories.

From 2021 to 2023, Chabaidao's performance grew rapidly. Over three years, Chabaidao's revenue was 36.4 billion yuan, 42.3 billion yuan, and 57.0 billion yuan respectively, with a compound annual growth rate of 25.1%; the company's gross profit was 13.0 billion yuan, 14.6 billion yuan, and 19.6 billion yuan respectively, with a compound annual growth rate of 22.9%; and the adjusted net profit was 9.0 billion yuan, 9.7 billion yuan, and 12.6 billion yuan respectively, with a compound annual growth rate of 18.2%.

Data shows that in 2023, Chabaidao sold a total of 1.016 billion cups of milk tea, with a total retail sales of approximately 16.9 billion yuan. As of April 5, 2024, Chabaidao had 8,016 stores nationwide, covering all 31 provinces and municipalities, achieving full coverage in all provinces and cities at all levels.

On the other hand, Naixue's Tea was still in a loss-making state at the time of listing. In 2021 and 2022, Naixue's Tea reported a net loss, only turning a profit in 2023 Why couldn't Chabaidao's performance help it avoid the fate of breaking on the first day?

"Capital is not that interested in the milk tea category to begin with." A practitioner in the tea beverage industry said this about Chabaidao's first-day break on the Hong Kong stock market.

In recent years, the lack of interest from capital in new tea beverages has almost become an industry consensus. Zhu Danpeng, a Chinese food industry analyst, believes that in an environment where the overall activity of the Hong Kong stock market is not high, capital is more willing to choose sectors like technology and energy that offer quick returns, and is not as enthusiastic about the food sector that requires a long-term perspective. This has also led to Chabaidao's cold reception in the Hong Kong stock market.

Compared to Nayuki Tea, Chabaidao already showed signs of a lackluster response during the subscription stage. The distribution results announced by Chabaidao show that the company globally issued approximately 148 million shares, raising a net amount of about HKD 2.463 billion, with a sale price of HKD 17.5 per share. The public offering was only subscribed 0.5 times, while the international offering was subscribed 1.11 times.

In contrast, Nayuki Tea issued a total of approximately 257 million shares at a price of HKD 19.8 per share, raising a total net amount of HKD 4.8424 billion. According to the subscription results announced, the Hong Kong public offering received 642,000 subscription applications, oversubscribed by over 432 times, and the international offering was also oversubscribed by 18.18 times.

However, despite Nayuki Tea's strong start, it couldn't maintain its advantage. Currently, its stock price has fallen to HKD 2.28 per share, with a market value of only HKD 3.9 billion.

Enclosure

The experience of Chabaidao's listing in Hong Kong is not good news for tea beverage companies that are still waiting to list or intending to list.

Just after the New Year in 2024, several new tea beverage companies lined up, holding their numbers to submit applications to Hong Kong, joining the competition for the "second milk tea stock" in the Hong Kong stock market. Now, after Chabaidao took the lead in breaking through, Migu Xuebingcheng, Guming, and Shanghainese Auntie are still waiting. News in the market about Chayan Yuese, Bawang Chaji seeking to go public has also been continuous.

Comparing the prospectuses of several tea beverage companies, it can be seen that the stories told by new tea beverage companies are generally similar - franchising, sinking, and going global. However, they have not been able to break out of the enclosure and tell a more "sexy" story to the market.

In recent years, the new tea beverage industry has gradually become saturated, with the previous pattern of high-end, affordable, and popular new tea beverages being continuously disrupted, and various tea beverage companies are constantly converging in terms of price, products, and strategies. Nowadays, most tea beverage products are concentrated in the price range of 10-20 yuan. Among the tea beverage companies queuing up for listing, except for Migu Xuebingcheng, which still occupies the price range below 10 yuan with extreme cost-effectiveness, most other products are in the price range of 10-20 yuan. The downward push in price range also means a shrinking profit margin.

This has led franchising and sinking to become the main operating mode and development direction for tea beverage companies at present.

From the information disclosed in the prospectus, whether it is Chabaidao, Migu Xuebingcheng, or Shanghainese Auntie, revenue from franchise stores accounts for over 90% of their total revenue, and the sinking market is their main market.

Data shows that by the end of 2023, the proportion of Chabaidao's stores in first-tier, new second-tier, second-tier, third-tier, fourth-tier, and below cities was 10.6%, 26.9%, 20.9%, 19.4%, and 22.2%, respectively As of September 30, 2023, approximately 49.0% of Auntie Fang's stores in Shanghai are located in third-tier and below cities.

Despite this, the focus of competition among various tea beverage companies is still on the sinking market. In order to further penetrate smaller county towns, in 2023, Auntie Fang in Shanghai launched a "Light Enjoyment Version" store model specifically designed for consumers in third-tier and below cities, emphasizing cost-effectiveness. The pricing of the Light Enjoyment Version ranges from 2 to 12 yuan, comparable to Heytea, with smaller store sizes and more flexible locations.

Previously focusing on self-operated stores, popular tea brands like Heytea and Naixue Tea have also opened up to franchising, shifting their focus from first and second-tier cities to the sinking market.

This shift is mainly due to the fact that compared to self-operated stores, franchised stores can generate higher gross profit margins. According to the ChaBaiDao prospectus, from 2021 to 2023, the gross profit margin of ChaBaiDao's franchised stores ranged from 34% to 36%, while the gross profit margin of self-operated stores was only about half, approximately 11% to 18%.

As franchising and expansion into sinking markets become the new goals for tea beverage brands, the competition for high-quality franchisees with resources and the ability to scale up store openings is becoming increasingly fierce. The overseas market has also become the next target for tea beverage brands.

According to the ChaBaiDao prospectus, a portion of the funds raised from the IPO will be used to support the supply chain capabilities in overseas markets, with plans to build production and distribution facilities. In 2024, the company plans to establish a supply chain system covering Southeast Asian markets such as Thailand, Vietnam, and Malaysia. In 2025, the plan is to establish distribution centers to support the company's expansion in Southeast Asian markets.

However, prior to this, stores of tea beverage brands such as Heytea, Naixue Tea, and King Tea Princess have already been established overseas.

As new tea beverage brands collectively fall into homogenization, what can tea beverage companies waiting to go public use to convince the capital market and secure financing?