Flagging a recent IPO - Chagee (CHA) - orphaned security trading at a large spread to peers

Please have a cup of tea

“I would like you to have a cup of tea” - Boris Johnson

As Peter Lynch famously promulgated, one really fun thing about investing is noticing trends, “flowers” that are blooming around you, and finding ways to cash in on that “insight”, the caveat being you have to be right about the trend of course.

Fad cycles may or may not have legs - see Funko in US and PopMart in HK.

Not too long ago, I noticed PopMart replacing a local major bank outlet in a central shopping mall near to where I live and heedlessly dismissing it with a mere “wth is this?”, to my chagrin of course as the stock has gone parabolic ever since.

I have some friends that have the innate ability to catch trend-waves early and surf em - Crocs jibbitz, Popmart figurines etc, and I try to pay attention to whatever wave they happen to be surfing at the moment.

Well, there is one wave that’s been crashing into my windscreen lately and its this premium fresh milk tea company called Chagee which just IPOed last month on the NASDAQ. This has taken the fresh milk tea scene by storm - from peers all the way to girlfriends absolutely loving this thing and can’t get enough of it. I myself, to medicate the office lull, have drank multiple cups and I’m not one to typically drink such things.

But apart from the fact that there is a Chagee-drinking trend going on anecdotally, the technical set-up of the stock is pretty weird.

There was a surge in fresh milk tea chain listings this year, namely Mixue and Guming on the HK stock exchange - both have done incredibly well, notching ATH’s after a brief sell-down post Liberation day (these are non-tariff names and hindsight :p tells me I should have bought the dip, on Mixue at least). Both up something like 70-130% since listing :o.

On that wave, Chagee also decided to list but not like the others in HK. It sailed across the Pacific to the US and listed on the NASDAQ. However, all its operations are more or less in China/APAC and so there’s sort of a mismatch for the listing to be on a US exchange.

Chagee IPOed on 17th April at $28/share and currently trades around $34 and change, so it hasn’t done too shabby through this turbulent month. The anchor-book was not as hot as say Mixue, which had Hillhouse as a cornerstone investor. Freely tradeable shares, net of anchor book turns out to be pretty tight, ~4% of shares outstanding essentially, a little like Mixue at ~3%. Mixue has done exceptionally well probably because it had the right investor base squeezing into that tight float - it’s an enormously popular franchise in China and the stock is listed just right at their doorstep.

The funny thing here is that Chagee trades at a huge discount to its HK peers as well as Luckin Coffee (LKNCY), listed on the US OTC market. There are obviously some key overhangs on the stock but I think it’s worth taking a look.

Valuation Discount

By my own estimates, at $34, Chagee trades at 19x LTM P/E, Mixue trades at 40x, Guming at 34x and Luckin at 22x (see last column). As you can see, Chagee trades completely divorced from its HK peers, trading down 2% today whilst peers across the Pacific closed green a few hours back.

*This is my Google Sheets dashboard which I created over the previous week and I’m quite proud of it :p

But apart from day-to-day trading dynamics, there is a large valuation discrepancy which we shall go into in a bit. But before that, let’s talk a few background facts.

Chagee, Mixue and Guming are all franchise models whereas Luckin operates a majority of its store. Luckin also deals mainly in coffee so it’s an odd-duck from this group, included because its a Chinese-operated beverage company listed in the US.

Amongst the aforementioned three, Mixue sells cheap beverages - RMB 2 to 8 (US$0.30 - $1.10) - whilst Guming and Chagee are on the premium side, with drinks on average, priced north of 17 RMB (US$2.50).

Mixue has the largest store network - close to 50,000 stores whilst Guming has close to 10,000 store and Chagee at around 6,500. Luckin has 22,000 stores.

Chagee’s growth history is rather crazy. The founders really took blitzscaling by the neck - growing its franchise network by north of 200% in FY23 and ~80% in FY24. GMV grew north of 700% in FY23 and ~170% in FY24 and revenue grew 840% and 170% in FY23 and FY24, respectively. The firm was generating losses prior to FY23 so it’s a pretty recent profit-story.

Management is guiding to grow its store base by another 1,000 to 1,500 stores in FY25. So we’re talking about 20% store growth and likely revenue growth around that ballpark as well. That would obviously be a huge moderation from the previous growth numbers Chagee was putting up and more or less in line with Mixue and Guming, which grew between mid-teens to 20% in FY24.

So forward outlook is alright and as we shall see later, profit margins are rather similar. So why is there such a large discount relative to peers?

First and foremost, delisting risk. Apart from the stock being listed in a public market with the wrong investor base, I’m guessing nobody wants to front-run a potential delisting of Chinese equities from the US stock market. Though it’s worth noting that any liquidity shock in such an event would present an opportunity to buy shares from indiscriminate selling. Luckin has already gone through it - was delisted from the NASDAQ in 2020 post fraud scandal and has performed extremely well since, all whilst being listed on the OTC. You can read more about the previous delisting of Chinese telcos and CNOOC in 2021, here.

Secondly, Chagee is a brand new concept. It was established in 2017, so just a mere 8 years ago. Mixue and Guming for example were established in 1997 and 2010, respectively. Luckin for example was established in 2017 as well and turned out to be a massive fraud. They’ve managed to pivot post-scandal however and outcompete peers in China. Chagee has been putting up this huge growth numbers so perhaps it may arouse some skepticism amongst investors - maybe this whole entire premium tea chain is one big house of cards? One big difference is that whilst Luckin was growing rapidly from 2017 through 2020, its operating losses was ballooning and the firm was burning prodigious amounts of cash - a huge tell on its own and not the case at Chagee.

Thirdly, as a result of rapid-expansion, there has been some cannibalization of store sales (in my view) as recent quarters saw SSSG growth declining - turning -18.4% in Q4 24. Obviously, as per the law of numbers, with the crazy SSSG figures from prior years, there is bound to be some sort of hangover, which sadly reared its ugly head in H2 24.

As per the data, you can see most of the SSSG drag in Q4 24 came from regions where SSSG was absolutely humongous in Q4 23 and where store expansion happened the fastest. Eastern China went from 9 stores in Q1 22 to 1,945 stores in Q4 24, saw 230% SSSG growth in Q4 23 and a -27.3% hangover in Q4 24, for example. Compare this with Southwestern China where the effects are not so pronounced.

Moreover, going forward, the firm will likely conduct more expansions outside of China. Whilst they do not breakout overseas stores data, the average sale/store abroad is allegedly 1.5x that of stores in China.

With regards to comping negative, Mixue and Guming also saw negative SSSG figures prior to listing ( post prospectus, they no longer diclose this figure in their earnings reports).

Mixue (above), saw a -0.6% decline in SSSG, lapping much softer numbers - a mere 12% growth in FY23.

Guming (below), saw negative SSSG growth, also lapping much softer numbers.

Additionally, Luckin Coffee suffered the same fate - on the back of incredible SSSG numbers, FY24 comps turned negative, partly due to price competition as well, but moderated through the year. In Q1 25, the firm managed to generate an 8% SSSG, as the comp base had reset itself.

Luckin saw its multiples compress at the beginning of 2024 but recovered gradually as the SSSG figures improved through time. LTM P/E seemed to have troughed a smidge above 15x in March last year.

There is obviously the risk that Chagee trades down to such a multiple but as mentioned, Chagee operates a predominantly franchise model unlike Luckin which is majority self-operated and so should trade at a higher multiple - like its fellow franchise model peers, Mixue and Guming.

Earnings Adjustments

Notably, in FY24, Chagee ramped up its sales and marketing from ~5.5% of revenue in FY23 to ~9% of revenue in FY24. Both Mixue and Guming, maybe as a result of having more brand equity, spend only 6.5% and 5.5% of revenue on S&M. Luckin spends around 5.5% of revenue on S&M as well.

So whilst Chagee generates the same EBITDA margin as Mixue ~24% give and take (Guming is at ~21%), normalizing for the same S&M will bring Chagee’s margins, the best of the lot. Luckin on the other hand, given its operating model, generates ~15% margins.

Normalizing S&M and taking the additional 3% down to the bottom line would bring LTM P/E for Chagee at ~14x.

Final thoughts and some risks

I’ve contacted a few friends over in China and they’re like yeah “Chagee is the bomb.” In terms of resilience, obviously Mixue seems to be the top dog - it has the cheapest drinks and has been around since 1997 so it clearly knows its way in the competitive Chinese market. Also, the fact that Chagee could rise so quickly in a few years attests to the low barriers to entry within the fresh milk tea market or at least in the premium segment, where Chagee and Guming are playing. There is a risk that Chagee turns out to be a one-hit wonder.

Andy Warhol: "In the future, everyone will be world-famous for 15 minutes."

There is also the possibility that the negative SSSG trends continue into H2 25 which may serve as a share overhang. By Q4 25, the base should have been reset for comps to lap positive.

Everyone’s kind of waiting and twiddling their fingers, hoping for a big consumption stimulus announcement in China - this should provide some extra juice to the stock in the near-term hopefully.

There are a few other ideas - back to more event-driven ish - I’ve been having in the pipeline that I’m still studying or have no time to write about.

Air Lease (AL) for example is something I’ve tweeted a fair bit about and they just put up some good numbers. It’s getting close to mid 50s as I posited 4 days ago. Let’s hope I’m not jinxing it with this quasi-victory lap.