New tea beverage brands are racing for Hong Kong IPO.

On February 14th, Shanghai Auntie (Shanghai) Industrial Co., Ltd. (referred to as "Shanghai Auntie") submitted an application to the Hong Kong Stock Exchange, becoming the fourth new tea beverage brand to attempt to impact the Hong Kong stock market in the past six months.

As of the first three quarters of 2023, Shanghai Auntie has 7,297 stores. According to Insglück Consulting, Shanghai Auntie is the fourth largest freshly made tea beverage brand in China. If we do not consider the mid-range price range (10-20 yuan), Shanghai Auntie is the freshly made tea beverage brand that covers the most cities in China.

Nevertheless, Shanghai Auntie has not received equal attention from the capital markets.

According to its IPO prospectus, in the latest C round of financing completed by Shanghai Auntie in February 2024, institutional investors, including Shanghai Hi-Road Food Technology's (300915.SZ) wholly owned subsidiary Shanghai Yipu Enterprise Management Co., Ltd, subscribed to 2.43 million yuan of registered capital with 0.122 billion yuan. Shanghai Auntie's registered capital increased to 0.102 billion yuan as a result.

Taking the above financing amount as an estimate, the latest post-investment valuation of Shanghai Auntie is about 5.127 billion yuan, and its single store valuation is about 0.7 million yuan. In comparison, another leading tea beverage brand completed a financing of 1 billion yuan in 2023, with a valuation of about 18 billion yuan and 7,117 stores. Its single store valuation was as high as 2.53 million yuan, more than three times that of Shanghai Auntie.

In fact, despite having a network of stores covering the entire country, Shanghai Auntie has been struggling with "appearance anxiety" in recent years. In 2022 and 2023, it successively launched the Huka brand and the Shanghai Auntie Light Enjoyment version, hoping to deepen its development in the coffee and sinking tea beverage fields.

According to its prospectus, in its attempt to list on the Hong Kong stock market, Shanghai Auntie plans to use the funds to enhance its digital capabilities, research and develop products and equipment, strengthen its supply chain capabilities in production, processing and warehousing, enhance its brand for further expansion, carry out marketing activities, and supplement its working capital.

Expansion's Price

A little-known fact is that Shanghai Auntie is almost not in Shanghai, with only 60 stores, less than 1%, in the city. In contrast, it has as many as 336 stores in the northern Tianjin market.

This is related to Shanghai Auntie's expansion path.

In 2013, Shanghai Auntie launched Wugu Milk Tea, which added grains as ingredients to milk tea beverages and was well received in northern markets. However, after setbacks in opening up the southern market, founder Dan Weijun began to adjust his strategy and turned to fresh fruit tea in 2019, with "Fresh Fruit Tea" written on Shanghai Auntie's signboards.

According to its prospectus, as of the first three quarters of 2023, Shanghai Auntie has covered 343 cities from Mohe in the north to Sanya in the south with its 7927 stores, of which 49% are in third-tier and lower cities.

Shanghai Auntie claims that, in terms of store numbers, it holds a "leading position" in the mid-range freshly made tea beverage brands in the sinking market.

But the cost of a wider coverage of stores is Shanghai Auntie's relatively weak profitability. In 2022, its gross margin was only 21.8%, far lower than the 29.97% of ancient tea and the 35.7% of tea baodao during the same period.

The main reason is that 80% of Shanghai Auntie's cost comes from raw materials, and the procurement of main raw materials, fresh fruits, is subject to regional limitations and has high transport losses.

For instance, mangoes purchased by Shanghai Auntie mainly come from Guangxi, and mulberries are purchased from Sichuan. The cost and difficulty of transportation increase with each additional region covered by stores, as transporting goods from Guangxi to Guangdong is not the same as transporting them to Heilongjiang.

According to Zhejiang Securities analyst Ma Li, the regional attributes of freshly made tea beverages are mainly due to the purchase and transport radius limitations of fresh fruit raw materials.

However, the average spending per customer of Shanghai aunties is lower than that of their competitors at the retail level.

According to analyst Ma Li from Zheshang Securities, the average spending per customer of Shanghai aunties is 1-3 yuan lower than that of Guming and Chabaida, and the gross margin of a single store is 40%, while the latter two are 65% and 60%, respectively. In other words, for the same cup of milk tea priced at 20 yuan, Shanghai aunties earn 5 yuan less in gross profit than their competitors.

Left hand sinking, right hand coffee.

Watching Snow King, the brainwashing hit, and HEYTEA holding hands with Fendi, Shanghai aunties seem a bit anxious.

This also makes the company's sales expenditures not low.

From 2021 to the third quarter of 2023, Shanghai aunties' sales expense ratios were as high as 10.85%, 12.66%, and 10.12%, respectively, far higher than those of comparable companies at the single-digit percentage level; management expense ratios and financial expense ratios are also at the forefront of the industry.

This has led to, in the first three quarters of 2023, although the fall in raw material prices has driven Shanghai aunties' gross margin up to 31.15%, their net margin level is only 12.77%, which is about 5 and 3 percentage points lower than Guming and Mijixuecheng, respectively.

It's no wonder Auntie is anxious. In fact, the new tea drink track is too coiled, with the middle price range accounting for about 45%.

According to analyst Ma Li from Zheshang Securities, in terms of store numbers, Mijixuecheng's national market share is about 7%, with Guming, Chabaida, Shanghai aunties, and Shuyishaoxiancao ranking 2-5, all in the middle price range, with similar market share gaps and white-hot competition.

And the path for each participant to deal with the competition is only to open more stores.

This is especially true for Shanghai aunties, who specialize in fresh fruit tea, because more stores can form economies of scale to mitigate costs.

At present, in order to open more stores, Shanghai aunties have two solutions. One is to launch a sub-brand called Shanghai Auntie Light Enjoyment for third-tier and lower cities, lowering the price range to 2-12 yuan to further attack the sinking market; the other is to try to sell coffee in Shanghai Auntie stores, launching the Shanghai Coffee brand, with prices ranging from 13-23 yuan, almost the same as Luckin's price range.

According to the prospectus, as of the third quarter of 2023, it already has 40 Light Enjoyment stores and sells coffee in 1964 Shanghai Auntie stores.

This means that Shanghai Auntie, who has not yet decided the winner in the fiercely competitive middle-tier tea drink market, is simultaneously entering the low-price tea drink and coffee markets, and its "far ahead" three-fee level compared with its peers may continue in the short term.

Under such circumstances, will the Shanghai Auntie, whose single-store valuation in the primary market is inferior to that of its peers, be reevaluated in the secondary market? The market is watching closely.