Weak sentiment may leave Auntea Jenny thirsty for better valuation

Key Takeaways:

• Auntea Jenny has revived its Hong Kong listing plan, reporting its profit fell 12% in the first half of last year while its revenue rose just 6.4%
• The bubble tea chain operator had nearly 8,500 stores in its network at the middle of last year

By Cheng Shui Tong

It was high tea time in June 2021 when Nayuki (2150.HK) became Hong Kong’s first bubble tea stock, in a festive IPO that was 451 oversubscribed. But the air quickly drained from that bubble, as China’s market for premium tea drinks showed increasing signs of saturation with the opening of thousands of new stores.

As the only listed player in the group, Nayuki’s stock reflected the industry’s growing indigestion, quickly falling below its IPO price and into a downward spiral for the last three years, at one point down more than 90% from the IPO price.

Now, many of its peers from China’s crowded premium tea party are coming to market in a second wave, including Auntea Jenny (Shanghai) Industrial Co. Ltd., which filed an updated prospectus with the Hong Kong securities regulator late last month. Like rivals Mixue, Guming and Chabaidao (2555.HK), Auntea Jenny filed its original IPO prospectus about a year ago.

But in the end, Chabaidao was the only one from the group that actually made it to market in April. Its stock plummeted nearly 40% on its first trading day, leaving IPO investors badly bruised. And despite a brief rally in October, the stock quickly lost ground again and is now trading around 40% below its IPO price.

Concerned about the potential for similar disasters, China’s securities regulator suspended further offshore IPOs for Chinese bubble tea chains last September, and only resumed giving the green light at the end of last year.

Auntea Jenny was one of the first to restart its stalled listing. But the industry is hardly back on solid footing, as evidenced by Nayuki’s plunge into the red in the first half of last year, as well as Chabaidao’s decision to cancel its interim dividend, even though it later announced a special year-end dividend to make amends with shareholders.

Smaller city focus

To compete and win in the challenging market, Auntea Jenny has tried to differentiate itself from its peers making a sea of products that are all very similar. Its homey brand conveys its origins in Northern China, in contrast to the trendier Heytea and Nayuki that were at the forefront of the bubble tea craze, and Mixue and Chabaidao that have strong national footprints. By comparison, Auntea Jenny has so far stayed mostly in its Northern China home and focused on satisfying bubble tea drinkers in lower-tier markets.

The phrase “lower-tier markets” is mentioned frequently in the company’s prospectus. It refers to third- and lower-tier cities, townships and rural areas with large populations and vast land but with limited consumer power compared to top cities like Beijing and Shanghai. As a result, people in those areas demand more value for their spending.

According to Auntea Jenny’s filings, the company’s stores located in third- and lower-tier cities increased from 48.8% of its total in 2021 to 50.3% at the end of June last year, higher than the share for its main competitors.

According to third-party data in the prospectus, the freshly made tea market in such third and lower-tier cities is expected to be the fastest growing segment in China between 2023 and 2028, with estimated annual growth of 22.8% in terms of gross merchandise value (GMV). Tea shops in third and lower-tier cities average 273 shops per million people, far lower than the 474 shops per million in first-tier cities, indicating significant room for growth.

Despite its large size, the company has yet to find a metric where it’s first among its rivals. It ranks only fifth in terms of market share based on GMV, with just 4.6% of the market, far lower than the 20.2% share for leader Mixue. In terms of pricing, its products typically cost between 7 yuan and 22 yuan each, more than Mixue’s rock-bottom range of 2 yuan to 8 yuan, though lower than more premium brands in the 10 yuan to 20-yuan range. Lacking any other claim to being number one, it has resorted to calling itself the “Number 1 freshly made tea beverage brand in Northern China.”

Low store opening costs

The search for a “number one” monicker wasn’t always so difficult. The company was the fastest growing among China’s top five freshly made tea chains between 2022 and 2023 in terms of store count and GMV growth rate, with the former more than doubling from 3,776 at the end of 2021 to 8,437 at the end of June 2024. It could expand its store network so quickly by banking on attractively low costs for the franchisees that run most of its shops. At the end of 2023, the average cost of opening an Auntea Jenny store was 275,000 yuan ($37,550), well below the industry average of 350,000 yuan.

The company is devoting its resources to building up its base in lower-tier markets, which is helped by the low cost of opening new stores. About 30% of the company’s nearly 5,000 franchisees operate more than one store. Its focus in one region of China allows it to operate warehouses and other logistics centers closer to its target markets that are sometimes in remote cities, further boosting its attraction to franchisees.

Growth strategy aside, another key factor to luring investors is setting a valuation that’s low enough to leave plenty of room for upside. When Nayuki applied for its 2021 listing, its price-to-sales (P/S) ratio stood at over 30 times, even though it didn’t turn profitable until 2023, only to fall back into the red last year.

Chabaidao is also profitable, with a price-to-earnings (P/E) ratio of 20 times at the time of its April IPO last year. Since then its shares have fallen 40%, though a similar 40% drop in its profit in the first half of last year means its trailing P/E ratio should be roughly unchanged.

Profits under pressure

Like many of its peers, Auntea Jenny’s profits are coming under pressure in the overheated market. Its profit fell 12% year-on-year in the first half of last year to about 168 million yuan, which would equal just 340 million yuan ($46 million) on an annualized basis. Its revenue grew just 6.4% to 1.66 billion yuan over that period, far slower than its 52% revenue growth for all 2023.

Such weak numbers could make a rumored $300 million fundraising target for its listing a tall order. So, to appeal to investors, Auntea Jenny may need to settle for a more modest valuation than what it may have previously targeted. That could also mean less money to be raised. But that might be the trade-off the company has to make to convince investors to give it their money in such a cutthroat sector.

This article is from an unpaid external contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy.