Nayuki Brews Up Traditional Teahouse Concept

Key Takeaways:

• Nayuki is experimenting with a new store format selling traditional-style teas at affordable prices, with the opening of a concept store in Shenzhen
• The premium tea seller recorded its first-ever adjusted profit in the first half of this year, but could face challenges as consumers rein in their spending

By Doug Young

Premium tea seller Nayuki Holdings Ltd. (2150.HK) is returning to its Chinese roots.

That’s the latest message coming from the nation’s largest publicly listed seller of modern-style premium tea drinks containing such 21st century touches as tapioca bubbles, cheese foam and fruity flavors. Seeking to expand its appeal to a more traditional tea-drinking crowd, Nayuki officially opened its first Nayuki teahouse concept store over the weekend.

The first new store looks distinctly Chinese, including lots of bamboo and a courtyard-style theme, unlike most of Nayuki’s nearly 1,200 stores across China that more resemble leading coffee chains like Starbucks SBUX and Luckin LKNCY. And yet the store’s location in Shenzhen, a modern boomtown that’s home to many of China’s top tech companies, underscores that this new chain is still squarely targeted at the younger crowd.

Nayuki announced the new chain in a post last week on social media, and provided quite a few pictures to show off its Chinese-style credentials. It didn’t provide any details on its plans for the format, indicating that it will probably be in a trial phase for the next year before Nayuki decides on how and whether to expand it.

The company is currently in the midst of an aggressive expansion for its trademark stores, which are broadly divided into Starbucks-style places where people can sit down and enjoy a cup of premium tea with friends, and smaller-format stores for the grab-and-go crowd. So, this new format represents a new direction as the company tries to set itself apart from a crowded Chinese market for premium tea products.

There are a few threads to this story that could mark the start of a new chapter in the development of tea drinks in China.

One of those is a sort of nostalgia and cultural rediscovery happening among the country’s youth, with dressing in Tang Dynasty-style clothing particularly popular these days. Such people would undoubtedly prefer to be seen in their traditional-style robes enjoying a cup of tea with friends at these traditional-style places rather than at a Starbucks.

Indeed, the new teahouse format serves mostly traditional loose-leaf teas, as well as a wide range of snacks. Equally important, those drinks and snacks are all quite affordable, with the 22 tea products on the menu selling for as little as 5 yuan, or less than $1, to up to 21 yuan ($2.89), according to one media report on the opening.

That’s quite important, as most of the traditional-style teahouses you now see throughout China are pricey places, with the average bill per customer often totaling 100 yuan or more. That means Nayuki hopes to make these new teahouses a more-affordable place for younger people to gather and hang out.

That could be an important factor as China’s economy shows recent signs of slowing sharply after years of breakneck growth. As that happens, consumers are becoming more budget-conscious and may be starting to reduce their spending on relatively discretionary purchases like premium tea. Reflecting that, Nayuki reported its average order per store fell more than 10% to 32.4 yuan in the first half of this year from 36.7 yuan a year earlier.

Chinese Company

One of the other major threads behind this story is cultural, while a third factor is more financial. On the cultural side, Nayuki is trying to carve out a more Chinese identity for itself, shedding a more Japanese-style that it cultivated for most of its life. On the financial side, the company reported its first-ever adjusted profit in the first half of this year, and is trying hard to stay in the black and ahead of the competition in a very overheated market.

On the cultural side, Nayuki is very cognizant of the potential to come under attack by Chinese nationalists for its attempts to look Japanese. Two other Chinese companies, retailer Miniso MNSO and sportswear seller Li Ning (2331.HK), both came under fire from Chinese nationalists last year for missteps related to Japanese-style products.

In both instances, the companies’ stocks suffered big losses and they were confronted with public relations disasters before the scandals finally died down. Nayuki undoubtedly realizes the dangers of such attacks, and has been making increasing attempts to look more Chinese over the last year, which could include the rollout of these latest traditional teahouses.

Then there’s the profitability issue. After reporting losses since 2019, the first year for which data is available, Nayuki posted its first-ever adjusted profit of 70.2 million yuan in the first half of this year, reversing a 249 million yuan loss in the year-ago period. But much of the move to profitability was due to cost controls, including greater emphasis on the smaller-store format to save rental fees.

The reality is that China’s premium coffee and tea markets are quite saturated, filled with other big names like HeyTea, Mixue Bingcheng, XSQ Tea, GoodMe, Auntee Jenny, and ChaBaiDao, to name a few. So far, none of those are publicly listed, though a recent Bloomberg report indicated that many may be getting ready to make IPOs. Such listings would give investors more choices from this crowded sector, which would inevitably draw some money away from Nayuki’s stock.

Despite its move to profitability, Nayuki’s shares haven’t fared too well this year. The stock is down about 35% since January, and now trades at a lackluster forward price-to-earnings (P/E) ratio of just 11, and an equally weak price-to-sales (P/S) ratio of 1.2. By comparison, Luckin trades at a lofty current P/E of 37, and an equally inflated P/S ratio of 4.4, while domestically listed Xiangpiaopiao (603711.SH) trades at ratios of 22 and 1.8, respectively.

We wouldn’t write off Nayuki just yet, though we do expect it will face challenges maintaining its profitability as it runs out of cost-cutting options and competition remains fierce. In the meantime, the latest move into traditional-style teahouses looks like an interesting diversification play, but is likely to remain a niche area without major growth potential.