China's Chagee Files For Nasdaq IPO; What Investors Need To Know

The premium tea chain has filed to list on the Nasdaq, reporting its revenue rose more than 20-fold between 2022 and 2024

Key Takeaways:

• Chagee has filed for a New York IPO, becoming the first of China's major premium tea chains to opt for a U.S. listing over the more popular Hong Kong
• The company's revenue and profits have soared in the last two years on a major expansion, but the growth showed signs of slowing towards the end of last year

Ask any Chinese tea or coffee chain who's their role model, and the last answer you'll get will be Starbucks. The U.S. giant rose to fame for its comfortable spaces and positioning as a lifestyle brand, in contrast to the hurried, grab-and-go culture that has come to dominate China's modern tea and coffee scene.

But Chagee Holdings Ltd. is breaking from that tradition, aiming to differentiate itself from an increasingly crowded premium tea drink sector filled with tens of thousands of stores all clamoring for attention. In its latest break with the crowd, the company made its first public filing on Wednesday for a Nasdaq IPO – becoming the first in its field to opt for New York over a Hong Kong stock market brimming with recent new listings by other premium tea chains.

Chagee didn't disclose a fund-raising target, though other media reports have said the amount is likely to be around $500 million or more. That could make it the largest listing by a Chinese firm in New York since robotaxi operator Pony AI raised about $400 million in a Nasdaq IPO last November.

The company hopes to wow investors with its strong growth story, while also catering to a New York crowd with more refined investment tastes, but also less familiarity with Chinese consumer brands than investors in Hong Kong. It will also need to address potential concerns about growing consumer caution that is affecting sales for everyone in China as the nation's economy slows after three decades of breakneck growth.

Chagee is a relatively late arrival to China's premium tea sector, founded in just 2017 by Zhang Junjie, a 20-something at the time, whose rags-to-riches story has become famous in China. Zhang has tried to differentiate his chain by focusing on China's tea-drinking roots, making drinks consisting of simple tea and milk, eschewing extras like caramel pearls, cheese foam and fresh fruit that are all the rage among nearly all the other chains.

To drive home its traditional positioning, the company also features a stylized picture of Consort Yu, a famous figure in Peking Opera, as its logo, and uses traditional-style designs for its products, which are all made with tea and milk in various combinations. The company considers the simplicity of its products and menu one of its strengths – a lesson that Starbucks is now learning as it tries to pare down its own menu to improve its service and efficiency.

"(Our) creation, in 2017, was inspired by how international coffee chains have made coffee drinking both a worldwide lifestyle and a social concept since the 1970s," the company said in the prospectus. "This success has made us believe that tea drinking needs to be transformed too — and led us to use the power of technology and brand to make tea drinking a modern-day experience that connects people and cultures around the world."

While Starbucks is never mentioned in the lengthy document, the U.S. chain has become famous for turning coffee drinking into as much a lifestyle statement as an actual product choice. While Chagee's shops aren't quite as warm and homey as its U.S. role model, they feature seating areas and are far more welcoming than the tiny spaces used by many of its rivals, often consisting of little more than a window where you can grab your tea or coffee and leave after ordering using an app.

Explosive growth

One place where Chagee doesn't differ much from its peers is its recent explosive growth, which it has achieved by using a franchising model. The company's roots lie in Southwest China's Yunnan province, famous for its pu'er-style tea, but it has rapidly expanded to the rest of the country over the last three years.

The chain is the brainchild of Zhang Junjie, now 30, who came from a modest background and first became familiar with the industry while working at a Taiwanese tea chain. After starting as an ordinary employee, he was rapidly promoted and became regional managing director in just three years. He briefly left the industry in 2015, before returning two years later to start Chagee.

The company's store count has jumped roughly sixfold from 1,087 shops in the fourth quarter of 2022 to 6,440 at the end of last year, according to the prospectus. Franchisees accounted for 97% of its stores at the end of 2024, and for 94% of its revenue last year. Most of its stores are in China, though the company also has 156 outside China.

Chagee didn't discuss its overseas expansion plans in the prospectus. But other media reports have indicated it sees the overseas market as its next major frontier, with plans to operate 1,000 to 1,500 worldwide outlets by the end of this year, including its first U.S. store that could open in Los Angeles in April.

The company's overall revenue has grown at lightning pace in step with its store expansion, rising from just 492 million yuan ($68 million) in 2022 to 12.4 billion yuan ($1.7 billion) last year. Its efficiency has grown as it scaled up, helping it to lower its cost of materials to 48.4% of total revenue last year from 59.2% in 2022. The company generated its first profit of 803 million in 2023, and last year the figure more than tripled to 2.51 billion yuan.

While things look generally rosy for Chagee, one thing it can't avoid is a slowing economy in China that is causing consumers to rein in their spending. That fact shows up most clearly in Chagee's same-store GMV, which grew just 2.7% last year after rising by a turbocharged 94.9% in 2023. The slowdown was most notable in the second half of the year.

"As we continued to scale and expand the scope and density of our teahouse network across China, the consumer demands have been better fulfilled while our store-level performance has also naturally begun to follow a normalized growth trajectory, as reflected in the decrease in average monthly GMV per teahouse in China in recent quarters and the deceleration in quarterly same-store GMV growth or decline," the company said.