The bubble tea business, in my personal view, is a peculiar business.
Over the years, we have seen brands come and go, and we have seen how the products evolve as we age older. It has come to a stage where most people will have their go-to brands and a clear preference for what suits their palate.
So it’s no mere feat for one brand to suddenly rise above all the existing brands and becomes China’s largest bubble tea chain.
Opting for an out-of-the-box marketing approach that jives well with social media, you may have come cross a bouncy snowman (called Snow King) dancing to a catchy tune on TikTok or Reels.
It might not tastes the most luxurious, but Mixue Group’s (HKG: 2907) stock soared by more than 40% in its inaugural IPO trading day.
The big question: Is there still more room to run for this HKEX IPO?
The growth strategy
Mixue’s rise to become the world’s largest food and beverage chain by number of outlets is mind-boggling.
Throughout my life, I lived with the fact that McDonald’s Corp (NYSE: MCD), Starbucks Corp (NASDAQ: SBUX) and Subway were the most ubiquitous chains in food and beverage.
Only to see a massive and sudden change just a few years back, where Mixue’s Snowman started appearing everywhere across Southeast Asia, marking a massive and sudden shift in the industry.
Just earlier this year, Mixue became the world’s most largest food and beverage business by outlet or store count. It’s no longer McD, so update your random fun facts!
Mixue’s marketing and growth doesn’t rely on a superior product, but rather on ultra-low prices that maximise affordability. Just like AirAsia’s “Now Everyone Can Fly” slogan, Mixue made it possible for everyone to sip on the small joys of life in the form of bubble tea, which had previously evolved via a more premium route under China’s “Wanghong” economy.
It is evident. Looking at the number of outlets in the cities in China, Mixue’s store composition is mainly saturated in third-tier and lower cities, while it is slowly growing its presence in first-tier cities.
Coupled with its cute Snow King image and the infectious theme song, the brand manages to stand out and grabs the attention of thirst-quenchers in the saturated franchised beverage scene.
And with a solid supply chain working behind the scenes, Mixue unlocked the cheat code to rapid expansion, achieving store counts in just a few years that took other chains more than 50 years to reach.
Is Mixue’s blitzkrieg expansion replicable? Yes on paper. I would argue that Mixue took a leaf out of plenty of the existing franchises, and enhanced it to to another level.
Financial
Mixue’s IPO shed light on how it attained profitability. It has some self-operated stores, but most of it are franchised. The gross profit margin difference is huge – Mixue attains a gross profit of around 30% while its self operated stores are only around 14%.
The franchise business model allows Mixue to scale rapidly and lightly – it does not run the stores directly, but collects an upfront franchise fee on top of a cut of revenue from its franchise outlets.
The company’s allure, marketing and brand, on top of affordable upfront investments, is a major conviction point for those trying to start out as a franchise operator. It takes an estimate RM 300k all-in cost to be a Mixue franchisee. Even though it is not necessarily cheap, but compared to other franchises, it is definitely on the lower end.
All it takes to propel a well-built brand like Mixue, is the ability to attract capital and partners willing to grow with the company. With a reasonable franchise fee, that drove the store count expansion, and also Mixue’s franchise revenue and operating revenue.
Catalysts and Risks
Mixue’s product portfolio is diverse. Even though it is well known for its bubble tea, it also has coffee and soft-serve ice cream as offerings. Their offerings are diverse enough to be a pit stop for groups of office workers and tourists.
And with the current generation’s insatiable thirst for boba tea and coffee, Mixue’s affordable offerings hit the sweet spot. The low price point serves as icing on the cake. Repetitive sales helps it to consolidate its raw and packaging material demand, giving it strong negotiating power with suppliers for the best price. Not to also forget its processing plant which can also churn out raw ingredients with optimum efficiency.
We are witnessing a franchised beverage and dessert company enhancing and perfecting the blueprint pioneered by McD and Starbucks.
On the flip side, the ever-evolving tastes of consumers will always be a concern. How long can Mixue continue to delight its customers? Will there ever be an occasion where Mixue fails to deliver a new product that excites its customers, or suddenly falls out of fashion just like the boba brands that we used to know?
It’s alright not to have the answers now, as the company has just surged more than 40% on its initial trading day. But it remains a factor to take note of.
Valuation
Mixue’s latest FY 2023 earnings per share is RMB 8.71, which is HKD 9.30.
With stock prices settling at HKD 290, that is a simple price-to-earnings ratio of 31x.
Using simple extrapolating of the 9M’24 EPS, Mixue’s FY 2024 EPS could end up close to RMB 13 (HKD 13.88). That lowers the P/E down to 21x.
And with fair value of food and beverage business industry trading at an average ~25x P/E, it boils down to the investor’s conviction to take a side.
If Mixue has more room for growth, there is definitely more legs to run on the share price appreciation. Else, the 40% jump on IPO day just put valuations into lofty levels.
My thoughts
There was a time where I followed the Chinese fast moving consumer goods IPO like a hawk. Although I haven’t tried Mixue before, I do have a soft spot for other packaged products – the tidbits and various instant noodles.
The deeper I dug, the more I realised that the Chinese packaged products that Singaporeans can get hold of from Scarlett Supermarket barely scratches the tip of the iceberg. There are just too many choices and varieties within China itself.
The same applies to the franchise food and beverage industry. While there’s always a crowd-pleaser at any given time, it is very difficult to predict if a particular fan favourite can continue to be timeless like McDs and Starbucks.
With that, I am more hesitant to even hold on to a stock like Mixue as a long-term investor. But that is just me.
Just not my cup of tea?
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