Has Nayuki, which has been listed, really started to "roll" with its open franchise model and achieved its first-ever profit?

Since its listing on June 30, 2021, Naixue (02150), which has been losing money for more than two years, has finally presented its first "profit report card" since going public.

According to the financial report data, in the first half of 2023, Naixue achieved a revenue of 2.594 billion yuan, a year-on-year increase of 27%; adjusted net profit was 70.2 million yuan, a significant turnaround from the loss of 249 million yuan in the same period of 2022; store operating profit was 473 million yuan, a year-on-year increase of 142%, with an operating profit margin of 20.1%, a year-on-year increase of 9.7 percentage points.

As the most competitive track in the domestic tea beverage industry, Naixue has managed to turn its losses into profits. There are many highlights in this achievement. What will be the company's growth potential in the future?

Stable revenue growth, with a total of 1,194 stores

Further analysis of the financial report reveals that Naixue's "report card" for its tea business has many bright spots, as follows:

In terms of revenue, overall revenue in the first half of the year remained stable and showed growth. Bottled beverages performed well, while cup lids and baked products gradually became less profitable.

In terms of brand performance, in the first half of the year, Naixue's tea shop revenue reached 2.354 billion yuan, a year-on-year increase of 25.35%, accounting for 90.8% of total revenue and serving as the company's business center. Revenue from bottled beverages was 157 million yuan, a year-on-year increase of 83.75%, accounting for 6% of total revenue. Revenue from cup lids was 33 million yuan, a year-on-year decrease of 24.07%, accounting for 1.3% of total revenue. Other revenue was 49 million yuan, a year-on-year increase of 31.5%, accounting for 1.9% of total revenue.

In terms of business lines, in the first half of the year, revenue from freshly made tea beverages was 1.905 billion yuan, a year-on-year increase of 29%, accounting for 73.5% of revenue, an increase of 1.5 percentage points compared to the same period last year. Revenue from baked products was 366 million yuan, a year-on-year decrease of 4%, accounting for 14.1% of revenue, a decrease of 4.5 percentage points compared to the same period last year.

In terms of revenue sources, the proportion of in-store orders, self-pickup orders, and delivery orders was 15%, 41%, and 44% respectively, with year-on-year changes of -4.9 percentage points, +5.6 percentage points, and -0.7 percentage points. Among the delivery orders, third-party delivery platform revenue accounted for 37%, while self-operated platform revenue accounted for 6.9%. In addition, as of the first half of 2023, the company had approximately 66 million members, an increase of 36%, with a monthly active member count of approximately 4.3 million and a monthly repurchase rate of approximately 23%.

It can be seen that in the first half of the year, Naixue's tea shops, as the company's core source of revenue, continued to play a pivotal role. Bottled beverages quickly opened up the market with their competitive advantages of convenience, wide distribution, and low unit price, and are expected to become the company's second growth curve. However, cup lids, since the listing of Naixue's tea, have seen a continuous decline in revenue and total revenue share, gradually becoming a less profitable business for the company. Additionally, the once promising baked goods business has also encountered a decline, mainly due to low gross profit and high losses, which seems to contradict the PRO small store fast-paced model that Naixue is currently promoting. From the perspective of profitability, the first half of the year saw the first profitable earnings, with significant cost reduction and efficiency improvement at the operational level.

Strictly speaking, this can be considered as the first audited financial report showing profitability since Naixue's listing. Although Naixue achieved a profit of 48.2 million yuan in the first half of 2021, the financial report was not audited and was only reviewed by an external unit, so it cannot be considered a true listing financial report. Since its listing on the Hong Kong Stock Exchange on June 30, 2021, Naixue, as the "number one new tea drink stock" in China, has not delivered any profitable performance until now, so this achievement is undoubtedly eye-catching.

In terms of specific reasons, Naixue's ability to achieve profitability this time is mainly due to the significant effect of "cost reduction and efficiency improvement". In the first half of the year, the company's raw material costs, employee costs, property rental and related expenses, and other asset depreciation and amortization as a percentage of revenue were 31.8%, 26.4%, 14.0%, and 5.5%, respectively, with a year-on-year change of +0.1, -8.4, -1.8, and -0.7 percentage points. Except for the increase in raw material costs, other costs showed a downward trend, especially the significant decrease in employee costs.

As the cost reduction efforts finally paid off, Naixue's profitability in the first half of the year also significantly improved. In terms of gross profit margin, the company achieved a gross profit margin of 68.2% in 2023H1, almost the same as the previous year. In terms of net profit margin, the company achieved a net profit margin of 2.5% in 2023H1, turning losses into profits.

In addition, in terms of store opening performance, the progress is slightly lower than expected, and the first batch of franchised stores will officially open at the end of the year.

As of the end of June 2023, Naixue had a total of 1,194 tea drink stores, a net increase of 126 from the end of 2022. Among them, the number of stores in first-tier, new first-tier, second-tier, and other cities was 414, 410, 266, and 104, respectively, with a net increase of 41, 53, 24, and 8. The company will continue to adhere to the strategy of increasing the number of directly operated stores in high-tier cities and plans to open 500 new directly operated stores every year in the next 2-3 years (compared to the previous guidance of 600 stores for 2023).

In July 2023, the company announced the opening of franchising, mainly targeting low-tier cities with fewer directly operated stores. With the company's improvement in digitalization and automation capabilities and management level, it is expected to promote the smooth operation of the franchising model, diversify the company's business risks, and contribute to the company's profitability. Considering the time required for franchisee selection, training, store decoration, etc., it is expected that the first batch of franchised stores will officially open by the end of this year, and the speed of store openings under the franchising model is expected to accelerate.

Can opening up franchising break the "industry consolidation"?

Although Naixue's semi-annual report highlights many positive points, there are also hidden challenges slowly emerging.

Being in the highly competitive new tea drink market, Naixue can only maintain its leading position by constantly "consolidating" itself.

It is well known that the milk tea market is highly competitive. Due to the low entry barriers and lack of significant technological barriers, there are many players in this market. According to the "2022 New Tea Drink Research Report" published by the China Chain Operation Association, as of the end of 2022, there were approximately 486,000 new tea drink stores, compared to only 378,000 at the end of 2020. In just two years, the number of new tea drink stores has increased by more than 100,000. And it's still during the pandemic.

As more and more competitors enter this race, it also means that this race is gradually shifting from incremental competition to stock competition, reaching the "ceiling" of growth.

According to the "2022 New Tea Beverage Research Report" released by the China Chain Operation Association, the market share of new tea beverages in 2022 is about 104 billion yuan, an increase of 3.7% compared to 2021. According to data from Narrow Gate Restaurant, as of now, the number of Heytea stores has exceeded 24,000, making it the largest in the industry; Guming ranks second with more than 8,000 stores; Shuyi Shaoxiancao and Chabaida have nearly 7,000 stores, ranking third; Shanghai Auntie follows closely with 6,900 stores. To some extent, the new tea beverage track has entered a new stage of stock competition.

At this moment, Heytea has to make a big move and open up franchising, joining the "internal competition".

On July 20th of this year, Heytea officially announced the launch of the "Partner Program", transforming from a direct-operated to a "direct-operated + franchising" dual-driven tea brand.

As of the first half of 2023, Heytea has 1,194 existing stores and is expected to accelerate store expansion in line with industry trends. During this period, the company opened a net of 126 stores, achieving stable expansion of store terminals. In the future, the company will enter the dual-driven stage in line with industry trends, on the one hand, continue to adhere to the direct-operated model to complete the encryption of stores in high-tier cities. According to the company's announcement, it is expected to open 500 direct-operated stores annually in the next 2-3 years; on the other hand, it will layout low-tier cities through franchising, increase brand exposure, and further enhance market share.

Although opening up franchising is the fastest way for Heytea to "grow bigger and stronger" and maintain its leading position, there are still some drawbacks to this layout.

On the one hand, there are some difficulties in maintaining brand consistency and quality control. Generally speaking, in the catering industry, franchisees prefer a "simple and easy to replicate" supply chain. After replicating the brand's supply chain, many franchisees will break free from headquarters control and "do their own thing". For the franchise headquarters, once a store "loses control" and encounters food safety and other adverse events, it will affect the image of the entire brand.

On the other hand, Heytea's franchise threshold is too high, which may hinder its development speed. According to the details announced by Heytea, the age requirement for partners is between 25 and 45 years old, the investment amount for a single store franchise is about 1 million yuan, the capital verification threshold for partners is 1.5 million yuan, and the regional cooperation is 4.5 million yuan or more. Compared with other newly opened franchised tea beverage brands, Heytea's overall franchise threshold can be considered quite high. Under such a high franchise threshold, it is estimated that many franchisees will be discouraged.

In addition, the management system of franchise stores is different from that of direct-operated stores, which means that they cannot fully implement the headquarters' strategic planning like direct-operated stores. Delayed execution or lack of cooperation will ultimately delay the development progress of the entire brand.

In the latest earnings report, Heytea stated that franchise stores will be required to maintain consistency with direct-operated stores, and consumers will not feel the difference between the two. The company will open franchise cooperation for low-tier cities with fewer direct-operated stores, and increase the brand's market share. The first batch of Nayuki's tea franchise stores is expected to open in the second half of 2023. The company will disclose the performance of franchise stores separately in the future.

At the same time, Nayuki's tea also mentioned that in the future, on the basis of maintaining a stable gross profit margin, the company will keep product prices at a lower level in order to serve more consumers and help franchise stores quickly occupy the low-tier city market.

However, as mentioned earlier in the development risks, ideals are beautiful, but reality is harsh. Whether Nayuki can maintain its leading advantage through open franchising in the fiercely competitive market and drive performance to new heights is still an "unknown variable" that needs to be resolved.