Can the IPO cure the "virtual obesity" of Auntie Shanghai?

By the end of 2024, the IPO progress of Hu Shang A Yi has taken another step forward.

On December 27, Hu Shang A Yi updated its prospectus, continuing to advance its listing process on the Hong Kong Stock Exchange, with CITIC Securities, Haitong International, and Dongfang Securities (International) serving as joint sponsors.

According to ZhiShi Consulting, as of December 31, 2023, Hu Shang A Yi is the fourth largest fresh tea beverage brand in China by number of stores, following Mi Xue Bing Cheng, Gu Ming, and Cha Bai Dao (2555.HK).

As of December 17, Hu Shang A Yi had reached 8,980 stores, with over 99% being franchise stores, and nearly half of the stores located in third-tier cities and below.

As a franchise-driven chain tea brand, the brand's performance is often closely tied to the number of franchisees.

As one of the players closest to 10,000 stores in the new tea beverage industry, Hu Shang A Yi's revenue does not match its scale, creating a sense of inflated growth.

In the first half of 2024, Hu Shang A Yi's revenue was 1.658 billion yuan, with an average revenue contribution per store of 196,500 yuan; Cha Bai Dao's revenue was 2.396 billion yuan, with an average revenue contribution per store of 286,100 yuan.

Big but Not Strong?

Hu Shang A Yi opened its first store in 2013, primarily selling "five-grain milk tea" made from glutinous rice, barley, and oats.

While this was very popular in the cold northern regions, its acceptance in the southern market was average.

To expand nationally, Hu Shang A Yi changed its brand slogan in 2021 and announced a high-profile transformation to fresh fruit tea.

This year was a highlight year for financing in the new tea beverage sector, with Nayuki's Tea (2150.HK) successfully listing on the Hong Kong Stock Exchange, and brands like Heytea, Nayuki's Tea, Mi Xue Bing Cheng, and Hu Shang A Yi collectively raising over 14 billion yuan.

Capitalization and scaling accelerated, and the countdown for the new tea beverage land grab began.

In the battle for franchisees, Hu Shang A Yi's advantage compared to its peers lies in its simpler franchise terms and lower investment costs.

Public information shows that the minimum total budget for Hu Shang A Yi's franchise is 170,000 yuan (excluding store rent, transfer fees, and decoration costs), with a brand franchise fee of 49,800 yuan, and new signed stores can enjoy a franchise fee waiver or cash rewards.

In contrast, the minimum investment amount for Mi Xue Bing Cheng franchise stores is 210,000 yuan, Gu Ming is 230,000 yuan, and Cha Bai Dao is about 270,000 yuan.

By sacrificing some profits, Hu Shang A Yi achieved rapid store expansion.

From 2021 to 2023, Hu Shang A Yi achieved revenues of 1.640 billion yuan, 2.199 billion yuan, and 3.348 billion yuan, respectively. The number of new stores added in 2022 and 2023 was 1,531 and 2,482, respectively.

In less than two years, Hu Shang A Yi completed a doubling of its store scale As of December 17, 2024, the number of Hu Shang A Yi stores has increased to 8,980, with half located in third-tier cities and below, making its level of "penetration" second only to Mi Xue Bing Cheng and Tian La La.

However, its profitability is not strong, showing signs of "virtual bloat."

With a comparable total number of stores, in 2023, Hu Shang A Yi's revenue scale was about 60% of Cha Bai Dao; the average sales volume per store was approximately 74,900 cups, while Cha Bai Dao was 143,500 cups.

Compared to Gu Ming, which is deeply rooted in its home base of Zhejiang, and Cha Bai Dao, which covers Southwest and Jiangsu-Zhejiang, Hu Shang A Yi's store layout is relatively scattered, with a balanced market share between northern and southern regions.

Hu Shang A Yi's store network in China as of June 30, 2024, source: prospectus

According to Narrow Door Restaurant Eye data, Hu Shang A Yi, Gu Ming, and Cha Bai Dao have entered 350, 217, and 348 cities, respectively.

From the perspective of chain operations, an average and dispersed store layout is not conducive to maximizing supply chain efficiency.

The high proportion of northern stores increases the transportation distance and cost of fresh fruits and other raw materials.

Compared to new tea beverage peers that have already delved into fruit planting, logistics, and other links, Hu Shang A Yi's layout in building its own supply chain is still shallow.

The company currently has 12 major warehousing and logistics bases, four equipment warehouses, eight fresh agricultural product warehouses, and 16 front-end cold chain warehouses.

Among them, three major warehousing and logistics bases and all front-end cold chain warehouses are operated by independent third parties.

From 2021 to 2023, Hu Shang A Yi's gross profit margins were 21.8%, 26.7%, and 30.4%, and in the first half of 2024, Hu Shang A Yi's gross profit margin increased to 31.2%.

In the first half of 2024, Hu Shang A Yi's inventory turnover days were 20 days, returning to the level of the entire year of 2021 after a reduction in the previous two years.

According to disclosures, the company's factory located in Haiyan County, Zhejiang Province, began commercial production in 2022, mainly producing pearls, taro balls, and taro paste.

While the self-produced capacity has increased, the scale expansion has also strengthened the company's bargaining power with suppliers.

However, in the first half of this year, Hu Shang A Yi's cost of sales saw a year-on-year increase of 10.9% to 1 billion yuan for ingredients and other raw material costs, with the proportion of sales costs rising from 83.3% in the first half of 2023 to 97.9%.

Compared to disclosed peers, Hu Shang A Yi's profitability is still not high.

Cha Bai Dao's gross profit margin and net profit margin for the first half of 2024 were 31.7% and 9.89%, respectively. Gu Ming's gross profit margin and net profit margin for the first three quarters of 2024 were 31.5% and 17.39%, respectively.

The "Infinite War" of Tea Drinks

According to Narrow Door Restaurant Eye data, as of December 15, 2024, the total number of milk tea beverage stores nationwide was approximately 410,600, with 127,800 new openings in the past year and a net closure of 17,800 stores.

The tea drink market has entered a saturation phase, and the mid-range tea drink segment where Hu Shang A Yi operates is one of the most fiercely competitive areas.

To attract more franchisees, brands are continuously increasing their discount policies. However, the overall opening speed of the new tea drink industry in 2024 is inevitably slowing down.

According to the tracking of the Jiuqian Central Retail Database, more than 25,000 tea drink and milk tea stores have closed in the first half of 2024, with Mi Xue Bing Cheng, Cha Bai Dao, Shu Yi Shao Xian Cao, and Yi He Tang each closing over a thousand stores.

Hu Shang A Yi is also finding it difficult to maintain high store growth.

In the first half of 2024, Hu Shang A Yi opened 1,492 new franchise stores, a decrease of more than 300 compared to the same period last year. By December 17 of the second half of the year, the number of new stores opened was less than 600.

The accumulated contradictions between the brand and franchisees have become increasingly prominent.

In October 2024, a Hu Shang A Yi franchise store in Ningbo hung a banner stating, "Franchising requires caution, I have lost everything." The franchisee indicated that the material prices sold to franchisees by the company were high, and after choosing to source externally, the company discovered this and refused to pay fines, leading to the unilateral closure of three of their stores.

In 2023, a total of 411 franchisees of Hu Shang A Yi ceased store operations, a significant increase compared to 115 in the entire year of 2021 and 197 in 2022.

Regarding the significant increase in the number of franchisee closures, Hu Shang A Yi attributed the reason to the increase in the base number of franchisees and stated that the company strengthened the assessment of franchisee performance in 2023.

Hu Shang A Yi places its hopes for the future on the relatively low penetration rate in lower-tier markets.

In 2023, Hu Shang A Yi launched a "Light Enjoyment Version" with a price range of 2 to 12 yuan, with a franchise fee starting at 120,000 yuan, focusing on the national trend concept and light milk tea products.

In March 2024, the "Light Enjoyment Version" was further upgraded to an independent brand "Cha Pu Bu," personally managed by founder Shan Wei Jun. As of June 30, the number of Light Enjoyment Version 1.0 and Cha Pu Bu stores was 202 and 89, respectively.

It is not uncommon in the industry to penetrate lower-tier markets through sub-brands.

Heytea previously launched "Xi Xiao Cha," and Nayuki's Tea also ventured into "Tai Gai." However, these brands have failed to support the imagination of a second growth curve and have instead found themselves in a strategically marginal position after the main brand's price reductions In addition, the coffee brand "HuKa" launched by Hu Shang A Yi in 2023 also announced its independence in 2024, changing from a store-in-store format to independent stores. Its price range of 10-15 yuan highly overlaps with the main price range of Luckin and Kudi, making its competitiveness and potential limited.

For new tea beverages, opening stores in lower-tier markets, launching sub-brands, and crossing into coffee are no longer new stories.

The industry is severely homogenized, and there are no significant competitive barriers between various new tea beverage brands, forcing them to continuously invest in supply chain, scale, and other aspects.

Capital accumulation remains crucial in the current stage of competition.

The prospectus shows that Hu Shang A Yi intends to use the funds raised from this IPO to enhance digital capabilities; develop products and equipment; strengthen supply chain capabilities in production, processing, and warehousing; enhance the brand for further expansion; marketing activities; and supplement working capital.

As of June 30, 2024, Hu Shang A Yi had only 240 million yuan in cash and cash equivalents, while Cha Bai Dao had 3.135 billion yuan; Gu Ming had 1.677 billion yuan in cash and cash equivalents as of September 30, 2024.

The urgency of Hu Shang A Yi's IPO push is understandable.

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