To The Moon

A Sweet Opportunity or a Melting Investment?

China’s largest fresh-drink chain, $MIXUEGROUP(02097)$ , is about to make its debut on the Hong Kong Stock Exchange, aiming to raise US$444 million. With over 45,000 stores across China and 11 other countries, the brand has built a reputation for its budget-friendly bubble tea and ice cream. But with recent IPO flops from its tea-chain predecessors, should investors brace for another chilly reception?

Mixue’s global ambition: Can it conquer new markets?

The IPO Rundown: Hot or Not?

Mixue is set to sell 17.1 million shares at HK$202.50 each, targeting a valuation of US$9.8 billion. Its profit surged 45.2% year-on-year to US$483 million in the first nine months of 2024, and it sold an eye-popping 7.1 billion drinks during that period. Yet, despite these impressive numbers, the sector has struggled—Nayuki Tea, $CHABAIDAO(02555)$ , and $GUMING(01364)$ all stumbled on their debut trading days. Can Mixue break the ice?

A Global Snowstorm or Just a Local Blizzard?

$MIXUEGROUP(02097)$ has aggressively expanded beyond China, operating in Southeast Asia, Australia, Japan, and South Korea. But does its budget-friendly model translate well abroad? While Indonesia and Vietnam have embraced its affordable offerings, breaking into developed markets like Australia and Japan could be tougher, where premium tea chains dominate. Customising its menu for local tastes and overcoming regulatory hurdles in food safety and franchising will be key to international success. Additionally, competition from other budget-friendly beverage chains in both China and international markets adds another layer of challenge.

Franchise empire or fragile expansion? The challenge ahead

Franchise Frenzy: Strength or Weakness?

With over 99% of its stores franchised, Mixue relies heavily on its partners to expand rapidly. The upside? A capital-light model that fuels growth without massive upfront costs. The risk? Maintaining quality and brand reputation across such a vast network. Franchisees generate most of their revenue through low-cost drinks, meaning slim margins. If consumer preferences shift or cost pressures rise, franchisees may struggle, impacting Mixue’s long-term sustainability. A deeper look at Mixue’s quality control measures and franchisee support could be crucial in assessing its future stability.

The Regulatory Chill Factor

Chinese regulators have shown increasing scrutiny toward food and beverage chains, delaying Mixue’s IPO in 2024 due to concerns over the industry's outlook. The government has also pushed for higher food safety standards and fairer franchise agreements, which could impact Mixue’s business model. Additionally, the intense competition and concerns about excessive market saturation could invite further regulatory intervention. Understanding how Mixue plans to navigate these evolving regulations will be key for investors.

Valuation: Is the Snow King Overpriced?

At US$9.8 billion, Mixue’s valuation is ambitious. For context, Luckin Coffee—China’s coffee disruptor—operates half as many stores but generates higher per-store revenue. $NAYUKI(02150)$ , which has struggled post-IPO, currently trades at a fraction of its initial valuation. While Mixue boasts an extensive supply chain and cost advantages, investors should ask: Is its pricing power strong enough to sustain long-term margins, or is it just another bubble waiting to burst? Looking at additional financial metrics, such as same-store sales growth or average revenue per store, could provide further insight into its financial health.

Valuation chills: Is Mixue’s IPO a hot deal?

Management Matters: Who’s Steering the Ship?

A company’s leadership can make or break its success. Mixue is led by co-founder Zhang Hongchao, who has played a key role in scaling the company. While his experience in driving franchise growth is impressive, investors may want to assess the broader management team’s track record in handling international expansion, regulatory challenges, and financial stability.

What Comes Next? Two Likely Scenarios

1. The Sweet Spot: Mixue successfully expands overseas, adapts to local preferences, and maintains its low-cost leadership, driving steady revenue growth.

2. Brain Freeze: Expansion stalls, franchisees struggle with profitability, and investors lose confidence, leading to a sluggish stock performance post-IPO.

Final Scoop: To Invest or Not?

While Mixue is a dominant force in China’s tea market, its heavy reliance on franchises, regulatory headwinds, and sector-wide IPO struggles make this a cautious buy at best. If you’re looking for a high-risk, high-reward play, the ‘Snow King’ might be worth a speculative scoop—but don’t be surprised if it melts under pressure.

Verdict: Not a must-buy on day one—watch for post-IPO performance before diving in.

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