China Consumer

Brewing interest

Another Chinese ‘new tea’ chain heads for IPO in Hong Kong

Nayuki shop w

Established in 2015, it may look like it, but this is not a Japanese brand

Remember the last time a Chinese beverage chain reported rapid growth and steep losses but still pulled off a successful IPO? It would be hard to forget Luckin Coffee, the start-up that listed in New York in 2019, promising to take down Starbucks only to defraud investors by fabricating its financial statements. At its peak, Luckin Coffee was valued at $12 billion; now it’s hovering around $2 billion.

Nayuki Tea, which is also known as Naixue (奈雪) in Chinese, will soon find out whether investors have put the Luckin nightmare behind them. Last week, the Shenzhen-based company passed a listing hearing at the Hong Kong Stock Exchange. According to Hong Kong Economic Times, the tea chain is expected to raise about $500 million with a $5 billion valuation.

Nayuki sells fresh-fruit cheese tea and baked goods. Unlike popular milk tea brands in the early 2010s, Nayuki and rival HEYTEA (see WiC490) use fresh brewed tea rather than powdered varieties. They also use fresh fruits instead of artificial flavourings. The drink can be topped with cream cheese foam with a sweet and savoury taste.

Early this year, Shenzhen Pindao Restaurant Management, the parent company behind Nayuki, raised more than $100 million in a series C funding round led by private equity firm PAG, valuing it at $2 billion. Jack Ma’s Yunfeng Capital was also among the investors in the latest round.

The company’s co-founder told Sina Tech that the goal of the IPO is not just to raise capital. “Nayuki is not going public because of a lack of money. The money we raised is still not being touched. We have always hoped to create a global brand. The purpose of listing is to allow us to operate for a longer period of time, be more open and transparent, and also demanding more from ourselves,” pointed out Peng Xin, who founded Nayuki in 2015 with her husband.

The first thing the company can certainly do better is boost its profit margin. Even though its drinks often retail for as much as those served by Starbucks, which is still considered a premium choice in China, the six year-old firm has struggled to make profits.

According to a survey carried out by ThePaper.cn of the new tea drinks industry in 2020, a Nayuki beverage costs on average Rmb32.6 ($3.62), which is the highest in the tea industry. That has earned the company the moniker of being the “Moutai of bubble tea” (China’s most famous liquor brand has long been a favourite A-share stock for local and foreign investors).

But its profit margin is nowhere close to that of the exorbitantly priced Moutai. According to its prospectus, between 2018 and 2020, Nayuki’s revenue grew from Rmb1 billion to Rmb3 billion. Losses, however, also widened from Rmb69.7 million to Rmb203 million during the same period.

Part of the reason is because its cost base is so high. In 2020, Nayuki’s F&B ingredients and labour costs accounted for 70% of its revenue. In comparison, Starbucks’s financial report for the same year shows that its equivalent expense was just 32.1% of its total revenue, i.e. half that of Nayuki.

The company operates all of its own stores instead of franchising so as to maintain product quality.

“If Nayuki wants to be profitable, it must dramatically reduce its labour costs and food costs. Based on its 2020 figures, the company has over 9,000 employees and 555 stores, which means on average, there’s 17 people working in a store,” ThePaper.cn calculated.

To that end, Nayuki has been opening smaller shops as it continues to expand. Its sub-brand Nayuki PRO requires less space and fewer staff members and mainly targets stop-and-go customers. It employs just 13 staffers per store, compared with 21 at its flagship outlets.

Among its goals for this year is to open about 350 new outlets and 70% of those will be Nayuki PRO.

The other challenge for Nayuki is product differentiation.

Not only does the company compete against its closest rival HEYTEA, there’s also a crop of more budget-friendly tea shops like Coco and Mixue, with the latter not only sounding similar to Nayuki’s Chinese name (Naixue) but also offering very similar products.

For the time being, Nayuki manages to stay ahead by churning out new products almost every week, says 36Kr, though it remains to be seen how long it can keep rivals at bay.

Competition continues to heat up. Start-ups have piled into the bubble tea market. In the first half of 2021, the number of new tea shop openings reached 550,000 across China, up 14.6% year-on-year reported Jiemian. And since the biggest groups of consumers of these tea drinks are affluent young people, they’re a demographic that tends to be more fickle and eager to try new things.

But Peng is optimistic: “First, we have created a lot of customers for the category. For example, you will find that the main consumer group of new tea drinks is not the group of customers who bought bubble tea from the streets five years ago. Moreover, the lower-end market for new-style tea drinks is shrinking. Whether it is first- and second-tier cities or lower-tier areas, people are moving upmarket, putting more emphasis on quality.”


© ChinTell Ltd. All rights reserved.

Sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.