Have also been looking at them. A concern I had was the product portfolio. Tea lattes (and semi relatedly guochao) are very on trend at the moment but I worry a new trend will emerge.
Tea lattes from chagee/chayan yuese are just much better business than the fruit heavy stuff Nayuki/Heytea make. Higher gross margin, easily automated with modified espresso machines, 75% faster production in store, much simpler supply chain (basically just milk and various types of tea leaves). Chagee massively simplified their menu in iirc late 22, and you saw a huge jump in GM as a result. What happens to both revenues and margins if tea lattes ever get less trendy?
The guochao fervour they've tapped into is similar with logo/packaging etc. is similar but I'm less concerned here. They seem very on top of marketing and I think they can manage to pivot to any new trends without hurting margins.
I think Chagee’s brand is quite exceptional and the current valuation allows significant leeway even if say tea lattes lose a bit of trend. The fruit heavy stuff clearly isn’t that popular with customers so I think Naixue and Heytea are gonna continue struggle and especially for Naixue, I don’t think they are consistently profitable and their valuation is still quite egregious. 70% of the assets for Chagee are covered by cash and the PE is almost half that of Mixue and Luckin’. In case tea lattes slow down I think they’ll try push even more guochao until a new trend emerges and attack that with their brand value, packaging, toy promotions etc etc you know the drill with Chinese discretionary plays haha.
I think if looked at from a more macro perspective, what works for Chagee is that their store layout, brand etc allows them to charge higher prices than their competitor while even offering say the same quality product. It’s quite like how Starbucks was able to fend off competition from Costa and command higher valuations because of the higher selling price per product. I’ve tried most Chinese milk tea chains i.e. Mixue, Naixue, Heytea, and PandaCha and none of them really focus on marketing and branding as much as Chagee does. For some reason all of them follow the Luckin coffee model of trying to undercut competition via lower prices. My view is that there’s room in the industry for both models to survive particularly for something like Mixue , it’s just that I’d rather hold something with more pricing power.
It's interesting you bring up starbucks where their business clearly isn't working in China. The typical explanation is that the large third space/premium for branding model isn't popular in China - and yet Chagee has large sit down concepts and doing very well. Maybe it's more the lack of market understanding for Starbucks (pork lattes) than the model itself?
There’s nothing inherently wrong with Starbucks’ model if there was then well you wouldn’t have competition like Manner, M Stand popping up and doing so well. It’s just that these guys can offer the same quality experience, product and lower prices at the same time while Starbucks refuses to do anything. They haven’t done anything to include or experiment with local favourites, upgrade the experience or cut prices. What works for Chagee’s sit down model is that they really hone in on the store experience by focusing on local culture, Chinese traditional paintings etc while Starbucks has the same old boring vanilla layout for every store.
I think where analysts struggle is that they ascertain that premium experiences or products don’t work in China because the people are inherently frugal, that’s not really the case it’s just that people are more value and experience conscious and demand good experiences and ambience. It can’t be that you have people paying 1000 RMB for ugly monkey toys (labubus) and lining up for laopus if they are inherently frugal and will always refuse to pay up.
Thanks Dragon, a great paper and very informative. I live in Malaysia so have seen Chagee up close, in addition to spending considerable time in China recently. To all those doubting Thomas's who say China is uninvestable, I say go and have a look. It will blow your socks off!
It’s nice swimming against the crowd and investing somewhere where the majority seethe. What are your opinions about the Chagee brand and product? I for one love them the only small gripe is that it’s very hard to sleep after drinking their tea haha
I mean look SSSG growth being negative is bad but you have to be more nuanced when thinking about this stuff. Look at the growth in 21,22, and 23. Some slowdown in 24 was warranted anyways. Also at this stage of growth SSSG doesn’t really matter much because expansion in both Chinese lower tier cities+ rural areas along with SE Asia, UK, US, Middle East etc etc will more than cover for it.
I think Luckin is more similar to Mixue than Chagee. I have differing thesis for both. Luckin is mass market and targets the working class blue collar plus college student plus value hunter demographic while Chagee targets more affluent and aspirational customers willing to spend more for brand, experience, ambience etc. Luckin’s price to sales is lower than Chagee’s price to sales while the opposite is true for PE ratio. The positive thing for Luckin is that their competition i.e. Cotti Coffee is run by proven frauds who love blindly opening stores and expanding without concern for profitability as they did when they were managing Luckin. My opinion is that Cotti won’t be able to sustain the endless price war and will most likely to go bankrupt allowing Luckin to raise prices slightly and earn higher margins. But I don’t think Luckin will ever earn very high margins because of their market position so that’s something that a potential investor should factor in independently
I personally think the Chagee brand, their products and generally their environments are first rate, and I say that as a diehard coffee addict. As an investment I rate them up there with GRAB. Just hold, be patient, and you will do well.
Have also been looking at them. A concern I had was the product portfolio. Tea lattes (and semi relatedly guochao) are very on trend at the moment but I worry a new trend will emerge.
Tea lattes from chagee/chayan yuese are just much better business than the fruit heavy stuff Nayuki/Heytea make. Higher gross margin, easily automated with modified espresso machines, 75% faster production in store, much simpler supply chain (basically just milk and various types of tea leaves). Chagee massively simplified their menu in iirc late 22, and you saw a huge jump in GM as a result. What happens to both revenues and margins if tea lattes ever get less trendy?
The guochao fervour they've tapped into is similar with logo/packaging etc. is similar but I'm less concerned here. They seem very on top of marketing and I think they can manage to pivot to any new trends without hurting margins.
I think Chagee’s brand is quite exceptional and the current valuation allows significant leeway even if say tea lattes lose a bit of trend. The fruit heavy stuff clearly isn’t that popular with customers so I think Naixue and Heytea are gonna continue struggle and especially for Naixue, I don’t think they are consistently profitable and their valuation is still quite egregious. 70% of the assets for Chagee are covered by cash and the PE is almost half that of Mixue and Luckin’. In case tea lattes slow down I think they’ll try push even more guochao until a new trend emerges and attack that with their brand value, packaging, toy promotions etc etc you know the drill with Chinese discretionary plays haha.
I think if looked at from a more macro perspective, what works for Chagee is that their store layout, brand etc allows them to charge higher prices than their competitor while even offering say the same quality product. It’s quite like how Starbucks was able to fend off competition from Costa and command higher valuations because of the higher selling price per product. I’ve tried most Chinese milk tea chains i.e. Mixue, Naixue, Heytea, and PandaCha and none of them really focus on marketing and branding as much as Chagee does. For some reason all of them follow the Luckin coffee model of trying to undercut competition via lower prices. My view is that there’s room in the industry for both models to survive particularly for something like Mixue , it’s just that I’d rather hold something with more pricing power.
It's interesting you bring up starbucks where their business clearly isn't working in China. The typical explanation is that the large third space/premium for branding model isn't popular in China - and yet Chagee has large sit down concepts and doing very well. Maybe it's more the lack of market understanding for Starbucks (pork lattes) than the model itself?
There’s nothing inherently wrong with Starbucks’ model if there was then well you wouldn’t have competition like Manner, M Stand popping up and doing so well. It’s just that these guys can offer the same quality experience, product and lower prices at the same time while Starbucks refuses to do anything. They haven’t done anything to include or experiment with local favourites, upgrade the experience or cut prices. What works for Chagee’s sit down model is that they really hone in on the store experience by focusing on local culture, Chinese traditional paintings etc while Starbucks has the same old boring vanilla layout for every store.
I think where analysts struggle is that they ascertain that premium experiences or products don’t work in China because the people are inherently frugal, that’s not really the case it’s just that people are more value and experience conscious and demand good experiences and ambience. It can’t be that you have people paying 1000 RMB for ugly monkey toys (labubus) and lining up for laopus if they are inherently frugal and will always refuse to pay up.
Thanks Dragon, a great paper and very informative. I live in Malaysia so have seen Chagee up close, in addition to spending considerable time in China recently. To all those doubting Thomas's who say China is uninvestable, I say go and have a look. It will blow your socks off!
It’s nice swimming against the crowd and investing somewhere where the majority seethe. What are your opinions about the Chagee brand and product? I for one love them the only small gripe is that it’s very hard to sleep after drinking their tea haha
Do you have any thoughts on their ongoing decline in same store sales over the past four quarters? Thanks!
I mean look SSSG growth being negative is bad but you have to be more nuanced when thinking about this stuff. Look at the growth in 21,22, and 23. Some slowdown in 24 was warranted anyways. Also at this stage of growth SSSG doesn’t really matter much because expansion in both Chinese lower tier cities+ rural areas along with SE Asia, UK, US, Middle East etc etc will more than cover for it.
Good point. Growth should more than offset the SSSG decline, which is from unusually high base anyways. Thanks!
Some articles that you might find interesting:
https://thelowdown.momentum.asia/how-chinas-chagee-achieves-explosive-growth-in-a-crowded-fb-market/
https://eu.36kr.com/en/p/3042726661030016
https://pandayoo.com/post/chagee-the-chinese-tea-brand-brewing-a-storm-on-wall-street/
Thanks for the suggestions, I’ve read all of these before
How do you think about your Luckin investment given the lower p/e and higher margins of CHA?
I think Luckin is more similar to Mixue than Chagee. I have differing thesis for both. Luckin is mass market and targets the working class blue collar plus college student plus value hunter demographic while Chagee targets more affluent and aspirational customers willing to spend more for brand, experience, ambience etc. Luckin’s price to sales is lower than Chagee’s price to sales while the opposite is true for PE ratio. The positive thing for Luckin is that their competition i.e. Cotti Coffee is run by proven frauds who love blindly opening stores and expanding without concern for profitability as they did when they were managing Luckin. My opinion is that Cotti won’t be able to sustain the endless price war and will most likely to go bankrupt allowing Luckin to raise prices slightly and earn higher margins. But I don’t think Luckin will ever earn very high margins because of their market position so that’s something that a potential investor should factor in independently
I personally think the Chagee brand, their products and generally their environments are first rate, and I say that as a diehard coffee addict. As an investment I rate them up there with GRAB. Just hold, be patient, and you will do well.
My only fear is the stupidity of Trump.