Premium Teahouse Expansion And Healthier Offerings Are Expected To Drive Long-Term Brand Strength

Catalysts

About Chagee Holdings

Chagee Holdings operates a premium global teahouse network focused on culturally rich, high quality tea beverages.

What are the underlying business or industry changes driving this perspective?

• Accelerating international expansion in Southeast Asia, including new entries into the Philippines and Vietnam and a growing base in Malaysia, Thailand and Indonesia, is expected to gradually shift the mix toward higher growth markets and support sustained revenue growth.
• Deepening localization of products, such as region specific launches like the Green Grab series and Peach Oolong Milk Tea, is strengthening brand relevance and raising per store sales productivity, which can lift overall earnings.
• Ongoing product innovation around healthier tea options, including low caffeine and premium raw materials, is aligned with rising consumer focus on wellness and quality, supporting resilient pricing power and stabilizing net margins despite competition.
• Scaling efficiencies in procurement and operations, evidenced by rising gross margin and declining per store operating costs even as company owned stores ramp, are expected to translate into operating leverage and enhance net income over time.
• A rapidly expanding and highly engaged membership base, now exceeding 220 million users, combined with a more advanced membership system, is likely to increase visit frequency and ticket size, underpinning steady same customer revenue and recurring earnings growth.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Chagee Holdings's revenue will grow by 15.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.8% today to 18.8% in 3 years time.
• Analysts expect earnings to reach CN¥3.8 billion (and earnings per share of CN¥20.39) by about December 2028, up from CN¥768.9 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting CN¥5.6 billion in earnings, and the most bearish expecting CN¥3.3 billion.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 12.1x on those 2028 earnings, down from 23.0x today. This future PE is lower than the current PE for the US Hospitality industry at 23.6x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.08%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Intensifying competition and delivery platform subsidy battles in China are already driving a 27.9% decline in domestic same store GMV and a 9.4% drop in total net revenue year over year. If discount driven rivals continue to erode Chagee’s premium positioning, this could structurally pressure revenue and compress net margins.
• Overseas markets, while growing GMV by 75.3%, are still a small base with same store GMV down 23.4%. If localization and brand building fail to translate into sustainable per store productivity, the international expansion could add fixed costs faster than cash generation and dilute earnings.
• Rapid network growth to 7,338 teahouses including 367 company owned stores and continued global hiring has pushed non GAAP general and administrative expenses to 13.4% of revenue from 9.1% a year ago. If scale efficiencies do not materialize, the structurally higher cost base could cap operating margin improvement and net income growth.
• The strategic focus on premium raw materials, award winning healthy beverages and experiential flagship stores reinforces brand equity but makes the model more exposed to macro slowdowns and trading down behavior. In a weaker consumption environment this could further depress GMV and limit the ability to sustain high gross margins of 53.8%.
• Heavy reliance on franchise revenue at 87.6% of total net revenue and a special cash dividend of roughly USD 177 million may constrain reinvestment flexibility. If franchisee profitability deteriorates or capital returns are not matched by future growth, the medium term impact could be slower revenue compounding and stagnating earnings.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of $21.76 for Chagee Holdings based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $38.86, and the most bearish reporting a price target of just $12.4.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be CN¥20.4 billion, earnings will come to CN¥3.8 billion, and it would be trading on a PE ratio of 12.1x, assuming you use a discount rate of 9.1%.
  
• Given the current share price of $13.49, the analyst price target of $21.76 is 38.0% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.