Cheap if able to sustain revenue, and a potential bargain if able to turn store openings into revenue growth

Conservative valuation of $24.28 based on sustained revenues of ~RMB3bn/quarter. Potential upside if growth in store openings realises additional revenue.

Summary

The Good

• After removing one-time stock compensation, adjusted operating margin remains consistent at ~20%
• Scale efficiencies show in Chagee's largest operating cost (materials, storage and logistics) as costs slightly reduced QoQ even as number of stores grew.

The OK

• Memberships in the mobile program grew from 192m in Q1-25 to 207m in Q2, representing 7.8% growth which is a little higher than the store opening growth of ~5.3% potentially indicating improving customer loyalty.

The Bad

• Monthly GMV average per store dropped from 432m RMB to 404m between Q1 and Q2, representing a 3 quarter consecutive decline in average GMV.
• Net revenues essentially flat QoQ, despite a large number of store openings

EPV Valuation

Asset Values

Chagee's assets are largely cash and cash equivalents, making a conservative net working capital easy to calculate. A conservative net working capital of RMB 9.2b assets and 2.87b in total liabilities is ~6.38bn. The book value of 8.2bn is not far off if also accounting for the right-of-use assets in store leases.

Normalizing Earnings

Operating Margin

Adjusting Q2 earnings to remove one-time stock compensation (RMB15.8m other operating costs, 31.1m sales and marketing, and 505.4m G&A) gives an operating income of 659.9m and an operating margin of 21.8%. Operating margin has been steady at around 23%, so an estimate on the lower end of 21% is conservative.

(Estimated) Normalized EBIT

Chagee is growing rapidly through store openings, making a normalized earnings difficult to calculate. Stores have increased by 40% in the last year, whilst YTD revenues increased only 17.8% from the previous YTD.

Instead making an assumption looking forward, if revenues are sustained (not accounting for the companies aggressive growth) we have approx 13bn revenue, for an EBIT of 2.6bn.

Adjusted Earnings

Chagee's tax rate appears to be around 17-20%, with the most recent quarter also at the lower end of this range once the adjustments above are accounted for. I will use 20% as the conservative estimate for the average tax rate. Taking the EBIT estimate of 2.6bn, Chagee's NOPAT will be ~2.08bn.

Identifying maintenance capex from the statements provided is difficult, as the portion of capex for growth (mainly store openings) is not clear. It appears to costs of property and equipment. Capital expenditures for property and equipment appear to be reflected on the balance sheet, however apportioning these costs per new store does not appear to reflect the cost to open a store. I will simply exclude the maintenance capex and depreciation (not recorded) from the analysis.

EPV and Value

Using a cost of capital of 10%, I calculate an EPV of RMB 20.8bn. Adding in the cash and short-term investments leads to a total of 29.7bn (~$4.17bn USD), or a price of $24.28 per diluted share.