Global Teahouse Expansion And Membership Scale Will Counter Same Store Weakness Over Time

Catalysts

About Chagee Holdings

Chagee Holdings operates a premium tea beverage business through a global teahouse network with a focus on culture, product quality and member engagement.

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

• Although the global tea beverage category has wide potential and Chagee now reaches 7,338 teahouses, the recent 9.4% revenue decline and pressure on same store GMV in both domestic and overseas markets suggest that store additions alone may not sustain revenue growth if competitive intensity remains high and unit economics soften.
• While overseas GMV growth of 75.3% and entry into new markets like the Philippines and Vietnam point to rising international tea consumption, the 23.4% same store GMV decline overseas indicates that future expansion could weigh on earnings if brand awareness and repeat traffic do not keep pace with store openings.
• Although Chagee is pushing product upgrades and a 4.0 menu to address demand for healthier beverages, the current pressure on average GMV per teahouse in Greater China and the need for heavier R&D and marketing support may limit the impact on net margins if customers trade down or shift to discounted offerings from competitors.
• Despite a large registered member base of 222 million and efforts to deepen engagement through a revamped membership system, the decline in same store sales suggests that higher frequency and basket size are not guaranteed, which could cap revenue per user and constrain future earnings growth if promotional spending has to rise to reaccelerate visits.
• While procurement optimization and scale have lifted gross margin to 53.8%, rising general and administrative costs at 13.4% of revenue and higher global payroll to support overseas expansion could increasingly offset gross margin gains and limit further improvement in operating margin and net income.

Assumptions

How have these above catalysts been quantified?

• This narrative explores a more pessimistic perspective on Chagee Holdings compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Chagee Holdings's revenue will grow by 5.2% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 6.3% today to 14.3% in 3 years time.
• The bearish analysts expect earnings to reach CN¥2.2 billion (and earnings per share of CN¥11.96) by about August 2029, up from CN¥819.0 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as CN¥2.5 billion.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 9.7x on those 2029 earnings, down from 16.0x today. This future PE is lower than the current PE for the US Hospitality industry at 23.4x.
• The bearish 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 9.46%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The 9.4% revenue decline in the recent quarter, along with 27.9% same store GMV decline in Greater China and 23.4% same store GMV decline overseas, suggests that if competitive pressure in tea beverages stays intense or increases, revenue could weaken further and put sustained pressure on earnings.
• Overseas GMV growth of 75.3% and continued store expansion into markets such as Malaysia, Thailand, Indonesia, the Philippines and Vietnam point to a long-term shift toward higher global tea consumption. If Chagee successfully converts that demand into higher per store GMV, overall revenue and net income could grow rather than stay flat.
• The focus on product upgrades, healthier beverages and new consumption scenarios such as breakfast and evening hours, supported by awards such as the World Beverage Innovation recognition for BOYA Jasmine Green milk tea, could steadily lift ticket size and transaction frequency over time, which would support higher revenue and earnings.
• The 222 million registered members, growing by 15 million quarter on quarter and 36.7% year on year, together with a revamped membership system aimed at higher stickiness and repeat purchases, could translate into better monetization of the user base and support expansion in net margins and earnings.
• Gross margin has reached 53.8%, helped by procurement optimization and scale. If Chagee continues to improve per store efficiency, especially in company owned teahouses where per store operating costs are already improving, this could offset higher G&A and other operating costs and support higher operating margin and net income over time.

Valuation

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

• The assumed bearish price target for Chagee Holdings is $10.21, which represents up to two standard deviations below the consensus price target of $14.52. This valuation is based on what can be assumed as the expectations of Chagee Holdings's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $19.71, and the most bearish reporting a price target of just $10.21.
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2029, revenues will be CN¥15.2 billion, earnings will come to CN¥2.2 billion, and it would be trading on a PE ratio of 9.7x, assuming you use a discount rate of 9.5%.
• Given the current share price of $10.16, the analyst price target of $10.21 is 0.5% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.