What information does the prospectus of Meixuebingcheng reveal?

The new tea beverage industry is full of joy as it welcomes the new year.

On January 2nd, the first working day of 2024, Heytea Holdings Co., Ltd. (hereinafter referred to as "Heytea") submitted its prospectus to the Hong Kong Stock Exchange, marking the official application for listing.

Heytea stated that the net proceeds from the IPO will be mainly used to strengthen the breadth and depth of the end-to-end supply chain, build and promote the brand and IP, and enhance the digitalization and intelligence capabilities of various business processes.

The prospectus shows that Heytea is the only company in the domestic made-to-order beverage industry that has reached a scale of 30,000 stores. As of September 30, 2023, Heytea has over 36,000 stores worldwide, covering 11 countries in China and overseas.

In the first nine months of 2023, its store network achieved a total of approximately 5.8 billion cups sold. According to a report by Zhaoshi Consulting, based on the above calculation, Heytea is the number one made-to-order beverage company in China and the second largest globally.

Heytea stated in the prospectus that it will continue to expand its domestic store network based on its supply chain system and operational capabilities. At the same time, it will continue to explore the Southeast Asian market and expand into other markets in a timely manner, aiming to create a more globalized century-old brand.

Heytea's revenue in the first three quarters of last year was 15.4 billion, a YoY increase of 46%.

Previously, Heytea planned to make its initial public offering and list on the A-share market. On September 29, 2021, it conducted counseling filing with the Henan Securities Regulatory Bureau. In 2022, Heytea planned to list on the main board of the Shenzhen Stock Exchange and raise 6.496 billion yuan, but there has been no further progress.

On January 2nd, Heytea submitted its prospectus to the Hong Kong Stock Exchange, officially taking the first step in its move to the Hong Kong stock market.

According to the prospectus, Heytea's revenue growth has been significant from 2021 to the first nine months of 2023. During this period, Heytea's revenue was 10.351 billion yuan, 13.576 billion yuan, and 15.393 billion yuan, with YoY growth rates of 121.18%, 31.2%, and 46.0% respectively.

The corresponding net profits were 1.912 billion yuan, 2.013 billion yuan, and 2.453 billion yuan, with YoY growth rates of 202.53%, 5.3%, and 51.1% respectively. The gross profit margins were 31.3%, 28.3%, and 29.7%, and the net profit margins were 18.5%, 14.8%, and 15.9%.

As a tea beverage brand that focuses on the "sinking market," Migu Bingcheng is committed to providing consumers with high-quality, affordable, and instant fruit drinks, tea drinks, ice cream, and coffee products priced at approximately 6 RMB (about 1 USD).

For example, its signature product, "Fresh Ice Cream," which is priced at only 2 RMB, is highly popular among consumers. In the first three quarters of 2023, a total of approximately 440 million units were sold in China, making it one of the best-selling products in the freshly made beverage industry.

At the same time, Migu Bingcheng foresaw the growing demand for freshly ground coffee products in the Chinese market and, based on the success of "Migu Bingcheng," launched the freshly ground coffee brand "Xingyun Coffee" in 2017 to expand its product categories. The core products of "Xingyun Coffee" are usually priced between 5 and 10 RMB.

According to a survey conducted by Zhaoshi Consulting, the brand awareness of "Migu Bingcheng" among surveyed consumers reached 93.0%. In the minds of consumers, "Migu Bingcheng" is synonymous with freshly made beverages and high-quality, affordable freshly made beverages.

Franchising is the cornerstone of economies of scale

In terms of revenue structure, the majority of Migu Bingcheng's income comes from selling goods and equipment to franchisees, accounting for over 98%. According to Migu Bingcheng's prospectus, as of September 30, 2023, over 99.8% of the stores are franchise stores, with the remaining being self-operated stores. Migu Bingcheng has over 16,000 franchisees.

Migu Bingcheng is also the only company in the domestic freshly made beverage industry with a network of over 30,000 stores, and there is currently no second brand in the industry with over 10,000 stores.

However, the net increase in the number of franchise stores for Migu Bingcheng has slowed down. As of the end of 2021, the end of 2022, and September 30, 2023, the number of franchise stores for Migu Bingcheng was 19,954, 28,929, and 36,093, respectively. The net increase rate of stores in 2022 and the first nine months of 2023 was 44.98% and 35.31%, respectively.

While continuously expanding its store network, Migu Bingcheng has also seen an increase in the number of store closures by franchisees. From 2021 to September 30, 2023, the number of closed franchise stores for Migu Bingcheng was 577, 696, and 856, respectively. Among them, the number of stores closed at the request of Migu Bingcheng was 371, 432, and 453, accounting for 64.3%, 62.1%, and 52.9%, respectively.

In terms of the number of stores closed by franchisees, there were 206, 264, and 403 stores, accounting for 35.7%, 37.9%, and 47.1% respectively. The number of stores closed by franchisees has increased.

Milksha pointed out that the franchise model is already quite mature, which allows for rapid replication but does not bring substantial income. According to the prospectus, the franchise agreements are generally for a period of 3 or 4 years, and the following fixed fees are charged to franchisees:

1. Franchise fee: The franchise fee is collected annually and varies in different cities in China, usually ranging from RMB 7,000 to 11,000.

2. Management fee: The management fee is collected annually from franchisees for daily management, operational guidance, and marketing support.

3. Training fee: Continuous training services are provided to franchisees, and training fees are collected annually.

In addition, Milksha's franchisees are usually required to pay a fixed deposit when signing the franchise agreement to ensure full compliance with the terms of the agreement. If there is no violation of the agreement, the deposit will be fully refunded after the expiration of the franchise agreement.

During the performance recording period, only 2% of the revenue came from franchise fees and related service fees, while the majority of the revenue came from the sale of products and equipment, mainly including the revenue from providing store materials and equipment to franchisees. Therefore, Milksha mainly treats franchisees as terminal sales channels, with the company playing the role of a raw material supplier.

According to the prospectus, Milksha is one of the few brands in the Chinese made-to-order beverage industry that purchases 100% of its beverage ingredients, packaging materials, and equipment from the brand itself. Approximately 60% of the beverage ingredients provided to franchisees by Milksha are self-produced, which is the highest in the Chinese made-to-order beverage industry according to a report by Zhushi Consulting. The core beverage ingredients are 100% self-produced.

Milksha's franchise model solves two problems that hinder the profitability of new tea beverages: first, it has formed a more optimal cost structure; second, the franchise model solves the problem of expansion leading to losses for tea beverage brands.

The supply chain is the key to Milksha's success, and it is also the cornerstone of Milksha's value proposition of "high quality at an affordable price".

According to a report by Zhushi Consulting, Milksha, as the first company in the domestic made-to-order beverage industry to establish a central factory, currently has the largest and most complete supply chain system in the industry, covering core aspects such as procurement, production, logistics, research and development, and quality control. Specifically:

In terms of procurement, Milksha's procurement network covers six continents and 35 countries worldwide. On the one hand, raw materials from high-quality sources around the world ensure the authenticity, freshness, and purity of the products; on the other hand, scale procurement also enhances bargaining power. Taking lemons, tea leaves, and coffee beans as examples, in 2022 alone, Milksha's procurement quantities for these three raw materials reached 50,000 tons, 9,000 tons, and 5,000 tons respectively, leading the industry in procurement scale. According to the report from Zhaoshi Consulting, in terms of the same type and quality of milk powder and lemon, the purchasing cost of Migu Bingcheng in 2022 is about 10% to 20% lower than the industry average.

On the production side, Migu Bingcheng has also become the enterprise with the most complete and largest scale of raw materials in the on-demand beverage supply chain field, and has achieved highly digitalized and intelligent production. Through its self-developed system, Migu Bingcheng provides a one-stop beverage ingredient solution including sugar, milk, tea, coffee, fruit, grain, and ingredients. It already has five production bases in Henan, Hainan, Guangxi, Chongqing, and Anhui, covering a total area of 670,000 square meters, with an annual comprehensive production capacity of approximately 1.43 million tons. This technology-enabled production process not only improves standardization and eliminates food safety hazards from the source but also enhances franchisees' satisfaction and consumers' experience.

Analysts pointed out that compared to higher-priced on-demand beverages, affordable on-demand beverages put more pressure on the breadth and depth of the company's supply chain and brand reputation. This means that leading affordable on-demand beverage companies not only have sustainable competitive advantages for expansion but also establish higher barriers to entry.

Looking globally, the size of the global on-demand beverage market is expected to reach approximately $1.1 trillion by 2028. Among them, the size of the Southeast Asian on-demand beverage market is expected to reach approximately $4.9 billion, with a compound annual growth rate of about 20.3% from 2022 to 2028, making it the fastest-growing market among major global markets.