Is Auntie from Shanghai's "appearance anxiety" only relieved by opening a store?

A new tea beverage brand is racing for a Hong Kong IPO.

On February 14th, Shanghai Auntie (Shanghai) Industrial Co., Ltd. (referred to as "Shanghai Auntie") submitted its application to the Hong Kong Stock Exchange, becoming the fourth new tea beverage brand in the past six months to attempt to go public in Hong Kong.

As of the first three quarters of 2023, Shanghai Auntie has 7,297 stores. According to Torch Insight, Shanghai Auntie is the fourth largest freshly made tea beverage brand in China. Excluding the mid-range price range (10-20 RMB), Shanghai Auntie is the freshly made tea beverage brand that covers the most cities in China.

However, Shanghai Auntie has not received equal favor from the capital market.

The prospectus shows that in February 2024, in the latest Series C financing round, including institutional investors such as Hiroad (300915.SZ) wholly-owned subsidiary Shanghai Yipu Enterprise Management Co., Ltd., subscribed 12.2 million RMB for 2.43 million shares of registered capital, increasing Shanghai Auntie's registered capital to 102 million RMB.

Based on the above financing amount, Shanghai Auntie's latest post-investment valuation is approximately 5.127 billion RMB, with an estimated value of 700,000 RMB per store. In comparison, in 2023, another leading tea beverage company completed a 1 billion RMB financing with a valuation of approximately 18 billion RMB, with 7,117 stores and a per-store valuation as high as 2.53 million RMB, more than three times that of Shanghai Auntie.

In fact, despite having a nationwide store network, Shanghai Auntie has been facing "appearance anxiety" in recent years. It successively launched the Hukafé brand and the Shanghai Auntie Light Enjoyment Edition in 2022 and 2023, aiming to deepen its development in the coffee and lower-tier tea beverage sectors.

The prospectus shows that for this attempt to go public in Hong Kong, Shanghai Auntie plans to raise funds to enhance its digital capabilities; research and develop products and equipment; strengthen production, processing, warehousing, and other supply chain capabilities; enhance the brand for further expansion; marketing activities; and supplement working capital.

The Cost of Expansion

An interesting fact is that Shanghai Auntie is hardly in Shanghai, with only 60 stores, accounting for less than 1%. In contrast, in the northern market of Tianjin, Shanghai Auntie has as many as 336 stores.

This is related to Shanghai Auntie's expansion strategy.

In 2013, Shanghai Auntie launched Five-Grain Milk Tea, a beverage that adds grains as ingredients to milk tea, which became very popular in the northern market.

After setbacks in developing the southern market, founder Dan Weijun began to adjust the strategy and shifted to Fresh Fruit Tea in 2019, putting "Fresh Fruit Tea" on Shanghai Auntie's store signs.

According to the prospectus, as of the first three quarters of 2023, Shanghai Auntie's 7,927 stores cover 343 cities from Mohe in the north to Sanya in the south, with 49% located in third-tier and below cities.

Shanghai Auntie stated that in terms of store numbers, it holds a "leading position" among mid-range price freshly made tea beverage brands in the lower-tier markets.

However, the wider coverage of stores comes at the cost of Shanghai Auntie's relatively weaker profit performance. In 2022, Shanghai Auntie's gross profit margin was only 21.8%, much lower than the 29.97% of the same period for Guming and the 35.7% of Chabaida. The main reason is that 80% of the costs of Auntie in Shanghai are from raw materials, and the main raw materials such as fresh fruits have regional restrictions on procurement, with high transportation losses.

For example, the mangoes purchased by Auntie in Shanghai mainly come from Guangxi, while mulberries are sourced from Sichuan. With each additional region covered by the stores, both transportation costs and difficulties increase accordingly. After all, the difficulty of shipping from Guangxi to Guangdong and Heilongjiang cannot be generalized.

According to Ma Li, an analyst at Zheshang Securities, the current branded tea beverage track has strong regional attributes, mainly due to the procurement and transportation radius limitations of fresh fruit raw materials.

However, at the retail level, Auntie in Shanghai has a lower customer unit price compared to its peers.

According to Ma Li, an analyst at Zheshang Securities, the customer unit price of Auntie in Shanghai is 1-3 yuan lower than that of Guming and Chabaida, with a store gross profit margin of 40%, while the latter two are 65% and 60% respectively. In other words, for the same cup of 20 yuan milk tea, Auntie in Shanghai earns 5 yuan less in gross profit compared to its peers.

Left hand sinking, right hand coffee

Watching the brainwashing songs spread all over the streets by Heytea, who partnered with Fendi, Auntie in Shanghai seems a bit anxious.

This also results in not insignificant sales expenses.

From 2021 to the third quarter of 2023, the sales expense ratio of Auntie in Shanghai reached 10.85%, 12.66%, and 10.12% respectively, far higher than the single-digit level of similar comparable companies; the levels of management expense ratio and financial expense ratio are also at the forefront of the industry.

This led to a net profit margin of only 12.77% for Auntie in Shanghai in the first three quarters of 2023, despite the drop in raw material prices driving its gross profit margin up to 31.15%, which is about 5 and 3 percentage points lower than Guming and Migu Bingcheng, respectively.

It's no wonder Auntie is anxious, as the new tea beverage track is too competitive, especially in the mid-range price segment, which accounts for about 45%.

According to Ma Li, an analyst at Zheshang Securities, in terms of store numbers, Migu Bingcheng has a national market share of about 7%, with Guming, Chabaida, Auntie in Shanghai, and Shuyi Shaocao all in the mid-range price segment, with similar market share gaps, intensifying competition.

The only way for all participants to deal with the competition is to open more stores.

This is especially true for Auntie in Shanghai, which focuses on fresh fruit tea, as more stores can create economies of scale to suppress costs.

Currently, in order to open more stores, Auntie in Shanghai has two solutions. On one hand, it has launched a sub-brand called Auntie in Shanghai Light Enjoy Edition targeting third-tier and below cities, with prices ranging from 2-12 yuan, further penetrating the sinking market. On the other hand, it has started selling coffee in Auntie in Shanghai stores, launching the Hukafei brand with prices ranging from 13-23 yuan, almost overlapping with Luckin's price range.

According to the prospectus, as of the first three quarters of 2023, it has 40 Light Enjoy Edition stores and has started selling coffee in 1964 Auntie in Shanghai stores.

This means that Auntie in Shanghai, which has not yet determined the winner in the fiercely competitive mid-range tea beverage market, is simultaneously entering the low-price tea beverage and coffee market, and its "leading" level of the three expenses compared to its peers may continue in the short term. In this context, will the Shanghai aunties in the secondary market be revalued if the single-store valuation obtained in the primary market is lower than that of their peers? The market is eagerly watching for the outcome.