Bubble tea will test limits of China’s consumers

Staff members prepare tea beverages for customers at a store of Chinese bubble tea chain Nayuki in Beijing, China June 24, 2021. REUTERS/Tingshu Wang

HONG KONG, Aug 8 (Reuters Breakingviews) - Bubble tea may be the new bellwether for the Chinese consumer. At least half a dozen boba-drink makers, including China’s largest chain by store count, Mixue Bingcheng, are planning initial public offerings in Hong Kong or the United States, Bloomberg reports. Margins are low in a market that generated $20 billion in sales in 2021, per research firm Momentum Works. But the sector can thrive – even if Beijing holds back on much-needed stimulus.

It’s an awkward time to pitch global investors the cheap sugary beverage popular among China’s Gen Z. Shoppers in the world’s second-largest economy are tightening their belts as confidence weakens and youth unemployment hits a record-high 21%. Total returns at once-popular consumption plays like Yum China (9987.HK), which operates mainland KFC and Pizza Hut stores, and the $16 billion hotpot restaurant operator Haidilao International (6862.HK) are just 4% and 1.3% respectively since the start of the year, far below the 17% at the S&P 500 (.SPX). Shares in Hong Kong-listed Nayuki (2150.HK), the country’s only publicly traded bubble tea chain, have dropped 70% since their debut in 2021.

Still, there are promising signs for the public market wannabes. Nayuki, known for its cheesy foam toppings, is currently worth roughly $1 billion, or around 16 times its forecast earnings for the next 12 months, according to analysts polled by Refinitiv. That’s higher than e-commerce giant Alibaba’s (9988.HK), multiple of 11 times and on par with Tencent (0700.HK). And even though its full-year operating profit margin is estimated to be a razor-thin 6% in 2023, revenue growth is on track to hit 63%.

One reason is that Chinese consumers may be paring back in big-ticket discretionary items like luxury goods and cars, but they are still willing to spend in other areas. July data from research firm China Beige Book show strong growth in restaurant-chain and travel sales; Starbucks (SBUX.O) reported an impressive 46% year-on-year jump in comparable China revenue in the quarter ending July 2. As consumption shifts to lower-end products, that bodes well for sellers of the tapioca ball-packed beverage: one of Mixue’s drinks retails for 8 yuan on average, roughly a quarter of the price of a cup of coffee.

With Beijing unlikely to roll out meaningful stimulus – such as cash handouts to households – bubble-tea makers can still deliver a potent brew for investors.

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own. Refiles to add link in fourth paragraph.)

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CONTEXT NEWS

At least six bubble tea companies are looking to go public in either Hong Kong or the United States, Bloomberg reported on July 24 citing people familiar with the matter.

In 2022, China’s biggest bubble tea chain by store count, Mixue Bingcheng, filed for a $918 million initial public offering in Shenzhen. The deal has been on hold, sources told Bloomberg, and the company has yet to make a final listing location.

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