New Stock Analysis | Gumeng: The growth rate of instant tea has peaked, can joining "leverage" continue to leverage capital confidence?

In 2010, at the age of 24, Wang Yunan founded the first "Guming" store in Daxi Town, Zhejiang Province, laying the first cornerstone of the Guming commercial territory. After 14 years of development, Guming has transformed from a regional small store to a national famous made-to-order beverage chain giant through franchise model, implementing a strategy of dense location distribution, and building a relatively complete supply chain system. The number of their stores is close to ten thousand, and the brand's influence spreads across the country. According to the Hong Kong Stock Exchange disclosure on January 12, Guming was listed through the Hong Kong Stock Exchange, with Goldman Sachs and UBS Group as joint sponsors. Guming's listing marks a key step for the company to formally enter the capital market and has sparked widespread attention and discussion. On one hand, in the fiercely competitive tea drink market, although Guming has achieved a significant scale advantage, its high reliance on franchise models raises questions about whether the company can continue to thrive in the current made-to-order tea market. On the other hand, as market saturation increases, how to continuously expand into new market spaces and maintain stable growth in same-store sales remains a pressing issue. Whether Guming can successfully break through in the wave of the capital market and continue to shine in its future commercial journey remains to be seen. China's largest popular made-to-order tea drink brand According to the prospectus, Guming is a leading and fast-growing Chinese made-to-order beverage company dedicated to providing consumers with fresh, tasty, consistent, and affordable high-quality products. Based on the GMV calculation for 2023, the "Guming" brand is the largest popular made-to-order tea drink brand in China with a 17.7% market share. As of December 31, 2023, the number of "Guming" stores is also the largest in China, with a total of 9001 stores, which increased to 9778 stores by September 30, 2024. As of September 30, 2024, Guming has 135 million registered Mini Program members, with over 43 million active members in the third quarter of 2024. The company's average quarterly repurchase rate in 2023 reached 53%, higher than the average repurchase rate of less than 30% for popular made-to-order tea drink brands. One of the main reasons behind Guming's high repurchase rate is the company's offering of a variety of consistent products. The prospectus shows that Guming stores mainly sell three categories of drinks: fruit tea drinks, milk tea drinks, and coffee drinks, as well as others. In 2023 and up to September 30, 2024, the company launched 130 and 85 new products, respectively. With its expanding store scale and growing member base, Guming's performance has continued to grow in recent years. In 2021, 2022, 2023, and the first three quarters of 2024, Guming's revenues were approximately 4.384 billion, 5.559 billion, 7.676 billion, and 6.441 billion yuan, respectively; during the same period, the total comprehensive income for the full year was approximately 23.992 million, 392 million, 1.077 billion, and 1.112 billion yuan, respectively. High reliance on franchise model It is worth noting that Guming's rapid business growth is mainly supported by the leverage effect generated by the franchise model. During the past performance period, the vast majority of Guming's revenue came from franchise stores. In the first three quarters of 2024, revenue from franchise stores accounted for 97.2% of the company's total revenue. According to the prospectus, from 2021 to September 30, 2024, the number of Guming franchisees increased from 2381 to 4842, while the number of franchise stores increased from 5689 to 9771. As of September 30, 2024, among the franchisees who have been operating Guming stores for over two years, on average each franchisee operates 2.9 stores, and 71% of franchisees operate two or more franchise stores. Guming pointed out in the prospectus that the company faces several risks related to the use of the franchise model, each of which could affect the company's revenue generation, damage the company's brand image, and potentially have adverse effects on the company's business and operating performance. These risks include but are not limited to, operational performance fluctuations risk, franchisee turnover risk, brand reputation damage risk, and increased market competition risk. In terms of franchise turnover, the franchisee turnover rates for Guming in 2021, 2022, 2023, and the first three quarters of 2024 were 6.2%, 6.7%, 8.3%, and 11.7%, respectively. The franchisee turnover rate is calculated by dividing the number of franchisees who terminated the franchise agreement in a specified year by the sum of the number of franchisees at the beginning of the year and the number of franchisees joining during the year. Guming stated in the prospectus that the main reasons for the increase in franchisee turnover rate during the aforementioned period were due to newly added franchisees having higher turnover rates, as the number of new franchisees increased from 2021 to 2023, and the industry faced slowdown and increased competition up to the first three quarters of 2024. Intense industry competition and expected slowdown in market growth Regarding the risks of competition in the made-to-order beverage market, Guming stated that the company faces fierce competition from other made-to-order tea drink brands in various areas, including product development and innovation, product quality and consistency, value for money, store location, consumer experience, and consumer acquisition and retention. Particularly, there are many Chinese tea brands with low differentiation in products, and the proximity of many made-to-order tea drink stores may limit the company's ability to effectively compete with others and may be overtaken by other made-to-order tea drink brands. Furthermore, intense competition may reduce Guming's market share and profitability, requiring the company to increase sales and marketing efforts and capital investments in the future. This may have a negative impact on the company's operational performance. According to the GMV calculation for 2023, the market share of the top five made-to-order tea drink brands is 46.8%, while the market share of the second to fifth rankings in the industry ranges from 4.6% to 9.1%. The competition among these brands is still fierce, and the outcome is yet to be determined. In the future, the growth of the Chinese made-to-order beverage market may slow down.Competition in the field may become even more fierce due to the slowdown in industry growth.According to the Zhaoshi Consulting report, the GMV (Gross Merchandise Value) of the Chinese ready-to-drink beverage market segmented by major submarkets is projected to increase from 187.9 billion yuan in 2018 to 517.5 billion yuan in 2023, with a compound annual growth rate of 22.5%. It is estimated that from 2024 to 2028, the GMV will increase from 627.9 billion yuan to 1163.4 billion yuan, with a decreasing compound annual growth rate of 16.7%. To cope with market competition and seize market opportunities, Guming plans to continue focusing on the industry's fastest-growing second-tier and lower-tier cities in the mass ready-to-drink tea market. As of September 30, 2024, the company will continue to increase store density in the 17 provinces where it already operates, along with expanding into the additional 17 provinces where they have not yet entered, providing ample growth space for the company. By 2023, provinces in mainland China where the company has not reached critical mass collectively account for 48% of the overall ready-to-drink tea market. In the future, the company will deepen penetration in existing provinces and expand its business to other provinces in China and other countries. To achieve its development goals, Guming plans to use the funds raised from the IPO for various purposes, including: expanding into new markets and increasing store density in existing areas; expanding the IT team and continuing to enhance digital business management and store operations; strengthening supply chain capabilities and improving supply chain management efficiency; improving consumer experience and operational management levels, as well as investing in talent development and research and development innovation to lay a foundation for the brand's continued development and competitiveness.