Is China’s Bubble Tea Bubble About to Burst?

Bubble tea, originating in Taiwan in the 1980s, has become a global phenomenon with an estimated half a million shops in China alone. The drink’s popularity spread from Asia to the West, making it almost impossible to find a major city where it isn’t on sale. Innovation has been key to its success, with new flavors and recipes constantly being launched. This approach has also helped bubble tea chains expand beyond China’s major cities.

Despite China’s slowing economy and consumers tightening their belts, bubble tea continues to provide an affordable pleasure to consumers in China. The “wide price range” of products offered by different bubble tea chains has helped the industry grow. However, some investors have not shown the same level of enthusiasm.

Several Chinese tea chains have looked to sell shares to the public in recent years, seeking to cash in on the craze. Last month, China’s third largest bubble tea chain, Sichuan Baicha Baidao Industrial (Chabaidao), made its stock market debut, but the shares plunged on their first day of trade and have yet to recover. Another disappointing debut by Shenzhen-based Nayuki, which has lost more than 80% of its value since its launch in Hong Kong almost three years ago.

Analysts point to several reasons for these weak performances, including concerns about the Hong Kong stock market as a whole. The amount raised from new listings in the city since the start of this year has dropped to levels not seen since 2009, according to consultancy firm Deloitte. However, other bubble tea chains are planning their own share sales.

China’s first and second largest chains by number of shops – Mixue Group and Guming Holdings – submitted applications to list on the Hong Kong Stock Exchange earlier this year. “Persisting weak market sentiment in Hong Kong is the primary reason” for Chabaidao’s market blunder, said Gary Ng, a senior economist at Natixis. He believes the city will struggle to attract new listings until there “is a clear sign of China’s pivot to growth and lower US interest rates.”

Others say investors are focusing on problems within the bubble tea industry itself. It “has relatively low barriers to entry, leading to increased competition,” said Kenny Ng, Securities Strategist of Everbright Securities International. Many companies rely on opening new stores to sustain revenue growth, but this expansion strategy can lead to a decline in gross profit margins as companies face higher costs associated with store operations and management.

For bubble tea fans, growing competition has its advantages, as price has become less of a factor when choosing between different brands because “they have a lot of discounts and vouchers.” However, for bubble tea makers and their potential investors, lower prices and higher costs could prove to be an unattractive recipe. “The Chabaidao case highlights the risks and does not bode well for the listings of other bubble tea chains,” warned Gary Ng.

Read More @ BBC

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