China bubble tea chain Mixue surges over 40% on debut

And that's worldwide. So that's more McDonald's 40 McDonald's doesn't have 45,000 outlets, but M does. OK, so what's the big news now, right? So M went public in Hong Kong on Monday, raising $444 million in an IPO. Following that, shares jumped over 40% on its market debut after it was heavily oversubscribed by more than 100 times of the total number of offer shares initially available. So you want to get a better understanding of this IPOs. So we have uh joining us right now Gary Eng,

he's senior economist for APEC at Texas. Uh, Gary, thank you for joining us and welcome to Open for Business on CNA 938. So the listing was heavily oversubscribed. Did this come as a surprise to the markets? Well, um, first, thanks for having me today. And then I don't think this is too much surprise to the market,

and uh there are two reasons for that. And from a general perspective, we do see there is this improvement in the sentiment which we really haven't seen in the past 3 years in the China-related assets driven by all this tech story. Dipsy, which has been basically filled the China's growth story again that people think that, OK, maybe actually a lot of assets may be undervalued compared to what they think before.

And of course for the case of M, the second reason is that it is at a sweet spot even though the Chinese economy may be decelerating, but if you. at this business model, it is actually targeting the residents that may be experiencing a consumption downgrade, but it's offering very affordable type of drink with the innovative solution in the F&;B industry. So it's not really aiming at selling something at a very high profit margin, but really about the high quantity.

So quantity over quality in a manner of speaking. So uh if we take a look at the timing of this listing, Gary, what conclusion can we draw here? Is there a link to the boom that we're seeing in the Chinese tech sector as well? Well, yes, I think that's definitely a very strong connection towards that because I mean, of course Misha is not.

related to the tax story, but the tax rally in China really boost the confidence of investors not only in China but also globally that people really think and look at China's growth story again. So yes, I would say that it's not a tech company, but it's definitely related to all this tech rally that we have been seeing over the past 1 or 2 months. And Gary, so we want to talk about Mish Xuan now being an attractive investment, it seems, uh opportunity. What

makes it so attractive? Well, um, indeed, um, if you look at the usual China's company growth model, it is really about having the very big quantity in terms of the size. In the domestic market, so 1.4 billion people, if each of the residents actually buy one milk tea from them,

that would be a very big market. But at the same time, I think this sort of business in F&;B is also trying to expand overseas because domestically, of course, there's that's pressure on the deflation, but I think M is also an example to show that it's Able to use it or model not only in China but look at what the other overseas market, which may actually offer them a higher profit margin model that investors

may be actually thinking about the future as well. So if you put it this way, it's really like a story that it can repeat this model maybe towards the rest of the world which can challenge, you know, other. FNB giants. From the investor's perspective, what risks should we be aware of in relation to M's IPO and perhaps

its future growth prospects as well? I think we should also look at the risk of this company and I think when we look at the milk tea industry, one of the biggest problem that we see here is that even though the growth prospects seems to be very uh great, but we cannot forget the fact that um it is also an industry that is highly replaceable, which basically means that in uh like today, maybe a consumer really like the product of M share,

but how Mha can actually distinguish itself versus um other players in the future? Would there be any other competitors which are able to sell uh Cheaper products or basically other sort of products that would attract consumer attention and then basically change the consumer spending pattern again. I think that is also a very, very good question that we should ask and then really depends on,

you know, how the management will manage this issue. But again, compared to many other industry, um, this industry is highly replaceable. Gary, Michuan now has the most number of stores owned by any food and drink chain. Is this rapid growth sustainable, do you think?

Well, um, I think the biggest difference of me share versus some of the other fast food chain is that the input costs may be a bit lower and of course, um I mean we do talk about that it has already surpassed some of the very large American fast food chains like McDonald, but let's not forget that for me

here the story is much smaller. The cost of really setting up everything will be much smaller than McDonald because of the more limited choice of the products is really about limiting or focusing on like a few, not a field, but like there's many choices, but you know, on drinks itself.

So the setup basically come with a lower cost. Then it is really about when it is expand, right, where the, where does the money come from if it is really from a very heavy leverage and if there's a certain change in the consumer preference, I do think this can pose a risk.

So it is really about whether it can actually keep this hype on Mti continue, um, you know, towards other market as well, but I I do think that domestically it's possible to see more companies trying to tap on the same type of business business model because the competition is simply quite high in China. Then the question is really whether it can expand overseas at a moderately good pace.

Which at the reasonably OK average. Yes, so I agree that it's possible to see, you know, certain over expansion, especially in the case within China. So, uh, going back to MXue's IPO, what would be the first sign of M Xue's true stock value? Uh, if I were an investor putting my money on Mue, how would I know what exactly is the true value by the time all of this hype dies down?

Well, um, I would say the revenue side will still be something very important and of course Mish may have a very high market share in China, you basically see the stores everywhere and then it's also tapping on this consumption kind of downgrade story that people choose to consume

their products. But I think if we are like looking at whether the Business model or the profit may actually reach a limit and look at some of the other periods FNB chains in China which may have fallen into a similar trap. For example, Haidao. I think we also have seen this hotpot chain everywhere, including in in Singapore, and they have adopted a very aggressive strategy and expansion before which at

the end they need to scale it back. So I Don't be surprised that we may end up in the same path eventually, but I guess in the short run, um, as long as they can still feel their profit with a reasonably OK leverage, maybe that business model at least will still be sustainable. But I guess once we start to see uh and and like expansion in stock at the same time, a fall in the profit. Per store, I think to me this is like a warning signal that maybe there could be a certain stress

from the overexpansion. I'm not saying this will necessarily happen. It really depends on the management, but it will be a warning signal to me. Yeah, it will definitely be one for the investors as well. In the meantime, we probably will have to see more niches popping up around the region and around the world before all of that happens. Gary, thanks very much for joining us this morning. That's Gary Ng, senior economist for APEC at Nitis.