Chagee: Stores up, stock down?
[First Take] Chagee Holdings Limited ($CHA; CHA US)
Disclaimer: This is a record of my investment decisions, not financial advice. I may change my decisions without notice. Use this only for education and entertainment. Do not rely on this for your investment decisions.
About
Share price: USD 10.34
Market capitalisation: USD 1,921 mn
Enterprise value (EV): USD 809 mn
Average daily volume (ADV): USD 9 mn
NTM P/E: 8x
Time spent: ~3 hours
My Decision
Pass
Background
“If you like the product, buy the shares!”
In Apr 2025, you tasted the ‘smooth, soft and subtle earthy tone’ of Chagee’s Jasmine Green Tea Latte. You liked it so much. With great excitement, you bought shares in Chagee during its IPO in that same month. Today, you are down -68%.
What happened? Do you need to improve your taste in tea?
Undeterred, you did more research. You tried Auntea Jenny’s Light Jasmine Milk Tea. It tastes better! With yet greater excitement, you bought shares during Auntea Jenny’s IPO in May 2025. Today, you are down -40%.
As you walk down the street lined with endless teashops, you spotted a fellow investor. He sits with a slumped chest and vacant eyes, staring into the distance. With quiet desperation, he sips from a teacup, one of the many identical ones scattered around him. You catch a glimpse of the brand. 奈雪. Naixue. Down -94% from its IPO in 2021.
In my Substack post, I try to make sense of why the share prices of many popular tea chains have collapsed: (a) an oversaturated market; (b) relentless new supply because barriers to entry are low and (c) rapidly shifting consumer tastes.
Because of these factors, I decided to pass on Chagee Holdings Limited (CHA; CHA US). Even though CHA appears like a bargain, the probability of a good investment outcome is low.
Clearly, liking a company’s product is different from making a good investment. Investing is about laying out cash today for more cash in the future. Besides the product, there are many other important factors to consider in an investment strategy.
In a future Substack post, I will discuss my investment philosophy and strategies that has helped me achieve reasonable returns within acceptable risks across the market cycle. If you’d like to read the post when it’s out, click the link below and subscribe.
Business model
Breakdown of 2024 revenue (RMB 12.4 bn, +167% YoY):
94% from franchised teahouses (+165% YoY)
6% from company-owned teahouses (+217% YoY)
Revenue from franchised teahouses is generated by providing products and services to CHA’s franchised teahouses under franchise arrangements.
Out of the 94% revenue from franchised teahouses, 80 ppt is generated from sale of raw materials, 7 ppt from teahouse equipment and other supplies and the remaining 7 ppt is earned from franchising and other services.
Revenue from company-owned teahouses is generated from the sale of freshly made tea drinks directly to customers at company-owned teahouses.
As of 2024, CHA 0.00%↑ has 6,440 retail shops (“teahouses”). 6,284 teahouses are in mainland China and HK. The remaining 156 teahouses are located overseas, mainly in Malaysia (148 teahouses).
6,271 teahouses are franchised while the remaining 169 teahouses are directly owned by CHA.
No customers individually represented > 10% of CHA’s revenue in 2024. However, there were two suppliers that exceeded 10% of CHA’s total purchases during 2024.
Relevant public comparables include Nayuki Holdings Limited (2150; 2150 HK), Auntea Jenny (Shanghai) Industrial Co., Ltd. (2589; 2589 HK), and Sichuan Baicha Baidao Industrial Co., Ltd. (2555; 2555 HK).
My reasons
An oversaturated market. Data gathered using Perplexity shows teashop density in mainland China is the second highest in the world, just behind Taiwan and significantly ahead of other major economies like the US.
In mainland China, there are about 30 teashops per 100,000 people. Compare this to ~10 coffeeshops per 100,000 people. The same numbers for the US are ~3 teashops and ~20 coffeeshops per 100,000 people.
You may argue that the market is not oversaturated because the Chinese drink tea whereas Westerners drink coffee.
However, the number of teashops in mainland China is around 10 times that in the US, while the number of coffeeshops in the US is only about twice that in China.
This disproportionately higher density of teashops in mainland China, relative both to its own coffee market and to the US, strongly suggests that the teashop market is oversaturated in mainland China.
Another indication of oversaturation can be found in Chagee’s same store sales growth (SSSG). Chagee recorded -19% decline in SSSG in each of Q4’24 and Q1’25. In Q2’25, SSSG deteriorated further to -23% and reached -28% in Q3’25.
Relentless new supply because barriers to entry are low. Despite oversaturation, players are still adding stores at a frenzy rate.
In Q3’25, CHA increased its number of teashops by +26% YoY despite declining same store sales of -28%. In H1’25, Auntea Jenny added 12% more teashops compared to the same period last year.
Barriers to entry are low. As you can imagine, tea is not a complicated product. A teashop can operate in areas as small as 15 sqm. The startup costs are much lower than other food and beverage concepts.
This is evident in the sheer number of brands that enter the market every year. ChaPanda started in 2008. Auntea Jenny started in 2013. Chagee was founded in 2017. No Yeye No Tea in 2018. Molly Tea started in 2021. The list goes on and on…
Rapidly shifting consumer tastes. When I started drinking tea, tea was just leaves + water. Then someone started putting in those tiny balls they call boba. Tea transformed into bubble tea.
Gong Cha was the untouchable king of bubble tea. Then people started ditching Gong Cha for brown sugar bubble tea by The Alley, cheese bubble tea by Naixue, etc.
Next was CHICHA San Chen which brought an artisanal experience to bubble tea with its ‘Teapresso’ machine.
Now, Chagee dominates with its ‘tea-first’ beverage without heavy toppings.
We have come a full circle: from leaves + water to boba and many other toppings back to leaves + water.
The casualty count is high. Gong Cha has shuttered all its stores in Singapore1. Nayuki is still running losses2[2].
Chagee may be the king of bubble tea now, but 10 years from now, who knows?
In a future Substack post, I will discuss my investment philosophy and strategies that has helped me achieve reasonable returns within acceptable risks across the market cycle. If you’d like to read the post when it’s out, click the link below and subscribe.
I’m no Chagee expert but I’ve never seen a relatively young company with such great margins and past growth and such atrocious same store sales growth this year. If they can figure out their store density there may be an investment case. And stay relevant of course.