Chagee Holdings Ltd. Q1 FY2025 Earnings Call

Good morning and good evening, ladies and gentlemen. Thank you for standing by and welcome to Chagee's First Quarter 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. We will be hosting a question-and-answer session after management's prepared remarks. Please note that today's event is being recorded. With that, I'll now turn the call over to the first speaker today, Ms. Alicia Guo, Investor Relations Director of the company. Please go ahead, ma'am.

Thank you. Hello, everyone, and welcome to Chagee's first quarter 2025 earnings call. With us today are Mr. Junjie Zhang, our CEO; and Mr. Aaron Huang, our CFO. The Company's financial and operating results were released earlier today and are currently available online. Before we continue, I refer you to our safe harbor statement in the earnings press release, which applies to this call. Any forward-looking statements that we make on this call are based on assumptions as of today and Chagee does not undertake any obligations to update these statements. Also, this call includes discussions of certain non-GAAP financial measures. Please refer to our earnings release, which contains a reconciliation of non-GAAP measures to GAAP measures. With that, I will turn the call to our CEO, Mr. Junjie Zhang. Please go ahead.

Hello, everyone, and thank you for joining us on our first earnings call as a public company. This April marks a pivotal moment in our journey as we joined NASDAQ, a significant achievement that positions us for our next chapter of growth. This milestone does more than strengthen our financial foundation; it introduces the innovation and dynamism of Greater China's premium tea drinks brand to global investors. I'm profoundly grateful to the entire Chagee team whose talent and dedication made this possible. To our franchise partners, your confidence in our vision has been instrumental in our expansion. And most importantly, to our customers, Chagee friends, your loyalty remains the bedrock of everything we build. Finally, I want to sincerely thank our shareholders. Your trust and support enable us to move forward with confidence and create greater long-term value. I'm delighted to share our operating results for the first quarter of 2025, along with our strategic plans for the future. Overall, we maintained steady growth in the first quarter with several key metrics showing strong improvement. Revenue for the quarter reached RMB3,392.7 million, up 35.4% year-over-year. Total GMV generated in the first quarter was RMB8,226.8 million, growing by 38% from a year ago. Net income was RMB677.3 million, a 13.8% increase compared to the same period last time. These results demonstrate the resilience and sustainability of our business model. Our solid performance is mainly driven by three strategic pillars working together: continued global expansion, differentiated product innovation, and a healthy customer ecosystem. These pillars not only supported our strong results this quarter but also formed the foundation of our long-term competitive advantage. First, on store network expansion, we continue to improve our global footprint. By the end of the first quarter, we had 6,512 stores in Greater China, a net increase of 228 stores from the previous quarter. GMV in the Greater China market was RMB8,048.4 million, up 37.2% year-over-year. Our overseas expansion progressed steadily, with the total number of stores in Southeast Asia rising to 169, including nine new stores in Malaysia and four in Singapore. GMV generated from the overseas market reached RMB178.4 million, representing an 85.3% growth year-over-year. It's worth mentioning that on April 11, 2025, we reached a significant milestone with our first Indonesian location in Jakarta. This store showcases our premium tea offerings, fresh brewed selections, and signature beverages, all enhanced by our proprietary tea espresso extraction method that delivers unparalleled depth and aroma. The space itself celebrates our cross-cultural vision through stunning murals by acclaimed local artists, thoughtfully weaving tea traditions with local heritage. Just weeks later, on May 11, we had a grand opening for our first US flagship store in Los Angeles, which served over 5,000 cups on its opening day, a remarkable milestone that signals strong momentum in this key market. Second, in product innovation, we bring back seasonal limited products for existing users while continuously launching new products to attract new customers. This quarter, we expanded our lineup with seven innovative offerings, including the low-caffeine BOYA Tea Latte and our specialized low-caffeine collection. Our low-caffeine range delivered strong week-over-week GMV growth with particularly encouraging results in pilot cities where customer reception has been positive. Launch week performance showed higher GMV growth than other cities, driven by strong afternoon and evening consumption patterns. Notably, the low-caffeine BOYA Tea Latte now holds one-third of the highest new customer conversion rate. We further amplified this momentum by creating a dedicated low caffeine showcase within our mini-program, strengthening category recognition and highlighting its unique value proposition. Furthermore, our seasonal specialty Xing Shi Chun Shan, featuring premium Longjing tea, represented over 16% of total cups sold during its limited availability and secured our third-highest repurchase rate, clearly demonstrating strong consumer appeal. Our Valentine's Day collection Meigui Cong Zhong achieved exceptional market visibility with 340 million online impressions, standing out through its sophisticated rose-infused flavors and distinctive packaging that resonated perfectly with the holiday spirit. According to data from Social Touch, Chagee maintains leadership in the premium tea beverage sector across both volume and engagement metrics, while holding the top position in key social media search rankings. Third, we've cultivated a thriving user ecosystem that continues to expand. By the close of the first quarter, our registered members in the Mobile Mini-Program grew to over 192 million, with 15 million new members joining during this quarter alone. Our active member count is now approaching 45 million, with steadily strengthening engagement metrics across all segments. A significant driver of this growth has been our low-caffeine selections, which have successfully captured increased afternoon and evening consumption occasions. Building on this momentum, our precision-targeted marketing campaigns and strategic brand partnerships have established a powerful foundation for sustained customer acquisition and retention. Moving forward, we will continue to advance our three core strategies. First, we will optimize our store network while driving operational efficiency at the store level, streamlining our cost structure and rightsizing labor and rental expenses. Second, we remain committed to product innovation that showcases our authentic leaf tea heritage. Third, we will enhance the customer experience to reinforce our premium brand positioning. We remain steadfast in our mission of aspiring to foster a global connection of people and cultures with every cup of our tea, positioning Chagee as the authentic voice and premier representative of Chinese tea heritage on the world stage. As we pursue sustainable shareholder returns, we will persistently push the boundaries of what's possible in our pursuit of excellence and continue to foster a global connection of people and cultures through our tea. With that, I will turn the call over to our CFO, Aaron, to go over the financials.

Thank you, Junjie, and hello, everyone. First, I would like to express my sincere appreciation for all the support and the help from our staff, business partners, and shareholders along the way. As a listed company, we will continue to focus on the sustainability of business growth and value creation for our shareholders. Before we get into the financials, please note that all numbers are in RMB and all comparisons are on a year-over-year basis, unless otherwise stated. We began 2025 with solid execution across our key business priorities. We made meaningful progress in network expansion, adding stores that are enhancing our market position, while delivering notable improvements in store operation efficiency. These achievements highlight our team's consistent execution capabilities and the resilience of our business fundamentals. Building on this foundation, we continue to advance strategic initiatives designed to ensure our business remains adaptable and resilient amid current market dynamics. First, we continue to optimize our supply chain efficiency across all markets. As we expand globally, we work with local suppliers where it makes operational sense, which helps us maintain product freshness and manage logistic costs. This approach supports our commitment to delivering high-quality products to consumers while maintaining operational efficiency. Second, we have prioritized cost optimization and operational efficiency across our business. By leveraging our growing scale, we have enhanced our negotiation position with suppliers and streamlined our operations. Third, we expect our geographic diversification into Southeast Asia and the North American market will reduce our dependencies on any single market while creating new growth opportunities. These strategic initiatives have positioned us well to navigate market uncertainties while we continue to deliver strong financial results. Next, let's go through the financials. Our net revenue for the first quarter increased by 35.4% year-over-year to RMB3,392.7 million, mainly driven by the continued expansion of our tea house network. Among them, net revenues from franchisee tea houses grew 31.8% to RMB3,149.9 million, representing 92.8% of our total revenues. Net revenue from company-owned tea houses increased by RMB107.7 million to RMB242.8 million, accounting for 7.2% of total revenues. The average monthly GMV per tea house in Greater China was RMB431,973 in the first quarter. While this represents a sequential decrease from the fourth quarter last year, it's important to note that this primarily reflects two factors. First, seasonality, as the first quarter typically experiences low consumer traffic following the Chinese New Year holiday period. And the second, our strategic network expansion, which includes a higher proportion of tea houses in their honeymoon phases. Turning to margins and expenses, operating income was RMB820.8 million with an operating margin of 24.2% compared to 28.2% in the first quarter of 2024 and 19.3% in the fourth quarter of 2024. This change reflects our strategic investment in brand-building and marketing for new product launches, research and development to enhance our product offerings, digital infrastructure to improve customer experience, and talent acquisition to support global expansion. To elaborate, operating costs for the company-owned tea houses were RMB157 million, up 170% from a year ago, but down 3.8% from the fourth quarter of 2024. As of March 31st, 2025, we operated 191 company-owned tea houses, up from 169 at the end of 2024. On this per store basis, operating costs have decreased compared to the full-year 2024, showing improved efficiency at the store level. Other operating costs increased by 79.6% to RMB172.5 million. This was primarily driven by higher payroll, utility, office expenses, and travel costs to support the rapid expansion of our franchisee tea house network. As a percentage of total net revenue, other operating costs were 5.1%, up from 3.8% in the same quarter of 2024. Sales and marketing expenses for the quarter were RMB299.3 million, up 166% from a year ago. This increase was primarily driven by higher advertising costs related to the launch of the new tea products and the associated marketing campaigns, as well as increased payroll expenses due to the expansion of our sales and marketing team. As a percentage of total net revenue, sales and marketing expenses were 8.8% compared to 4.5% in the same quarter of 2024. General and administrative expenses reached RMB352.8 million, an increase of 62.1% from a year ago. The growth was mainly attributable to higher R&D expenses for upgrading existing tea recipes and rolling out our new product, increased IT service costs to support business development and operational efficiency, and higher payroll expenses resulting from an expanded administrative team to support our growing business. G&A expenses accounted for 10.4% of total net revenues compared to 8.7% in the same quarter of last year. As a result, net income increased by 13.8% to RMB677.3 million, resulting in a net income margin of 20% compared to 23.7% a year ago and 19.3% in the fourth quarter of 2024. The decline of the net income margin versus last year Q1 is due to, firstly, continued investment in branding and marketing, especially in new products and overseas markets. And secondly, net losses occurred from overseas operations, which were still at a ramping-up stage. Basic and diluted net income per ordinary share was RMB3.92 during the first quarter. As of March 31st, 2025, our cash and cash equivalents, restricted cash, and time deposits totaled RMB5,392.4 million, up from RMB4,868.7 million at the end of 2024. Our IPO in April raised total gross proceeds of approximately $472.9 million, including the over-allotment option, providing significant flexibility to fund our growth initiatives and navigate market uncertainties. We will not be providing formal quarterly financial guidance at this time. Instead, we are focused on executing our long-term growth strategies and delivering lasting value to our shareholders. We may consider providing such guidance in the future as we see fit. With that, I will hand it back to the operator to begin the Q&A session. Operator, please go ahead.

Our first question comes from the line of an analyst from CICC. Please go ahead.

Okay. Thank you, management. Congratulations on the solid revenue and profit growth in Q1. So I have a question on the overseas markets. Could you provide an update on your current overseas market expansion and development? Thank you.

Thanks. That's a good question. As of March 31st, 2025, we have 169 overseas stores, including 157 in Malaysia, 10 in Singapore, and 2 in Thailand, representing only 2.5% of our global network, but they demonstrate exceptional growth quality. Overseas GMV reached RMB178 million, growing 85.3% year-over-year, highlighting the tremendous growth potential of the overseas market. Taking Singapore as an example, our 10 stores achieved an average monthly GMV of approximately RMB1.8 million per store in Q1 '25, substantially higher than the Greater China market average. This demonstrates the higher spending power and profitability potential in the early stage of development in the overseas market, providing crucial support for our long-term growth trajectory. We have achieved strong results in our strategic markets. In Singapore, we added four new stores in Q1, bringing the total store count to 10 stores. These stores delivered excellent per store GMV performance in Q1. In Indonesia, our new store in Jakarta, which opened on April 11th, performed exceptionally, selling over 10,000 cups in the first three days and acquiring over 5,000 registered users in the first week, with a daily average of over 2,000 cups in April. In the United States, our Los Angeles flagship store opened in May with over 5,000 cups sold on the opening day, generating strong market visibility. These results show that we can tailor our product offerings and the in-store experience to local market demands, delivering authentic regional characteristics for consumers. At the current stage, we are focused on building our team and systems overseas. This helps us create a strong foundation for healthy long-term sustainable growth. When it comes to opening new stores abroad, we care more about quality and key performance rather than just how fast we can expand. Moving forward, we will continue to expand our global footprint while maintaining steady growth in the Greater China market. By strategically enhancing the contribution of the overseas stores, we aim to propel towards the goal of becoming a world-leading tea drink brand. Next question, please.

Thank you. One moment for the next question. Our next question comes from the line of Xinwei Liu from Citi. Please go ahead, sir.

Hello. Thanks, management. I have one question about same-store sales growth. Could you provide more details on your Q1 same-store sales growth trends? Thanks.

Thank you for the question. Yeah, same-store sales growth (SSSG) is measured for stores that have been opened for at least 13 months and have generated sales in both periods being compared in the first quarter of 2025. So, about 3,300 stores met these criteria. This made up around 50.6% of our total store portfolio at the end of the quarter. SSSG experienced a decline as our store-level performance started to follow a normalized trajectory. As a result, Q1 SSSG was negative 18.9% after we rapidly scaled our new tea house expansion from over 4,000 to over 6,600 just within one year. This unprecedented growth strategy helped Chagee to rapidly take the leading market share in the premium category of fresh made tea drinks, far ahead of our closest peers. Now, Chagee is transitioning from a rapid market penetration strategy to a same-store sales growth strategy. To do so, we focus on new products, more usage occasions, exciting marketing events, and excellent customer experience through day-to-day operations. So we work closely with our partners to grow in a healthy way by creating high brand value to win consumers instead of just by cutting prices. We have seen consistent and healthy growth in the same-store sales over the last several years in some of the more mature markets, for example, in Jiangnan and Guangxi provinces, where we have operated for over six to seven years. The same-store sales growth in Q1 still reached high single-digit to high teen levels. Thanks.

Thank you for the questions. That concludes the Q&A session. So, I would like to hand the call back to management for closing.

Thank you again for joining our call today. If you have any further questions, please feel free to contact us or request through our IR website. We look forward to speaking with everyone in our next call. Have a good day. Thank you.

Bye.