Earnings Call Transcript - CHA Q3 2025

Operator, Operator

Good morning and good evening, ladies and gentlemen. Thank you for standing by, and welcome to Chagee's Third Quarter 2025 Earnings Conference Call. 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.

Alicia Guo, Investor Relations Director

Thank you. Hello, everyone, and welcome to Chagee's Third 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 obligation 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, sir.

Junjie Zhang, CEO

Hello, everyone. Thank you for joining Chagee's Third Quarter 2025 Earnings Conference Call. First, I want to express my sincere gratitude to every member of the Chagee team. In dynamic and challenging markets, our resilience and strong execution have driven steady progress and built a solid foundation for the long-term future we envision. Over the past few years, we have consistently asked one core question: Why does Chagee exist? Our answer is clear: we exist to bring people together through tea. This founder mission and commitment drive us to focus on user value as the starting point for all strategies. Every decision and initiative aims to expand and deepen a community of people who connect with our brand value. Guided by this belief, we will steadfastly execute our high-quality development strategy. We're dedicated to delivering high-quality products rather than chasing traffic and trends. We prioritize product excellence. Our ongoing raw material upgrades ensure tea that is authentic, wholesome, warm, and culturally rich, serving as a cornerstone of every experience and a key trust pillar for our brand. We emphasize the user experience, creating engaging content and building emotional connections to make each cup a shareable story. Our offering goes beyond a beverage to a distinctive experience rooted in Eastern aesthetics. Store quality remains our focus, and global expansion will depend on the health and profitability of each store. We pursue healthy growth across our network, identify high-potential locations, and strive to make every Chagee store the go-to place for friends gathering over tea. In the face of short-term market fluctuations, we will maintain our strategic results. We're deeply confident in the vast potential of the global tea beverage market and in the distinctive path Chagee has chosen, which is driven by culture and quality. These are my reflections on the core of our business and future direction. Now, I will turn the call over to our CFO, Aaron, who will detail the specific results of our strategic execution this quarter. Thank you.

Aaron Huang, CFO

Hello, everyone. Thank you for joining our earnings call. Before we dive into the details, please note that all amounts are in RMB and all comparisons are on a year-over-year basis unless otherwise stated. So in the third quarter, our total net revenues were RMB 3,208.3 million, a decrease of 9.4% year-over-year and 3.7% sequentially. Total GMV for the quarter was RMB 7,929.5 million. Despite the challenging macro environment and the intensified competition, we maintained our focus on profitable growth and disciplined execution. Non-GAAP net income was RMB 502.8 million with a non-GAAP net margin of 15.7%, reflecting the underlying resilience of our business model. Let me highlight several key operational achievements. First, our global teahouse network reached 7,338, with a net addition of 300 teahouses in the third quarter. Overseas expansion accelerated, contributing 54 net new teahouses as we successfully entered new markets, including the Philippines and Vietnam. Second, product innovation continued to drive momentum. In the home market, we launched the low caffeine Jasmine Green Tea Latte, which has become a top 3 best seller, driving strong user acquisition. The BOYA Jasmine Green Milk Tea earned the title of best organic beverage at the 2025 World Beverage Innovation Awards, underscoring our strong product quality and leadership in healthy beverage innovation. In Asia Pacific, the new tea launch performed exceptionally well, validating our regional product strategy. Furthermore, our member ecosystem remains robust. Total registered members reached 222 million by the end of the third quarter, representing an increase of 15 million sequentially and 36.7% year-over-year. Our franchisee network also demonstrated remarkable stability, with the store closure rate remaining low at 0.3% for 3 consecutive quarters, underscoring the health and confidence of our franchisee partners. Now let me provide a more detailed financial analysis. Starting with the revenue, our total net revenue for the third quarter was RMB 3,208.3 million, mainly driven by the continued expansion of our teahouse network. Among them, net revenue from franchisee teahouses was RMB 2,811.6 million, representing 87.6% of our total net revenue. Net revenue from company-owned teahouses increased by 63.8% to RMB 396.7 million, accounting for 12.4% of total revenue. The increase was primarily driven by the expansion of our company-owned teahouse network in both Greater China and overseas markets. In Greater China, total GMV decreased by 6.2% year-over-year to RMB 7,629.2 million. The average GMV for teahouses in Greater China was RMB 378,506, a year-over-year decline reflecting both the high base from last year and a more severe competitive environment, including the impact of delivery platform subsidy competition. Even so, our commitment to maintain a premium position and brand integrity remains central. Meanwhile, overseas markets continue to show substantial progress with GMV increasing 75.3% year-over-year and 27.7% quarter-over-quarter to RMB 300.3 million. This growth is mainly driven by strategic store expansion and growing brand awareness, positioning the overseas market as a key pillar of our future growth. In the third quarter, we expanded our overseas presence by adding a net 54 stores, bringing our total store number to 262 stores as of September 30, 2025. This growth was fueled by our successful entries into the Philippines and Vietnam, as well as our continued steady expansion in Malaysia, Thailand, and Indonesia. During the quarter, we added 18 new stores in Malaysia and 9 each in both Thailand and Indonesia. Our commitment to being an exceptional employer has earned prestigious awards in key markets, including HR Asia's Best Companies to Work For in Asia 2025 in Malaysia and certified OJT center plus NS Mark Gold status in Singapore. These honors have strengthened our brand and helped us attract the top talent needed for growth. While our store expansion continues, we recognize pressure on GMV performance at existing stores with domestic and overseas same-store sales GMV declining by 27.9% and 23.4%, respectively. This softness is attributed to a high base from the same period last year and intensified competitive pressure. However, the fundamentals of our franchisees remain solid as evidenced by consistently lower closure rates. We expect the same-store GMV growth to remain under pressure in the near term. Turning to margins, our gross profit, calculated by excluding cost of materials, storage, and logistics from net revenue, reached RMB 1,726.5 million this quarter, resulting in a strong gross margin of 53.8%. This marks a solid improvement both year-over-year, up from 50.1% in the third quarter of last year. The margin improvement results primarily from two factors: the benefits of an expanding economic upscale and decreasing purchase costs driven by our persistent procurement optimization initiatives. On operating expenses, share-based compensation expenses this quarter were RMB 104.9 million. This reflects our commitment to long-term employee engagement and aligning their goals with shareholders to provide greater clarity on underlying operational performance. We will reference non-GAAP operating results with a full reconciliation available in our earnings release and the Form 6-K. Operating income was RMB 454.4 million, representing an operating margin of 14.2%. Excluding share-based compensation expenses, non-GAAP operating income was RMB 559.3 million, representing a 17.4% margin. The above-mentioned margin differences reflect our step-up investment in talent recruitment for global expansion, including brand building to support new product launches, R&D to enhance our offerings, and digital infrastructure to elevate customer experience. The operating costs for company-owned teahouses were RMB 271.4 million, up 94.7% from a year ago and up 47.4% from the second quarter of 2025. As of September 30, 2025, we operated 367 company-owned teahouses, up from 239 in the second quarter of 2025. On a per store basis, operating costs have decreased compared to the second quarter of 2025, showing continually improved efficiency at the store level. Other operating costs increased by 7.3% to RMB 178.9 million, largely due to higher payroll support for the expansion of our global store network. On a non-GAAP basis, other operating costs accounted for 5.4% of revenue compared to 4.7% a year ago. Sales and marketing expenses for the quarter were RMB 304.5 million, down 13.4% from a year ago, showing strong discipline with branding promotion. On a non-GAAP basis, sales and marketing expenses represented 9.2% of revenue compared to 9.9% a year ago. General and administrative expenses reached RMB 517.4 million, up 59.7% year-over-year driven by an expanded workforce and additional office facilities supporting global operations. On a non-GAAP basis, G&A expenses represented 13.4% of revenue compared to 9.1% a year ago. Income tax expenses represent 21.4% of income before tax, slightly higher than 20% a year ago. This was primarily driven by the impact of share-based compensation expenses recognized during the quarter. We achieved our 11th consecutive quarter of profitability with GAAP net income of RMB 397.9 million. Non-GAAP net income, excluding share-based compensation expenses, was RMB 502.8 million with a non-GAAP net income margin of 15.7% compared to 18.3% last year. This demonstrates our ability to maintain healthy profitability and margins while continuing to invest for future growth. During the quarter, basic net income per ordinary share was RMB 2.07 and diluted net income per ordinary share was RMB 2.03. On a non-GAAP basis, basic net income per ordinary share was RMB 2.63, and diluted was RMB 2.57. Turning to liquidity, we ended the quarter with roughly RMB 9,142 million in cash and cash equivalents, restricted cash, and time deposits. This robust balance sheet, coupled with our 11th consecutive quarter of profitability, provides a solid foundation. Our Board has approved a special cash dividend of USD 0.92 per ordinary share or ADS totaling approximately USD 177 million, payable on or around December 15, 2025, to shareholders of record as of December 8, 2025. This distribution underscores our commitment to enhancing shareholder value and reinforcing investor confidence in our business model. Our strong cash generation ability enables us to return capital while continuing to invest in growth. This special dividend also demonstrates our conviction in the company's trajectory and our dedication to reinforcing market confidence in our long-term prospects. At this time, we will not provide formal financial guidance. Our strategic focus is on key pillars that foster sustainable long-term shareholder value. We are dedicated to continuing product innovation and strategic brand investment to enhance market presence. At the same time, we are boosting operational efficiency to optimize resources and drive improved performance, positioning the company for agile and sustained growth. We are confident in delivering our long-term strategy and growth potential. We will persist with prudent management, strategic investment in future drivers, and commitment to creating durable value for shareholders. We believe our solid financial foundation, clear strategic roadmap, and exceptional team will help us capitalize on long-term opportunities despite market dynamics.

Operator, Operator

Our first question comes from the line of Sijie Lin from CICC.

Sijie Lin, Analyst

Sijie Lin from CICC asked how the high-quality development strategy will be executed.

Junjie Zhang, CEO

Thank you for your question. Regarding our high-quality development strategy, we have a clear execution plan focused on four key areas: brand, product, experience, and channels. First, in building a valuable brand, we are enhancing our brand to accelerate the introduction of brand experiences like Teahealth and streamline the customer journey. Simultaneously, we are developing specialty locations such as tea culture themed sites and heritage themed teahouses to strengthen our cultural identity and emphasize our unique qualities. Additionally, we are creating a high-quality product system with four main priorities. We will establish and maintain strict premium tea standards. We will also enhance our core raw materials, ensure quality in food from start to finish, and launch the 4.0 menu to ensure consistent quality for all customers across locations. We are also promoting innovation across categories and introducing new consumption scenarios. With the 4.0 menu, we will include new categories such as special tea and expand our offerings to include breakfast and evening options to maximize store use throughout the day. Furthermore, we are improving how products are displayed during preparation to enhance the customer experience. We are also upgrading our membership program to create a genuine member community in a mutually beneficial network, which will encourage loyalty and repeat purchases from our 222 million members. At the same time, we are refining store facilities and technology to boost efficiency and customer satisfaction. Lastly, we are developing a strong channel strategy. Our teahouse network is growing steadily, with 300 new teahouses added this quarter, and we will continue to expand at a consistent rate. We are also advancing flagship teahouses like the Chagee Teahouse in Hong Kong and the product store at the 2025 Rolex Shanghai Masters. These venues clearly demonstrate what our brand represents and will enhance our brand recognition.

Operator, Operator

Our next question comes from Xiaopo Wei of Citigroup.

Xiaopo Wei, Analyst

Could you provide more details on the overseas network expansion and the store operations in regions outside of China?

Aaron Huang, CFO

All right. Thank you, Xiaopo. So our overseas markets are a pivotal growth driver. The momentum is solid across our channels. This quarter, we entered into two new markets, the Philippines and Vietnam, while our store count in Malaysia has exceeded 200. So this is a big milestone. Our local operations are showing strong signals. Our localized products and marketing campaigns have achieved great success. For example, our September collaboration with Pop Mart generated a tremendous response across Southeast Asia. In Malaysia, the Green Grab series made up 50% of cups sold on the first day, making this an all-time high. During the campaign's first week, teahouses in Singapore achieved average daily sales of over 500 cups of the product. Our Peach Oolong Milk Tea also performed exceptionally well. It captured over 30% of cups sold in Indonesia within 15 days of launch and about 16% in Thailand, making it a top seller in both markets. These successful localization efforts, combined with our steady store expansion pace, give us strong confidence in overseas growth in Southeast Asia. Moving forward, we will continue to deepen our presence in those markets we've entered, steadily expand into new markets, and keep improving per store profitability and brand impact.

Operator, Operator

As there are no further questions, I would like to hand the conference back to management for closing remarks.

Alicia Guo, Investor Relations Director

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

Operator, Operator

Today's conference call has concluded. Thank you for participating. You may now disconnect.