WEBVTT - China bubble tea chain Mixue surges over 40% on debut

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<v Speaker 1>Now CNA 938 rewind.

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<v Speaker 2>M Xue, the Snow king has claimed the throne, the

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<v Speaker 2>Snowing being the mascot of M Xue. Who and what

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<v Speaker 2>is M Xue. Mix Xue is a Chinese chain that

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<v Speaker 2>sells milk tea, fruit drinks, and ice.

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<v Speaker 2>mostly in China and Australia, although you might have seen

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<v Speaker 2>some shops here in Singapore too. China's Miue has surpassed

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<v Speaker 2>McDonald's to become the world's largest food and drink chain

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<v Speaker 2>by store count.

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<v Speaker 2>Uh, and over the past two years, M Xue has

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<v Speaker 2>doubled the number of store locations to get this 45,000.

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<v Speaker 2>And that's worldwide. So that's more McDonald's 40 McDonald's doesn't

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<v Speaker 2>have 45,000 outlets, but M does. OK, so what's the

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<v Speaker 2>big news now, right? So M went public in Hong

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<v Speaker 2>Kong on Monday, raising $444 million in an IPO.

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<v Speaker 2>Following that, shares jumped over 40% on its market debut

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<v Speaker 2>after it was heavily oversubscribed by more than 100 times

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<v Speaker 2>of the total number of offer shares initially available. So

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<v Speaker 2>you want to get a better understanding of this IPOs.

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<v Speaker 2>So we have uh joining us right now Gary Eng,

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<v Speaker 2>he's senior economist for APEC at Texas. Uh, Gary, thank

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<v Speaker 2>you for joining us and welcome to Open for Business

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<v Speaker 2>on CNA 938. So the listing was heavily oversubscribed. Did

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<v Speaker 2>this come as a surprise to the markets?

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<v Speaker 2>Well, um, first, thanks for having me today. And then

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<v Speaker 2>I don't think this is too much surprise to the market,

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<v Speaker 2>and uh there are two reasons for that. And from

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<v Speaker 2>a general perspective, we do see there is this improvement

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<v Speaker 2>in the sentiment which we really haven't seen in the

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<v Speaker 2>past 3 years in the China-related assets driven by all

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<v Speaker 2>this tech story.

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<v Speaker 2>Dipsy, which has been basically filled the China's growth story

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<v Speaker 2>again that people think that, OK, maybe actually a lot

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<v Speaker 2>of assets may be undervalued compared to what they think before.

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<v Speaker 2>And of course for the case of M, the second

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<v Speaker 2>reason is that it is at a sweet spot even

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<v Speaker 2>though the Chinese economy may be decelerating, but if you.

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<v Speaker 2>at this business model, it is actually targeting the residents

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<v Speaker 2>that may be experiencing a consumption downgrade, but it's offering

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<v Speaker 2>very affordable type of drink with the innovative solution in

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<v Speaker 2>the F&amp;B industry. So it's not really aiming at selling

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<v Speaker 2>something at a very high profit margin, but really about

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<v Speaker 2>the high quantity.

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<v Speaker 2>So quantity over quality in a manner of speaking. So

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<v Speaker 2>uh if we take a look at the timing of

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<v Speaker 2>this listing, Gary, what conclusion can we draw here? Is

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<v Speaker 2>there a link to the boom that we're seeing in

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<v Speaker 2>the Chinese tech sector as well? Well, yes, I think

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<v Speaker 2>that's definitely a very strong connection towards that because I mean,

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<v Speaker 2>of course Misha is not.

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<v Speaker 2>related to the tax story, but the tax rally in

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<v Speaker 2>China really boost the confidence of investors not only in

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<v Speaker 2>China but also globally that people really think and look

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<v Speaker 2>at China's growth story again. So yes, I would say

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<v Speaker 2>that it's not a tech company, but it's definitely related

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<v Speaker 2>to all this tech rally that we have been seeing

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<v Speaker 2>over the past 1 or 2 months.

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<v Speaker 2>And Gary, so we want to talk about Mish Xuan

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<v Speaker 2>now being an attractive investment, it seems, uh opportunity. What

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<v Speaker 2>makes it so attractive? Well, um, indeed, um, if you

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<v Speaker 2>look at the usual China's company growth model, it is

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<v Speaker 2>really about having the very big quantity in terms of

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<v Speaker 2>the size.

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<v Speaker 2>In the domestic market, so 1.4 billion people, if each

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<v Speaker 2>of the residents actually buy one milk tea from them,

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<v Speaker 2>that would be a very big market. But at the

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<v Speaker 2>same time, I think this sort of business in F&amp;B

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<v Speaker 2>is also trying to expand overseas because domestically, of course,

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<v Speaker 2>there's that's pressure on the deflation, but I think M

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<v Speaker 2>is also an example to show that it's

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<v Speaker 2>Able to use it or model not only in China

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<v Speaker 2>but look at what the other overseas market, which may

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<v Speaker 2>actually offer them a higher profit margin model that investors

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<v Speaker 2>may be actually thinking about the future as well. So

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<v Speaker 2>if you put it this way, it's really like a

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<v Speaker 2>story that it can repeat this model maybe towards the

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<v Speaker 2>rest of the world which can challenge, you know, other.

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<v Speaker 2>FNB giants. From the investor's perspective, what risks should we

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<v Speaker 2>be aware of in relation to M's IPO and perhaps

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<v Speaker 2>its future growth prospects as well? I think we should

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<v Speaker 2>also look at the risk of this company and I

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<v Speaker 2>think when we look at the milk tea industry, one

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<v Speaker 2>of the biggest problem that we see here is that

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<v Speaker 2>even though the growth prospects

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<v Speaker 2>seems to be very uh great, but we cannot forget

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<v Speaker 2>the fact that um it is also an industry that

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<v Speaker 2>is highly replaceable, which basically means that in uh like today,

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<v Speaker 2>maybe a consumer really like the product of M share,

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<v Speaker 2>but how Mha can actually distinguish itself versus um other

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<v Speaker 2>players in the future? Would there be any other competitors

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<v Speaker 2>which are able to sell uh

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<v Speaker 2>Cheaper products or basically other sort of products that would

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<v Speaker 2>attract consumer attention and then basically change the consumer spending

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<v Speaker 2>pattern again. I think that is also a very, very

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<v Speaker 2>good question that we should ask and then really depends on,

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<v Speaker 2>you know, how the management will manage this issue. But again,

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<v Speaker 2>compared to many other industry, um, this industry is highly replaceable.

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<v Speaker 2>Gary, Michuan now has the most number of stores owned

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<v Speaker 2>by any food and drink chain. Is this rapid growth sustainable,

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<v Speaker 2>do you think?

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<v Speaker 2>Well, um, I think the biggest difference of me share

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<v Speaker 2>versus some of the other fast food chain is that

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<v Speaker 2>the input costs may be a bit lower and of course,

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<v Speaker 2>um I mean we do talk about that it has

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<v Speaker 2>already surpassed some of the very large American fast food

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<v Speaker 2>chains like McDonald, but let's not forget that for me

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<v Speaker 2>here the story is much smaller. The cost of really

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<v Speaker 2>setting up everything will be much smaller than McDonald because

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<v Speaker 2>of the

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<v Speaker 2>more limited choice of the products is really about limiting

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<v Speaker 2>or focusing on like a few, not a field, but

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<v Speaker 2>like there's many choices, but you know, on drinks itself.

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<v Speaker 2>So the setup basically come with a lower cost. Then

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<v Speaker 2>it is really about when it is expand, right, where the,

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<v Speaker 2>where does the money come from if it is really

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<v Speaker 2>from a very heavy leverage and if there's a certain

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<v Speaker 2>change in the consumer preference, I do think this can

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<v Speaker 2>pose a risk.

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<v Speaker 2>So it is really about whether it can actually keep

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<v Speaker 2>this hype on Mti continue, um, you know, towards other

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<v Speaker 2>market as well, but I I do think that domestically

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<v Speaker 2>it's possible to see more companies trying to tap on

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<v Speaker 2>the same type of business business model because the competition

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<v Speaker 2>is simply quite high in China. Then the question is

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<v Speaker 2>really whether it can expand overseas at a moderately good pace.

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<v Speaker 2>Which at the reasonably OK average. Yes, so I agree

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<v Speaker 2>that it's possible to see, you know, certain over expansion,

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<v Speaker 2>especially in the case within China. So, uh, going back

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<v Speaker 2>to MXue's IPO, what would be the first sign of

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<v Speaker 2>M Xue's true stock value? Uh, if I were an

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<v Speaker 2>investor putting my money on Mue, how would I know

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<v Speaker 2>what exactly is the true value by the time all

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<v Speaker 2>of this hype dies down?

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<v Speaker 2>Well, um, I would say the revenue side will still

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<v Speaker 2>be something very important and of course Mish may have

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<v Speaker 2>a very high market share in China, you basically see

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<v Speaker 2>the stores everywhere and then it's also tapping on this

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<v Speaker 2>consumption kind of downgrade story that people choose to consume

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<v Speaker 2>their products. But I think if we are like looking

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<v Speaker 2>at whether the

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<v Speaker 2>Business model or the profit may actually reach a limit

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<v Speaker 2>and look at some of the other periods FNB chains

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<v Speaker 2>in China which may have fallen into a similar trap.

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<v Speaker 2>For example, Haidao. I think we also have seen this

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<v Speaker 2>hotpot chain everywhere, including in in Singapore, and they have

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<v Speaker 2>adopted a very aggressive strategy and expansion before which at

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<v Speaker 2>the end they need to scale it back. So I

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<v Speaker 2>Don't be surprised that we may end up in the

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<v Speaker 2>same path eventually, but I guess in the short run, um,

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<v Speaker 2>as long as they can still feel their profit with

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<v Speaker 2>a reasonably OK leverage, maybe that business model at least

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<v Speaker 2>will still be sustainable. But I guess once we start

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<v Speaker 2>to see uh and and like expansion in stock at

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<v Speaker 2>the same time, a fall in the profit.

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<v Speaker 2>Per store, I think to me this is like a

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<v Speaker 2>warning signal that maybe there could be a certain stress

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<v Speaker 2>from the overexpansion. I'm not saying this will necessarily happen.

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<v Speaker 2>It really depends on the management, but it will be

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<v Speaker 2>a warning signal to me. Yeah, it will definitely be

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<v Speaker 2>one for the investors as well. In the meantime, we

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<v Speaker 2>probably will have to see more niches popping up around

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<v Speaker 2>the region and around the world before all of that happens. Gary,

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<v Speaker 2>thanks very much for joining us this morning.

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<v Speaker 2>That's Gary Ng, senior economist for APEC at Nitis.