Executive Summary / Key Takeaways

• Premium Positioning Under Siege: Chagee's refusal to engage in delivery platform subsidy wars protects brand integrity but cost same-store sales growth of -27.9% in Q3 2025, creating a critical test of whether Chinese consumers will reward quality over price in a slowing economy.

• International Expansion as Growth Engine: Overseas GMV surged 75.3% year-over-year while domestic revenue contracted, with store count jumping from 115 to 262 in twelve months, making Southeast Asia and the U.S. the pivotal battlegrounds for the company's next growth phase.

• Franchise Model Resilience: Despite domestic headwinds, the 0.3% store closure rate for three consecutive quarters signals franchisee confidence in the long-term strategy, providing a stable foundation that competitors like Nayuki (2150.HK) (with negative margins) cannot match.

• Margin Expansion Through Procurement: Gross margin improved to 53.8% in Q3 2025 from 50.1% a year ago, driven by procurement optimization and economies of scale, demonstrating that operational efficiency gains can partially offset top-line pressure.

• Capital Allocation Flexibility: With RMB 9.1 billion in cash and a $472.9 million IPO war chest, Chagee can fund its international push while returning capital via a $177 million special dividend, a rare combination for a growth-stage company.

Setting the Scene: The Premium Tea Paradox

Founded in 2017 in Shanghai, Chagee Holdings Limited has built a 7,338-store empire by positioning itself as the premium alternative in China's $170 billion new-style tea market. The company operates a hybrid model: 87.6% of Q3 2025 revenue came from franchisees, while company-owned stores (now 367 locations, up from 239 in Q2) represent a growing 12.4% of revenue. This structure matters because it allows rapid expansion with limited capital while maintaining direct control over flagship locations that shape brand perception.

The new-style tea industry is maturing. Growth has decelerated from 44.3% in 2023 to an expected 12.4% in 2025, as market saturation meets consumer caution. This slowdown creates a strategic inflection point: competitors like Mixue Group (2097.HK) (53,000 stores) dominate through extreme low-cost efficiency, while mid-tier players like Chabaidao (2555.HK) and struggling premium chains like Nayuki fight for share. Chagee's response has been decisive: abandon the race for store count and double down on brand premiumness, even at the expense of near-term sales.

This positioning creates a fundamental tension. The company's average monthly GMV per teahouse in Greater China plummeted 21.4% year-over-year in Q1 2025 to RMB 431,973, evidence of both market saturation and intensified competition. Yet management explicitly rejects the industry's subsidy-driven customer acquisition, arguing that price-sensitive users lack loyalty and destroy franchisee profitability. This philosophy will define Chagee's investment case: either it emerges as China's Starbucks of tea, commanding pricing power through brand equity, or it becomes a cautionary tale about misreading consumer behavior in a downturn.

Technology, Products, and Strategic Differentiation

Chagee's moat rests on three pillars: product innovation, operational efficiency, and a sticky member ecosystem. The low-caffeine Jasmine Green Tea Latte became a top-three bestseller in Q3 2025, while the BOYA Jasmine Green milk tea won "best in nature or organic beverage" at the World Beverage Innovation awards. These launches aren't mere menu extensions; they target health-conscious millennials and Gen Z consumers willing to pay premium prices, directly supporting the brand positioning strategy.

The 4.0 automated brewing stations represent a critical operational lever. Rolling out by year-end, these machines promise to reduce labor costs by 15-20% while improving consistency. This matters because labor inflation and service speed are key constraints in high-traffic urban locations. If successful, the automation initiative could offset some pricing pressure by improving per-store economics, particularly in overseas markets where labor costs vary widely.

The member ecosystem provides a defensible customer base. Registered members reached 222 million by Q3 2025, with 73.9% of mini-program orders coming from repeat customers who had placed two or more orders. This stickiness reduces reliance on third-party delivery platforms and creates direct-to-consumer data advantages. In an industry where customer acquisition costs are rising, a self-contained ecosystem of this scale is a significant competitive asset that Mixue's transaction-focused model cannot easily replicate.

Financial Performance: The Trade-Off in Numbers

Chagee's Q3 2025 results reveal the financial manifestation of its strategic pivot. Total net revenue fell 9.4% year-over-year to RMB 3.21 billion, while gross margin expanded 370 basis points to 53.8%. This divergence tells a clear story: the company is sacrificing volume for profitability, a dangerous but potentially necessary move in a commoditizing market.

The geographic split highlights the transition. Greater China GMV declined 6.2% to RMB 7.63 billion, with same-store sales GMV down 27.9%. Meanwhile, overseas GMV jumped 75.3% to RMB 300 million, contributing 54 net new stores including entries into the Philippines and Vietnam. The overseas store count now represents 3.6% of the total network but is growing at triple-digit rates, making it the only meaningful growth engine.

Operating margins compressed to 14.2% (GAAP) and 17.4% (non-GAAP) in Q3, reflecting deliberate investments in global talent, brand building, and digital infrastructure. General and administrative expenses surged 59.7% year-over-year to RMB 517 million, driven by expanded workforce and office facilities. These costs are not inefficiencies; they are the price of building an international organization from scratch. The question is whether the payoff will materialize before domestic weakness deepens.

The franchisee segment generated RMB 2.81 billion in Q3, representing 87.6% of revenue, while company-owned stores grew revenue 63.8% to RMB 397 million. The per-store cost decline at company locations demonstrates improving operational leverage, but the heavy franchisee dependence means Chagee's fate is tied to its partners' willingness to absorb near-term pain for long-term gain.

Outlook and Execution Risk

Management has explicitly refused to provide formal financial guidance, citing a focus on "key pillars that foster sustainable long-term shareholder value." This stance signals two things: first, near-term visibility is poor due to competitive dynamics; second, leadership is playing a long game that may involve quarters of disappointing results.

The same-store GMV outlook remains challenging. CFO Hongfei Huang stated that pressure will persist due to a high comparison base and intensified competition. This admission is crucial—it means investors should expect continued domestic weakness through at least the first half of 2026. The company's response is to moderate expansion pace and focus on "high-quality development" across brand, product, experience, and channels.

International expansion targets are aggressive but measured. Chagee plans to open more than 200 overseas stores in 2025, having already added 147 stores in the first nine months. The Los Angeles flagship, which served 5,000 cups on opening day, and the Jakarta launch demonstrate the brand's cross-cultural appeal. However, success in Southeast Asia (where Malaysia already exceeds 200 stores) does not guarantee U.S. market fit, and the costs of building local teams, supply chains, and brand awareness will weigh on margins for several quarters.

The strategic shift from penetration to same-store growth is the core bet. Chagee is essentially saying: we have enough stores; now we must make each one more productive. This means expanding into breakfast and evening hours, cross-category innovation, and enhancing the membership experience. If successful, this could reaccelerate domestic GMV without requiring new store capital. If it fails, the company will be left with a saturated home market and an unproven international business.

Risks and Asymmetries

The delivery platform subsidy war represents the most immediate threat. CEO Junjie Zhang's commentary reveals the strategic divide: platforms attract price-sensitive customers who switch for discounts, undermining brand loyalty and franchisee margins. Chagee's refusal to participate cost it market share in Q2 and Q3, and there is no guarantee that consumers will return once subsidies end. If platforms sustain their spending longer than expected, Chagee's domestic recovery could be delayed indefinitely.

Domestic market saturation presents a structural risk. The 21.4% decline in average monthly GMV per store in Q1 2025 suggests cannibalization from rapid expansion. While management is now moderating growth, the network effect of 6,500+ stores in Greater China means new locations will continue to pressure existing ones. This dynamic could force a more dramatic retrenchment, including store closures, if same-store trends don't stabilize by mid-2026.

International execution risk is substantial. The overseas business is growing from a small base, and the 23.4% same-store GMV decline in Q3 shows that even new markets face competitive pressure. Building local supply chains, navigating regulatory requirements, and adapting products to local tastes require skills that Chagee is developing in real-time. The investment in North American leadership (Emily Chang and Aaron Harris) is necessary but adds cost before revenue.

Premium pricing sensitivity in an economic downturn could undermine the entire strategy. If Chinese consumers trade down en masse, Chagee's refusal to discount will accelerate market share loss to Mixue and other value players. The company's 53.8% gross margin provides some cushion, but operating margins below 15% show limited room for error. A prolonged consumer slowdown could force a painful strategic reversal.

Valuation Context

Trading at $13.73 per share, Chagee carries a market cap of $2.55 billion and enterprise value of $1.40 billion, reflecting net cash of over $1 billion. The P/E ratio of 23.67 and price-to-sales of 1.36 sit below premium consumer peers but above struggling competitors like Nayuki (negative margins). The price-to-free-cash-flow ratio of 9.22 suggests the market is pricing in meaningful earnings pressure, creating potential upside if the international expansion succeeds.

Comparing to key competitors reveals Chagee's relative positioning. Mixue Group (2097.HK) trades at 25.75 P/E with 18.07% profit margins and 22.27% operating margins, but its 53,000-store scale and low-cost model make it a fundamentally different business. Chabaidao (2555.HK) trades at 16.55 P/E but suffers from -7.54% revenue growth and lower margins (11.17% profit, 15.94% operating). Nayuki (2150.HK) trades at a negative P/E with -13.15% profit margins, highlighting the challenges of premium positioning without execution.

Chagee's balance sheet strength is a key differentiator. The 0.12 debt-to-equity ratio and 4.22 current ratio provide flexibility that loss-making Nayuki and highly leveraged peers lack. The special dividend demonstrates management's confidence in cash generation, but also raises questions about whether capital could be better deployed accelerating international expansion. The IPO proceeds of $472.9 million, earmarked for Asian and North American storefronts, technology development, and supply chain, provide a clear roadmap for value creation.

Conclusion

Chagee Holdings is executing a high-stakes strategic pivot: sacrificing near-term domestic growth to preserve brand premiumness while betting its future on international expansion. The 53.8% gross margin and healthy franchisee network demonstrate that this is not a desperate move but a deliberate choice. However, the -27.9% domestic same-store sales decline and intensifying delivery platform competition show the immediate cost of this strategy.

The investment case hinges on two variables: the speed of international market maturation and the durability of Chinese consumers' willingness to pay for premium tea experiences. If overseas stores can replicate the Singapore model (where mature locations achieve payback under 12 months and generate RMB 1.8 million monthly GMV), the domestic headwinds become a temporary transition cost. If international growth stalls or domestic trends worsen, Chagee will face pressure to abandon its premium positioning, potentially destroying the brand equity it has built.

With 222 million registered members, award-winning product innovation, and a war chest of RMB 9.1 billion, Chagee has the assets to execute this transition. The 0.3% store closure rate proves that franchisees remain believers. Whether the market rewards this patience depends on whether management can deliver evidence of same-store stabilization in China and accelerating profitability overseas before the October lock-up expiration introduces additional volatility.