Shenwan Hongyuan: Initiates GUMING with a "Buy" rating and a target price of HKD 21.2

According to the Zhitong Finance APP, Shenwan Hongyuan has released a research report stating that it has initiated coverage of GUMING (01364) with a buy rating. GUMING's current stock price is above the valuation of Hong Kong's restaurant stocks at 16-18 times, but lower than the valuation of Hong Kong's tea beverage company Mixue Group (02097) at 26 times. Considering GUMING's advantages in the cold chain supply chain, the potential store opening space in 14 provinces in China where it has not yet entered, and shareholder returns, the firm believes the company deserves a certain valuation premium, giving it a 2025 PE valuation of 25 times, resulting in a target price of HKD 21.2. Shenwan Hongyuan's main points are as follows: Based on the 2023 sales revenue and number of stores, GUMING is the number one brand of mass-produced tea beverage stores in China and the second largest brand of freshly made tea beverage stores in China. In provinces such as Zhejiang, Fujian, and Jiangxi, which have achieved critical scale first, as well as in each prefecture-level city, GUMING ranks first in the entire price range market. By the end of 2024, GUMING's number of stores will reach 9,914, with franchise stores contributing 97% of revenue. 80% of the company's stores are located in second-tier cities and below, with 41% located in towns, making its influence particularly significant in lower-tier cities and towns. The firm is optimistic about GUMING's product innovation capabilities, supply chain efficiency based on regional densification strategies, attractive shareholder returns, and store opening potential. Strong R&D capabilities and fast product updates GUMING's core concept is "one cup a day, never gets tired," focusing on fruit tea and milk tea beverages. With strong R&D capabilities, GUMING launches numerous new products every year, with a high success rate for new products. In the three years ending in 2023, two to three new products launched in the current or previous year were included in the top ten best-selling beverages each year, with a quarterly average repurchase rate as high as 53%. The company launched fruit and vegetable juice products in March, with one single product outperforming the previous best-selling light milk tea during its launch period. In the second half of 2024, GUMING began to introduce coffee machines on a large scale, with over 5,000 stores having completed the installation of coffee machines, significantly boosting store performance, and coffee products are expected to contribute 20% of GUMING's revenue in the long term. The largest cold chain supply chain in the industry GUMING has the largest cold chain warehousing and logistics infrastructure among freshly made tea beverage brands in China. Among the top ten freshly made tea beverage brands, GUMING is the only company that can provide frequent delivery services of short-shelf-life fresh fruits and fresh milk to stores in lower-tier cities every two days. In contrast, other tea beverage brands typically deliver every four days and often rely on third-party logistics suppliers, which usually do not provide cold chain delivery support. In 2023, GUMING's total value of cold chain delivery materials exceeded 4 billion yuan, ranking first in the industry. High profits for franchisees and strong willingness to franchise In 2023, the single-store operating profit of GUMING's franchisees reached 376,000 yuan, with a single-store operating profit margin of 20.2%, significantly higher than the single-store operating profit margin of the mass-produced tea beverage market during the same period (usually below 15%). As of 9M24, among franchisees who have opened GUMING stores for more than two years, each franchisee operates an average of 2.9 stores, with 71% of franchisees operating two or more franchise stores. Among the new franchisees signed in February and March 2025, 63% are existing franchisees Earnings Forecast It is expected that revenue will grow by 17% year-on-year to 10.3 billion yuan in 2025, mainly driven by the opening of new franchise stores, with a net increase of 2,000 stores expected, bringing the total number of stores to 11,914, a year-on-year increase of 20%, while same-store revenue is expected to remain flat. It is anticipated that adjusted net profit will grow by 23% year-on-year to 1.9 billion yuan in 2025, with the adjusted net profit margin expected to increase by 1 percentage point year-on-year to 19%. Risk Warning: Risks of lock-up stock release and management risks of the franchise model