Chagee Holdings Limited American Depositary Shares (CHA) Q2 2025 Earnings Report, Transcript and Summary

Good morning and good evening, ladies and gentlemen. Thank you for standing by, and welcome to Chagee's Second Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note that today's call -- event is being recorded. With that, I will 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 Second 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 by the Newswire earlier today and are currently available online. Before we continue, I refer you to our safe harbor statements 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, sir.

[Interpreted] Hello, everyone. Thank you all for joining Chagee's Second Quarter 2025 Earnings Conference Call. We truly appreciate your continued trust and support, which has enabled us to forge ahead steadily in this dynamic market environment. Before we dive into our quarterly performance, I'm delighted to share an important update in our talent strategy. To accelerate our North American market expansion, we have successfully assembled a new North American leadership team. We are honored to welcome Ms. Emily Chang as our Chief Commercial Officer for North America. Emily brings extensive international brand building experience, having served as CEO at West at VML and McCann Worldgroup China and Chief Marketing Officer at Starbucks China. Additionally, we welcome Mr. Aaron Harris as our Chief Development Officer for North America. As a chain restaurant industry expert, Aaron has successfully led market expansion for multiple national and international QSR brands, most recently, as Senior Vice President of Development at Dutch Bros Coffee. His rich experience in scaled operations will drive our development in the U.S. market. This is not just a key talent acquisition, but also an important move for our global strategic layout. We have proactively established a local team in core markets such as Asia Pacific and North America, making systematic investments in organizational capabilities. In the second half of this year, we will continue to invest strategically in overseas markets, steadily enhancing the development of a global talent pipeline and operational system. With our elite local teams, we're confident that we will achieve a pivotal breakthrough and sustain strong growth momentum globally. Next, I will walk you through the operating results and business updates. Despite the evolving dynamics of the global tea beverage market, we have stayed committed to growth strategy driven by brand value and product innovation. This has reinforced our operational resilience and sharper strategic focus. This quarter, we achieved solid progress with revenue sustained double-digit year- over-year growth and consistent profitability. One of the most important factors behind these results is our consistent commitment to a clearly defined brand strategy in an environment where mainly in the industry, compete for market share through aggressive price promotions. We remain committed to our differentiated value first positioning, a strategy that is earning positive market feedback while maintaining a disciplined pricing framework. Our third-party delivery GMV has seen growing contributions with strong repeat purchasing behavior among registered members. These results validate our brand positioning and confirm that consumers recognize and appreciate the value we offer. To strengthen this advantage and deepen our competitive moat, we will launch a comprehensive upgrade plan for essential raw materials in the second half of the year, focusing on key ingredients such as tea, milk and syrups. We believe that ongoing investment and sourcing improvements will deliver an elevated product experience to our customers, reflecting the core of our value first strategy. On a global stage, our strategy continues to deliver strong momentum. The overseas markets have demonstrated strong growth momentum and are becoming an increasingly important growth engine for the company. This progress has been driven by a combination of localized product and marketing innovation, disciplined geographic expansion and operational excellence. In April, our Hojicha Genmai milk tea captured customer attention across Southeast Asia, propelling us to the top position in share of voice among key brands in the region. In Malaysia, the product is sold out in major cities within 2 weeks of launch. In June, our Earl Grey series co-branded with the British Library performed equally well. The collection sparked vibrant engagement on social media. Simultaneously, our pop-up experiential events in Singapore and Malaysia drew tens of thousands of visitors providing immersed brand experiences and significantly elevating brand visibility. Hub sales during these events recorded decent sequential growth, especially in Singapore. At the same time, we continue to make steady and solid progress with our overseas store expansion. In the first half of the year, we advanced our strategic positioning in critical markets, including Indonesia and United States while further strengthening our strategic collaboration in Thailand. Operational quality across all regions continues to improve. Our Singapore stores sustained solid and stable sales momentum, consistently delivering leading daily average sales. Profitability in our Malaysian stores exceeded expectations. More importantly, we have achieved a sequential increase in the sales price for our products in the overseas markets, demonstrating the strength of our premium brand positioning. Domestically, we're pushing boundaries by integrating modern consumer experience with traditional cultural elements. In the second quarter, we introduced the themed concept stores such as the ceramic inlay arts activity in Guangdong and the kite culture pop-up store in Shandong successfully blending heritage tea culture with contemporary retail design. This demonstrates that our globalization strategy is not just about growing our footprint, but equally about reinforce brand value and elevating operational quality. Product innovation remains at the heart of our growth. In the second quarter, our new product, Lychee Black Tea Milk -- milk tea showcased strong first week sales alongside other recent introductions. The 2 products drove a meaningful sequential increase in GMV during their launch period. Moreover, the time limited return of Melon Oolong Milk Tea proved highly popular, ranking prominently among the quarter's most favorite product. Driven by the dual engines of product innovation and user operations, our member ecosystem continues healthy development. By the end of the second quarter, a number of registered members achieved strong growth both sequentially and year-over-year. This reflects not only our ability to operate with efficiency at scale, but also the deep market renaissance of our mission to champion health-oriented tea beverages. In the face of ongoing market challenges, we remain steadfast in our belief that quality is the foundation of lasting growth. As market conditions shift, our promise is clear. we will consistently offer tea that is both wholesome and promising in quality. Short-term results will never come at expense of our enduring commitment to excellence. As a representative of modern tea -- Chinese tea, our mission is twofold: to preserve the essence of Chinese tea culture and to modernize it for global consumers through innovation and creativity. We will honor our craft, true hold to our values and use every couple of high-quality tea as a gesture of sincerity. We firmly believe that genuine care for both our product and our customer is the key to earn enduring market trust and sharing the authentic experience of Chinese tea with the world. This concludes my remarks. Now I will turn the call to our CFO, Aaron, who will provide detailed insights to our financial performance. Thank you.

Thank you, J, and good evening, good morning, 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. In the second quarter, our revenue reached RMB 3.3 billion, up by 10.2% year-over-year. GMV came in at RMB 8.1 billion, a year-over-year increase of 15.5%. Non-GAAP net income was RMB 629.8 million, up by 0.1% year-over-year. For the first half of 2025 non- GAAP net income rose by 6.8% year-over-year to RMB 1.3 billion. By end of the second quarter, our total membership exceeded 200 million, increasing by 14.5 million from the first quarter and 42.7% year-over-year. These results underscore the resilience of our business model and the strength of our execution under dynamic market conditions. Now let me provide some context around the market condition we faced this quarter. The intensified delivery platform subsidy competition in China created headwinds for our business, while we remain disciplined in protecting our pricing integrity and a premium brand positioning. We recognize that this competitive environment weighed on near-term performance. At the same time, we are advancing our strategic expansion into international markets. This involves deliberate investments in organizational infrastructure, including talent acquisition just J and operational capabilities. While these initiatives are currently affecting profitability in short term, they are very critical investments as we work towards achieving operational leverage in these new markets. Next, let me go through these financials. Our total net revenue for the second quarter increased by 10.2% and year-over-year to RMB 3,331.9 million, mainly driven by the continued expansion of our teahouse network. Among them, net revenue from franchisee teahouse grew by 6.1% to RMB 3,020.7 million, representing 90.7% of our total net revenue. Net revenue from company-owned teahouses increased by 77.3% to RMB 311.2 million, accounting for 9.3% of the total revenue. The increase was primarily driven by expansion of company-owned teahouse network. Our total GMV for the second quarter increased 15.5% year-over-year. The average monthly GMV per teahouse in Greater China was RMB 404,352, a year-over-year declining, reflecting both high base from last year's outstanding quarter and a more severe competitive environment, even so our commitment to maintain premium position and the brand integrity remains central as we navigate the current backdrop and prepare for improving market conditions. Meanwhile, our overseas markets have gained significant traction with GMV increasing 77.4% year-over-year and a 31.8% quarter-over-quarter. This growth is mainly driven by strategic store expansion and our growing brand awareness positioning the overseas market as a key pillar of our future growth. In the first half of 2025, we expanded our overseas presence by adding a net 52 stores compared to year-end 2024, bringing our total of 208 stores as of June 30, 2025. The opening of a store in Indonesia attracted approximately 35,000 new member registrations during the launch week. In Thailand, the average daily cup sales rose by 54% following our grand openings with 15,000 new members joined in just the first 3 days. Our Los Angeles store in United States set a record with 5,000 cups sold a single day. Turning to margins. Our gross profit calculated by excluding cost of material, storage and the logistics from net revenue reached RMB 1.8 billion this quarter resulting in a strong gross margin of 53.9%. This remarks solid improvements both year-over-year, up from 48.4% in the second quarter of last year and sequentially from 53.1% in the first quarter of 2025. This margin expansion was primarily driven by 2 key factors. First, we continue to benefit from a growing economy of scale as our business expands. Second, lower purchasing costs achieved through our ongoing procurement optimization initiatives have played a significant role. On operating expenses, share-based compensation expenses rose significantly this quarter, which is reflected across our expense categories. The significant amount of share-based compensation expenses recognized in the second quarter of 2025 were related to the vesting of share-based awards with the performance conditions related to IPO success. The breakdown includes RMB 505.6 million in G&A, RMB 31.1 million in sales and marketing expenses and RMB 15.8 million in other operating costs. To provide greater clarity on underlying performance, we will also reference non-GAAP operating results with full reconciliation available in our earnings release and Form 6-K. Operating income was RMB 107.6 million. Excluding share-based compensation expenses, operating income was RMB 660.1 million, representing a 19.8% margin. This margin change reflecting a step-up investment in the brand building and marketing to support a new product launch R&D, to ensure our offering, digital infrastructure and to elevate customer experience and talent recruitment for global expansion. Operating costs for company-owned teahouse was RMB 184.1 million, up 72.8% from a year ago and up 17.2% from the first quarter of 2025. As of June 30, 2025, we operated 239 company-owned teahouses, up from 191 at the first quarter of 2025. On per store basis, operating costs have decreased compared to the first quarter of 2025, showing improved efficiency at the store level. The other operating costs increased by 36.2% to RMB 173.7 million, largely due to higher payroll supporting the expansion of the franchisee network. On a non-GAAP basis, other operating costs account for 1.7% of revenue compared to 1.2% a year ago. Sales and marketing expenses for the quarter were RMB 385 million, up 54.6% from a year ago, reflecting higher advertising costs tied to new tea product launch and related campaigns, along with payroll growth and to support the business expansion. On a non-GAAP basis, sales and marketing representing 10.6% of revenue compared to 8.2% a year ago. G&A expenses reached RMB 944.6 million, up 301.1% year- over-year driven by SBC costs I just mentioned related to the IPO and expanded the team to supporting global operation, increased R&D for product upgrades and innovation and higher IT service costs to enhance operational efficiency. On a non-GAAP basis, G&A expenses represented 13.2% of revenue compared to 7.8% a year ago. Income tax expenses represented 62.1% of income before tax, significantly higher than 20.1% a year ago. This was primarily driven by the impact of share-based compensation expenses recognized during the quarter. We achieved our tenth consecutive quarter of profitability with net income of RMB 77.2 million. Non-GAAP net income, excluding share-based compensation expenses, was RMB 629.8 million, with a non- GAAP net margin of 18.9% compared to 20.8% last year. The margin decline reflects our continued investments in new products and overseas markets and the net losses from overseas operations that are still ramping up. Our Greater China business remains healthy, delivering a profitability growth from last year. During the quarter, basic net income per ordinary share was RMB 0.36 and the diluted net income per ordinary share was RMB 0.35. We ended the quarter with RMB 8.9 billion in cash and cash equivalents, restricted cash and time deposits, up from RMB 4.9 billion at the end of 2024. While near-term headwinds persist, we are confident in our strategic trajectory. Our overseas operations are gaining encouraging consumer traction, and we are building the organizational and operational foundation to sustain a long-term growth. The investments we are making today in people, infrastructure and their capabilities, well position us to capture significant opportunities as these markets mature and the operational leverage takes hold. At this time, we will not be providing the formal financial guidance for the whole year. Our priority is to execute our long-term growth strategy and delivering lasting value to our shareholders. We may revisit the possibility of offering guidance in the future as conditions evolves. In closing, I want to reaffirm our unwavering commitment to our premium brand strategy in today's dynamic competitive landscape. We remain focused on delivering healthy, high-quality tea offering that our customers trust and value. We are deeply grateful for the continued support of our team, Chagee friends and valued shareholders. Through disciplined capital allocation and our commitment to the strengthening for diversifying our global business, we will continue creating sustainable long-term value for our shareholders. Our focus remains on protecting margin and delivering profitable growth that is standing the test of time. With that, I will turn the call back to the operator to begin the Q&A session. Operator, please go ahead.

[Operator Instructions] We will now take the first question from the line of Lillian Lou from Morgan Stanley.

Thanks a lot for Junjie Zhang and Aaron's detailed introduction and I look forward to a big step forward in the global expansion. I have a question actually on China right now. Obviously, we saw it in the second quarter results as there was impact from delivery platform subsidy program. So my question is related. One is what kind of operational impact we've been seeing. For example, the impact on general ASP, the franchise work on store's profit margin and the stability. And related to that, what company's strategy going forward related to dealing with platforms subsidy program, how we defend our positioning in the industry and how we look at the second half general operation focus? Then I will translate my question. [Foreign Language]

[Interpreted] Thank you so much for your question. We see delivery platform competition heating up quite a bit in the second quarter and attract a lot of attention globally. While competition can be really good for the market and the heavy reliance on the subsidy right now isn't really sustainable for the industry as a whole. So we don't really count on the platform or the discount to attract more customers. It might help us with the GMV in a short period of time, but it doesn't really help with the profitability to our partners or to our franchisees as well. So we believe that on -- it puts a lot of pressure on the merchant margin and shakes up delivery platforms' income and stability and create financial strength for the platform as well. So the key issue with the subsidy is that they mainly attract price-sensitive customers who don't have strong brand loyalty, and will switch quickly to whoever offers lowest price. So that makes it really hard to build lasting customer relationships. So for the company, we have 3 principles: the first principle is to build around, we stay firmly committed to delivering high-quality products and services. We're not going to get pulled into price wars. Instead, our focus is on offering superior product quality and an outstanding customer experience. And secondly, we're not doubling down our premium brand positioning. We believe real long-term value comes from brand building trust and delivering greater user experience not from short-term price cuts or discounts or coupons. Our strategy is all about enhancing the high-value brand image. And thirdly, we are focusing on optimizing operational efficiency to boost our competitiveness. Without relying on subsidies we keep investing in technology and progress -- process improvement to improve efficiency. For example, the 4.0 automated machine will be rolled out at the end of the year. It will largely lower the labor cost and increase the efficiency of the operation at the store level. So when we pass those savings on to the customers and partners who truly appreciate our quality so we can stay reasonably competitive on price without compromising our core value. And also at last, our R&D -- product R&D will have something different at the end of the year, and the menu will be changed totally. So we welcome you guys to look forward to our changes at the end of the year. Thank you for your question.

We will now take the next question from the line of Xiaopo Wei.

Sorry, Sandra, can we hold on for a second? The CEO has a little comment to add?

My apologies, of course.

[Interpreted] So actually, we believe right now, China has been transferring from the Chinese manufacturing or Made in China mode to the brand positioning mode at the moment. So we believe the lower pricing strategy doesn't really consistent with the high-quality life experience or branding positioning for the Chinese market overall trend at the moment. So keeping the lower voice, it is not really helped with the higher value positioning we firmly believe that we're going to stick to the high-quality brand positioning and also offer a high-quality product to our customers. Thank you. Sandra, please go ahead with the next question.

We will now take the next question from the line of Xiaopo Wei from Citi.

Can you hear me?

Yes, please.

Okay, good. yes, I have 2 questions on overseas, overseas business. In your prepared remarks, you mentioned the very exciting new hire in the U.S. leadership and also many exciting new products in the overseas market locally. So could you update us on the expansion plan for overseas and China in the next few quarters? Secondly, in the operation of overseas market, did you observe anything you want to share with us? And how could you translate those observations to the future strategy for the overseas business? [Foreign Language]

All right. Thanks for the question. Let me answer it. So let me first just go through a little bit more detail on the overseas development market by market that will be give you like a full picture of where we are now in overseas market. So I will not talk about the domestic growth, but more focus on the overseas market. In the international market that now we have 208 stores in total, including 178 Malaysia and 16 Singapore and 8 Indonesia, 5 Thailand and 1 U.S. So in overall, we have 39 new stores added in the second quarter. So we also successfully entered Indonesia first ever with new-age stores in 1 quarter. So in the same time, we made new strides in North America too. So opened our very first store in Los Angeles in May with the second U.S. store now soft opening in August. So overall, from -- a look at from an overall GMV perspective, the international markets keep up the strong growth. As I just mentioned that in the quarter that we have a 77.4% growth year-over-year. To break it down by market, we see a lot of very good signal in the performance country by country. In Singapore, we see the daily sales stayed very strong in the second quarter, holding steadily above 1,500 cups a day store. So we are still continuing optimizing the single store model to really maximize our potential in Singapore. By June, our average payback period of mature store in Singapore improved to less than 12 months. So we see they will soon as an overall country will we go breakeven in coming quarter. So that's really a very robust business development in Singapore. In Malaysia, we have 178 store now running very smoothly. And overall, the profitability performance of our store exceeded our plan, our internal plan. In Thailand, we relaunched the market with 3 net new stores in the quarter. Average store performance is very well. And at a daily basis, it's 800 cups a day store. So we see a very welcome by the local customers. In Los Angeles, our first store opening, I just mentioned that with 5,000 cups sold a day, it's a very long line like 3, 4 hours. and now still keep at 1,000 cups a day for the first store. So we -- going forward, we will push hard on 2 fronts, strengthening our presence in those mature markets like Malaysia, and we will continue to have a rapid growth in those markets. But in the meantime, we prepare entering more country like today is the first grand opening day in Philippines. So we see that more and more exciting news coming in. For the second half, the first one that we -- the Philippines will be the last country in this year as a new country -- as a new market we enter into. So -- and then for the Vietnam as well, as just mentioned. And then in the Q4 and Q3, we definitely -- with established team there, we were ramping up the growth. And we estimated that in -- for the full year, we will open more than 200 stores as a whole in the total overseas markets. So that's for the overall overseas market expansion. And as from a business perspective, there are some highlights that J mentioned as well. For example, we have a lot of local product launch. It's not a product that actually launched before in China, like Hojicha that's very popular in Singapore. We see a lot of local relevant campaigns well received by local customers. So I think as J just mentioned that we have played as a very important lifestyle brand, and we are focused on building a relevant experience to local customers, not just like simply say it's a Chinese brand. So I think that's something that we see very welcome by the different markets.

We will now take the next question from the line of Sijie Lin from CICC.

So my question is on SSSG. So could you please provide more color on the same-store sales performance in Q2, and what's your view of the same-store growth trend going forward? [Foreign Language].

Thank you. Thank you. It's a good question. Yes, the same-store GMV continued softening this quarter, mainly due to 2 reasons. The first reason that we talk about it before, so because we are comparing against a very strong second quarter in last year. And secondly, of course, the overall delivery platform price war intensified, we choose not to engage heavily to protect our brand positioning. So that's definitely where we have a little more market share kind of challenges leads to temporary customer diversion and that impacted the sales a little bit. Given the high base from the comparable period last year, we expected continued pressure on the same-store GMV in the second half of 2025. So we are moderating store expansion in 2025, which eases growth pressure on the same stores. Also, we believe that the subsidy-driven price will not last indefinitely, right? So its impact will gradually fade. And as J just mentioned that we will do what we are strong at. We will focus on the product quality elevation, and we will continue to improve better sugar, better milk and better tea. So really providing the high-quality product to the customers and to bring the customer back, focus on the customer experience, right, stay away from those price competition and really focus on our customer -- our long-term strategy, delivering high-quality product and experience to build a premium brand and earning the customer trust through the consistent excellence. So I think we believe that, that is something that the Chagee should play, and we are very confident that, that will be appreciated by customers as well.

I would like to hand the conference back to our management for closing remarks.

Thank you. Thank you again for joining our call today because we're short of time. If you have any other 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-bye.

Bye.

This concludes today's event. Thank you for participating. You may now disconnect. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]