We estimate positive investor sentiment towards freshly-made (FM) tea store players in China to last in 2H25, principally on accelerated store openings and stronger per store GMV. We are particularly bullish on the Company’s growth story, as well as its better earnings visibility ahead, from the long-term perspective. In the short run, Guming is undergoing an upward forecast revision on its execution excellence amid industry tailwinds as well.
　　Key Factors for Rating
　　The GMV of China’s FM beverage market is expected to rise at a CAGR of 16.7% in 2024-28, with huge upside potential in per capita consumption, esp. in lower- tier markets. In terms of GMV, Guming ranked No.2 in the overall FM tea store market in China in 2023 (with a share of 9.1%), according to CIC.
　　Guming’s robust growth trajectory, as well as its leadership position in the mid- priced FM tea store market in China, is underpinned by the following competitive edge, which are interconnected and mutually reinforcing for long-term cohesive competency. 1) Successful implementation of its regional densification strategy, with a potential to more than double the store count in China in 4-5 years from now, based on our estimation, 2) an agile franchise model, as well as disciplined management of franchisees, 3) superior supply chain capabilities, and 4) higher repurchase rates driven by good product matrix (with consistent innovation) and increasing brand awareness.
　　Key Risks for Rating
　　Major risks: 1) a slowdown in industry growth, 2) food safety issue, 3) the pace of store densification (esp. in its key operating regions) could miss expectations.
　　Valuation
　　We project Guming’s revenue to be RMB11.0bn/RMB13.5bn, up 26%/22% YoY in 2025-26. We expect modest enhancement in GPM (i.e. 31.0%/31.3% in 2025- 26, vs. 30.6% in 2024), based on 1) economies of scale in the entire value chain, 2) adequate franchisee subsidy/benefits, and 3) modest upstream procurement price fluctuations. Overall, we expect its net profit CAGR to be 24% from 2024 to 2027. Under its efficient asset-light franchise model, Guming’s ROE would be 32%-33% from 2026 onwards, and along with superior earnings quality, its FCF profile is further improving.
　　Our TP of HK$30.80 is based on 35.0x 25E P/E, which is 1) similar to Mixue and other Gen Z “new consumer” leaders’ current average 25E P/E, and 2) at a 5% discount to the NAV derived from our DCF simulation. In addition, we reckon its current 25E PEG of 1.1x is not excessive. Initiate with BUY rating. Key catalysts include 1) accelerating store network expansion, 2) stronger-than-expected per store GMV, 3) near-term benefits from escalated food delivery competition, and 4) inclusion in Southbound Stock Connect from 9 June 2025.