Impacted by sluggish consumption recovery and fierce industry competition, Nayuki’s 2023 results missed as 2H23 revenue of RMB2.57bn was 9.4% below our estimate. The company also recorded a core net loss of RMB53m in 2H23, primarily due to high fixed expenses. Still, the company reiterated its plan to open 2,000-3,000 franchise stores by 2026. We believe Nayuki has become more attractive to potential business partners as the reduced franchise fee may significantly shorten the cash payback period to 14.8 months, according to our estimate. Hence, considering Nayuki’s premium brand image and clear growth drivers, we expect the company to sustain 25% revenue CAGR in 2023-26E and ramp up its core NPM to 8.6% in 2026E. Maintain BUY.
　　Key Factors for Rating
Recovery in 2023 a bumpy road. Hindered by anemic consumer sentiment and intensified competition, Nayuki’s 2H23 revenue increased 14% YoY to RMB2.57bn, 9.4% below our estimate. In contrast to RMB71m core net profit in 1H23, the company reported core net loss of RMB48m in 2H23, as fixed costs (staff cost, depreciation, utility costs etc.) lowered OPM and NPM to -3.5% and - 1.9% respectively. Regarding guidance for 2024, Mgmt further revised down the number of self-operated stores as the gross opening of 200 stores will largely be offset by closures of underperforming stores. Still, the company reaffirmed its commitment to open 2,000-3,000 franchised stores by 2026. Currently, 200 franchise stores have been opened and an additional 400 potential franchisees have paid deposit. We anticipate Nayuki to have 2,150 franchised stores in 2026 with franchise revenue contributing over 25% of group revenue.
　　Adjustments on franchise fee mitigate profitability concerns. Nayuki announced to lower the initial investment requirement for franchise stores from RMB980k to RMB580k by reducing the store area. We deem it positive to attract more franchisee as: 1) the revised franchise fee aligns more with industry peers, alleviating financial pressures on franchisees. 2) the smaller store model, which entails less fixed costs, particularly rent and utilities, enhances store-level OPM and shortens the payback period. Based on our estimates, assuming c.RMB3m annual sales per store, reducing the store area from 130 sqm to 70 sqm could shorten the payback period from 27 months to 14.8 months.
　　Overseas market a blue ocean yet implies long-term supply chain investment. Nayuki revealed its intention to open low double-digit stores overseas in 2024, targeting Southeast Asia, the US, the UK etc. We agree that overseas markets offer significant potential for China’s tea-chain brands, given higher pricing abroad (ticket price in Thailand being 20-30% higher, per mgmt) and intensifying competition domestically. While Nayuki shows ambition on global expansion, we expect the company’s spending on supply chain infrastructure to increase, as raw materials like seasonal fruits and tea leaves, require local sourcing and logistics.
　　Key Risks for Rating
　　Downside risks: Significant increase in raw material prices; more intense competition in fresh-made tea industry; food safety incident; sudden shift in consumer preference.
　　Valuation
　　We cut 2024E/25E revenue by 14%/16% and 2024E/25E GPM by 1.6ppts/2.2ppts, mainly to factor in fewer net opening of self-operated stores and higher contribution from franchise business. Our latest target price of HK$3.18 is based on 10x 2025E P/E (previous: 20x 2024E P/E).