Chagee - Earnings Call - Q2 2025

Transcript

Operator (participant)

Good morning and good evening, ladies and gentlemen. Thank you for standing by, and welcome to Chegi's Second Quarter twenty twenty five Earnings Conference Call. At this time, all participants are in a listen only mode. We will be hosting a question and answer session after management's prepared remarks. Please note that today's 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.

Speaker 1

Thank you. Hello, everyone, and welcome to Chaji's second quarter twenty twenty five 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 Chaiji 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 measure to GAAP measure.

With that, I will turn the call to our CEO, Mr. Junjie Zhang. Please go ahead, sir.

Junjie Zhang (Chairman, CEO & Director)

Hello, everyone. Thank you all for joining Qaji's second quarter twenty twenty five 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're honored to welcome Ms. Emily Chung 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 World Group 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 Brose Coffee. His rich experience in scaled operations will drive our development in The US 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 sharpened 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 the 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 Gemini milk tea captured customer attentions across Southeast Asia, propelling us to the top position in share of voice among tea brands in the region. In Malaysia, the product is sold out in major cities within two 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. Cup 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 Cimaric inlay art 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, VICI Black Tea Milk, milk tea showcased a strong first week sales alongside other recent introduction. The two products drove a meaningful sequential increase in GMV during their launch period.

Moreover, the time limited return of MeiLo Oulu 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 continued healthy development. By the end of the second quarter, number of registered members achieved a 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 up 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 cup 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 earning during market trust and sharing the authentic experience of Chinese tea with the world. This concludes Now my I will turn the call to our CFO, Aaron, who will provide detailed insights to our financial performance. Thank you.

Hongfei Huang (CFO)

Thank you, Jay, and good evening, good morning, everyone. Thank you for joining our earnings call. Before we dive into the detail, please note that all amount are in RMB and all comparisons are on a year over year basis unless otherwise stated. In the second quarter, our revenue reached RMB3.3 billion, up by 10.2% year over year. GMV came in at 8,100,000,000 a year over year increase of 15.5%.

Non GAAP net income was $629,800,000 up by 0.1% year over year. For the 2025, non GAAP net income rose by 6.8% year over year to RMB 1,300,000,000.0. By end of the second quarter, our total membership exceeded 200,000,000, increasing by 14,500,000.0 from the first quarter and 42.7% year over year. These results underscore the resilience of our business model execution under dynamic market conditions. Now let me provide some context around the market condition we faced this quarter.

The intensified delivery platform subsidiary competition in China created headwinds for our business, while we remain disciplined in protecting our pricing integrity and premium brand positioning. We recognize that this competitive environment weighed on near term performance. At the same time, are advancing our strategic expansion into international markets. This involves deliberate investments in organizational infrastructure, including talent acquisition just Jay shared and operational capabilities. While these initiatives are currently affecting profitability in short term, they are very critical investment 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% year over year to $3,331,900,000 mainly driven by the continued expansion of our tea house network. Among them, net revenue from franchisee tea house grew by 6.1% to $3,020,700,000 representing 90.7% of our total net revenue. Net revenue from company owned teahouse increased by 77.3% to $311,200,000 accounting for 9.3% of the total revenue. The increase was primarily driven by expansion of company owned the T House network.

Our total GMV for the second quarter increased 15.5 year over year. The average monthly GMV per tea house 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 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 2025, we expanded our overseas presence by adding a net 52 stores compared to year end 2024, bringing our total of two zero eight stores as of 06/30/2025. The opening of the store in Indonesia attracted approximately 35,000 new members registration 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 three days. Our Los Angeles store in United States set a record with 5,000 cups sold a single day. Turning to margin.

Our gross profit calculated by excluding cost of materials, storage and the logistics from net revenue, reached $1,800,000,000 this quarter, resulting in a strong gross margin of 53.9%. This remarks a solid improvement both year over year, up from 48.4% in the second quarter of last year and sequentially from 53.1% in the 2025. This margin expansion was primarily driven by two key factors. First, we continue to benefit from growing economic 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 expenses categories. The significant amount of share based compensation expenses recognized in the 2025 were related to the vesting of share based awards with the performance condition related to IPO success. The breakdown includes $505,600,000 in G and A, 31,100,000.0 in sales and marketing expenses and $15,800,000 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 six ks. Operating income was $107,600,000 Excluding share based compensation expenses, operating income was $660,100,000 representing a 19.8% margin.

This margin change reflecting step up investment in the brand building and the marketing to support a new product launch, R and D to ensure our offering, digital infrastructure and to elevate customer experience and the talent recruitment for global expansion. Operating cost for company owned the Tea House was $184,100,000 up 72.8% from a year ago and up 17.2% from the 2025. As of 06/30/2025, we operated two thirty nine company owned tea houses, up from 191 at the 2025. On a per store basis, operating costs have decreased compared to the 2025, showing improved efficiency at the store level. The other operating costs increased by 36.2% to $173,700,000 largely due to higher payroll supporting the expansion of the franchisee network.

On a non GAAP basis, other operating costs accounts for 1.7% of revenue compared to 1.2% a year ago. Sales and marketing expenses for the quarter were $385,000,000 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 and A expenses reached $944,600,000 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 and D for product upgrades and innovation, and a higher IT service cost to enhance operational efficiency. On a non GAAP basis, G and 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 $77,200,000 Non GAAP net income, excluding share based compensation expenses was $629,800,000 with a non GAAP net margin of 18.9% compared to 20.8% last year. The margin decline reflects our continued investment in new product and the 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 RMB0.36 and the diluted net income per ordinary share was RMB0.35. We ended the quarter with $8,900,000,000 in cash and cash equivalents, restricted cash and the time deposit, up from $4,900,000,000 at the 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 sustaining our long term growth. The investments we are making today in people, infrastructure and the capabilities will 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 condition 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 customer trust and value.

We are deeply grateful for the continued support of our team, charge of friends and valued shareholders. Through disciplined capital allocation and our commitment to the strengthening or diversifying our global business, we will continue to 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 and A session. Operator, please go ahead.

Operator (participant)

Thank you. We will now take the first question from the line of Lillian Liu from Morgan Stanley. Please go ahead.

Lilian Liu (Operations Analyst)

Hello. Thank you for the opportunity to ask the question. Thanks a lot for Junjie Zhong 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 stores profit margin and the stability? And related to that, what company's strategy going forward related to dealing with platforms subsidy program, how we define our positioning in the industry and how we look at the second half general operation focus? Then I will translate my question.

Junjie Zhang (Chairman, CEO & Director)

Thank you so much for your question. We see you deliver 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 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 to our franchisees as well.

So we believe that it puts a lot of pressure on the merchant margin and shakes up delivery platforms' income stability and creates financial stress for the platform as well. So the key issue with the subsidy is that they mainly attract the 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 three 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 build 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 four point zero 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 be reasonably competitive on price without compromising our core value.

And also, at last, our R and D product R and 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.

Operator (participant)

Thank you. We will now take the next question from the line of Xiaopo Wei. Please go ahead.

Speaker 1

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

Operator (participant)

Sure. My apologies. Of course.

Junjie Zhang (Chairman, CEO & Director)

So actually, we believe, right now, 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. So 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. You. Sandra, please go ahead with the next question.

Operator (participant)

Thank you. We will now take the next question from the line of Xiaopo Wei from Citi. Please go ahead.

Xiaopo Wei (Analyst)

Hi, can you hear me?

Operator (participant)

Hello? Yes, please.

Xiaopo Wei (Analyst)

Okay, good. Yes, I have two questions on overseas business. In the prepared remarks, you mentioned a 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?

Hongfei Huang (CFO)

All right. Thanks for the question. Let me answer it. Let me first just go through a little bit more detail on the overseas development market by market. That would be I'll give you, like, a full picture of where we are now in a a overseas market.

So I would not talk about domestic growth, but more focused on the overseas market. In the international market that now we have two eighty eight stores in total, including 178 in Malaysia and 16 Singapore and eight Indonesia, five Thailand and one in U. S. So overall, we have 39 new stores added in the second quarter. So we also successfully entered Indonesia first ever with the new A stores in one quarter.

So in the same time, we made a new strides in North American 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 look at from an overall GMV perspective, the international markets keep up the strong growth.

As I just mentioned to 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 that daily sales stayed very strong in the second quarter, holding steadily above 1,500 cups a day store. So we are still continually 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 twelve months.

So in we see there was soon as overall contract where we go breakeven in coming quarter. So that's really very robust business development in Singapore. In Malaysia, we have a 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 three net new stores in the quarter.

Average store performance very well. And at a daily basis, it's 800 cups a day a store. So, yeah, so we we see a very welcome by by the local customers. In Los Angeles, our first store opening, you know, I just I mentioned that, you know, with the 5,000 cup sold a day, it's a really long line, like, three, four hours. And now still keep at 1,000 cups a day for the for the first store.

So so we going forward, we'll push hard on two fronts, strengthening our presence in those mature market like Malaysia, and we will continue, you know, have a rapid growth in those market. But in meantime, so we, you know, prepare entering more country. Like today is the first grand opening day in in in Philippine. So so we see that more and more, you know, exciting news coming in. For the second half, the the first one that, you know, we the Philippine will be the, you know, the the last country in this in this year as a new country as a new market we enter into.

So and then for the the Vietnam as well, as just I mentioned. And then in the Q4 and Q3, we definitely we established a 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 all in the total overseas markets. So that's for the overall overseas market expansion.

And as from business perspective, there are some highlights that Jay mentioned as well. For example, we have a lot of local product launch. It's not a product that actually launched it before in China like Ho Chi Cha that's very popular in Singapore. We see a lot of local relevant campaigns well received by local customers. So I think that the the as Jay just mentioned that, you know, we are played as very important a lifestyle brand, and we are focused on, you know, 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. Operator, next question, please. Thank you. Thank you.

Operator (participant)

We will now take the next question from the line of C. J. Lin from CICC. Please go ahead.

Sijie Lin (Analyst)

Thank you, management for taking the question.

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 sales growth trend going forward?

Hongfei Huang (CFO)

Thank you. Thank you. It's a good question. Yes, the same store GMV continued softening this quarter, mainly due to two reasons. The first reason that we talked about it before, so because we're comparing against a very strong second quarter in last year.

And secondly, of course, the overall delivery platform price were intensified. We choose not to engage heavily to protect our brand positioning. So that definitely will have a little more market share kind of challenges, leads to temporary customer diversion and 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 2025. So we are moderating store expansion in 2025, which eases gross 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 Jay 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, you know, better sugar, better milk, and better tea. So really providing the high quality product to our 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 long terms our long term strategy. Delivering quality quality high quality product and experience to view a premium brand and earning the customer trust through the consistent excellence. So I think we believe that, that is something that QIAG should play. And we are very confident that, that would be appreciated by customer as well. Thank you.

Operator (participant)

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

Junjie Zhang (Chairman, CEO & Director)

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.

Hongfei Huang (CFO)

Bye bye.

Operator (participant)

This concludes today's event. Thank you for participating. You may now disconnect.