The new tea industry is leaping by leaps and bounds, with low-tier cities as the main engine. The new tea industry is accelerating its share of the soft drink market. The CAGR in 2017-2022 was as high as 24.9%, and the 2022-2027 CAGR is still as high as 19%. The growth is mainly driven by low-tier cities. As far as Nai Xue's tea is concerned, the low-tier cities are empty markets that have not been touched before, while the high-tier cities of Hi Cha “left behind”, and the competitive pattern after Lele Tea was acquired became more clear, and Nai Xue faced marginal optimization of the living environment.

The operating profit margin at the Nai Xue store level remained stable at 20%, and the high-quality model empowered them to join. As lightweight PRO stores replace traditional standard store types and automatic tea machines optimize costs, Nai Xue's store model has achieved a leap in profitability/resilience/penetration compared to before the pandemic. It is more adapted to the current macro environment with weak consumption power, empowering franchisees to gain a foothold in a sinking market full of strong players.

There is still room for optimization of the Nai Xue franchise model, and the store expansion and the asset-heavy store model are naturally mutually exclusive. Nai Xue focuses on the “zero difference in franchise direct management” big store model. Compared to Hi Cha/Tea Baodao/Michelle Ice City, Nai Xue's initial investment amount/franchise threshold is high, so it is difficult to obtain the same expansion rate as the competition. However, in a context where brands are sinking and the degree of homogenization of store types is increasing, Nayuki, who focuses on spatial experience, may be able to form her own differentiation barriers/memory points. Referring to the pace of store expansion of Hi Cha & Lele Tea, the expansion of stores will enter a steady state 5 months after opening the franchise, and there will be a small peak in store opening during the peak season and before the holidays.

“Direct operation+franchise” two-wheel drive expansion, full firepower for the next 2-3 years. The gross number of directly-managed stores has jumped from 300 in the past to 500 this year. The guidelines have been met with a high degree of implementation, and will maintain a growth rate of 30% + in the future. Although the threshold for franchise stores is high, the probability of completion of a total of 2,000 stores opening plans over the next two years is high. With about 1,500 stores at the end of the year, Naixue still has a lot of space/potential compared to other brands. Given that the increase in headquarters expenses is manageable, the increase in store volume will increase operating leverage and increase the center of the Group's profit margin.

Investment suggestions: The current tea drinking track is a high-growth gold track, and the company is a leading brand of high-quality ready-made tea. The company will enter a golden store opening period in the next 2-3 years. Driven by the dual engine of direct management and franchise, 2024 may be a harvest year. High-tier cities have accelerated expansion with direct-run stores. It is expected that over the next 2-3 years, an average of 500 new direct-run stores will be opened, with a store growth rate of over 30%; low-tier cities will open up to join and use high brand potential to enter a sinking market with more space. It is expected that a total of 2,000 new franchise stores will be opened in 2024-2025, which is the main source of the company's performance elasticity. 2023H1 Nai Xue's tea store-side manpower/rent cost optimization has been implemented, the profitability of the single-store model continues to be verified, and there is still room for further optimization of manpower/rent costs in the future. Optimistic about store expansion/store model improvement/diversification of business formats to achieve high growth. Based on the above assumptions, we estimate that the company's net profit for 2023-2025 is 167/4.85/840 million yuan, and the corresponding valuation is 38/13/8 times.

Risk warning: food safety risks; the speed of opening stores falls short of expectations; the decline in model profitability, etc.