How full equity buyouts could help China’s cooling bubble tea sector turn a new leaf

As the bubble tea industry in China experiences a slowdown, full equity buyouts are emerging as a potential solution to invigorate the sector. Investors are increasingly drawn to the major brands by the increasing competition and the recent bubble tea boom. While growth in the industry is now expected to be in the mid to high single digits, down from the double-digit projections in previous years, financial analysts noted a shift in investment strategies.

One notable development is the deal reached on August 6 by global private investment firm Bain Capital to purchase Taiwan-founded bubble tea brand Gong Cha Global from US private equity firm TA Associates and other shareholders. Bain Capital plans to work closely with Gong Cha's management team, focusing on expanding its store presence in Japan, South Korea, and the United States.

Gong Cha, operating nearly 2,200 stores in 33 markets worldwide, primarily utilizes a capital-light franchise model, generating revenue through franchise and royalty arrangements instead of relying on company-owned outlets. The company's focus remains on product improvement and brand building, with no stores in mainland China but with outlets in Hong Kong and Macau, according to S&P Global Ratings director Sandy Lim.

In China, the challenge for fresh-tea brands lies in improving store economics, as most financing transactions involve growth-stage minority investments. Large-scale private equity buyouts have not been observed yet. Among Chinese investors, major domestic bubble tea chains have been supported through early-stage financing and IPO subscriptions, with notable examples being Hong Kong-listed brands Nayuki Holdings and Mixue Group, as well as privately held Heytea.

In 2021, Heytea closed its Series D financing, raising US$500 million from Chinese private equity firms HSG and Hillhouse Investment, and foreign investors Temasek and L Catterton.

Another major player, Hong Kong-listed Nayuki Holdings, experienced a significant decline in its stock price following its 2021 IPO. Despite initial success, the company's fortunes have since reversed, as it closed at HK$0.73 on Monday, a drop of over 96% over five years. The company's largest shareholders, wife-and-husband duo Peng Xin and Zhao Lin, have also experienced a substantial drop in their stake, falling from 11.18% to 4.98% as of November 2024.