Chagee Holdings Limited

Good morning and good evening, ladies and gentlemen. Thank you for standing by and welcome to Chachi's third quarter 2025 earnings conference call. At this time, all participants are in a listen-only mode. We'll be hosting a question and answer session after management's prepared remarks. Please note that today's event is being recorded. With that, I'll now turn the call over to the first speaker today, Ms. Alicia Guo, Investor Relations Director of the company. Please go ahead, ma'am.

Hello, everyone, and welcome to Chai-Chi's third quarter 2025 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 NewsWare earlier today and are currently available online. Before we continue, I refer you to our Safe Harbor statement in the earnings price release. which applies to this call. Any forward-looking statements that we make on this call are based on assumptions as of today, and CHAGI 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. Jun Jie Zhang. Please go ahead, sir.

感谢各位今天参加报应茶几2025年第三季度的业绩发布会。 首先,我想对全体报应茶几的伙伴们致以谢意。 在充满变化与挑战的市场环境中, 是他们的坚韧与卓越执行让我们得以稳步前行。 Hello, everyone.

Thank you all for joining the Chinese Third Quarter 2025 Early Conference Call. First and foremost, I would like to express my sincere gratitude to every member of the Chinese team In a dynamic and challenging market, our resilience and strong execution have driven steady progress and built a durable foundation for the long-term future we envision.

过去几年,我们一直在回答一个核心问题,方查机究竟为何而存在? Our answer is to move the market back to the world. This is our original intention and mission. We look forward to the deep value for the user. Therefore, all of our strategic objectives are focused on focusing on the value of the user. Every decision we make, every step we take, our ultimate goal is to continue to expand and deepen the user community that agrees with our brand value.

Over the past few years, we have consistently asked one core question, why does Chaji exist? Our answer is clear, that is, bringing people together through tea. This founding mission and commitment drives us to focus on user value as the starting point for all strategies. Every decision and initiative aims to expand and deepen a community of people who connect with our brand values. Guided by this belief, we will steadfastly execute our high-quality development strategy.

We insist on high-quality products in an era of demand. We chose to return to the product-oriented path, and continued to promote the raw material upgrade strategy. We insist on being a hot drink with warmth and cultural connotations. This is not only the starting point of all user experiences, but also the most persistent performance class of our brand. We insist on user experience, and always strive to build emotional connections, so that every cup of tea can become a story to share. We provide not only a cup of tea, but also a unique experience and emotional resonance based on Eastern American studies. We adhere to the priority of door-to-door quality. Global door-to-door expansion is always ahead of single-store health and business quality. Promoting door-to-door scale, health and development, and building high-performance door-to-door, we strive to make every store a place of choice for consumers to check.

We're dedicated to delivering high-quality products. Rather than chasing traffic and trends, we prioritize our product excellence. Our ongoing raw material upgrades ensure a team that is authentic, wholesome, warm, and culturally rich, serving as cornerstone of every experience and a key trap pillar for our brand. We emphasize the user experience, creating engaging content, and building emotional connections to make each cup a shareable story. Our offering goes beyond a beverage to a distinctive experience rooted in Eastern aesthetics. Store quality remains our focus, and global expansion will depend on each store's health and profitability. We pursue health growth across store networks, identify high-potential locations, and strive to make every Chagi store the go-to place for friends gathering over tea.

In the face of short-term market fluctuations, we maintain our strategic results.

We're deeply confident in the vast potential of global tea beverage. and in a distinctive path Chachi has chosen, the one driven by culture and quality.

These are my reflections on the core of our business and future direction.

Now I will turn the call over to our CFO, Aaron, who will detail the specific results of our strategic execution this quarter. Thank you.

Hello, everyone. Thank you for joining our earlier call. Before we dive into the details, please note that all amounts are in RMB and all comparison on a year-over-year basis, unless otherwise stated. So in the third quarter, our total net revenue were $3,208.3 million, a decrease of 9.4% year-over-year, and a 3.7% sequentially. Total GMV for the quarter was $7,929.5 million. Despite the challenging macro environment and the intensified competition, We maintained our focus on profitable growth and the disciplined execution. Non-GAAP net income was $502.8 million with a non-GAAP net margin of 15.7%, reflecting underlying resilience of our business model. Let me highlight several key operational achievements. First, our global tier house network reached 7,338 stores. with a net addition of 300 teahouses in the third quarter. Overseas expansion accelerated, contributing 54 net new teahouses as we successfully entered the new market, including the Philippines and the Vietnam. Second, product innovation continued to drive the momentum. In the home market, we launched the low-caffeine jasmine grain become a top street bestseller. Driven strong user acquisition. Boya Jasmine Green Milk Tea earned the best in nature or organic beverage title at the 2025 World Beverage Innovation Awards, underscoring our strong product quality and the leadership in healthy beverage innovation. In Asia Pacific, the future world milk tea launch performed exceptionally well, validating our regional product strategy. Furthermore, our member ecosystem remains robust. Total registered members reached 222 million by the end of the third quarter, representing an increase of 15 million sequentially and 36.7% year over year. Our franchisee network also demonstrated a remarkable stability. The stock closure rate remained low at 0.3% for three consecutive quarters, underscoring the health and the confidence of our franchisee partners. Now let me provide a more detailed financial analysis. Starting with the revenue, our total net revenue for the third quarter was $3,208.3 million, mainly driven by the continued expansion of our tea house network. Among them, net revenue from franchisee to tea house was $1. representing 87.6% of our total net revenue. Net revenue from company-owned tea houses increased by 63.8% to 396.7 million, accounting for 12.4% of total revenue. The increase was primarily driven by the expansion of our company-owned tea houses network in both Greater China and overseas markets. In Greater China, total GMV decreased by 6.2% year over year to 7,629.2 million. The average monthly GMB per key house in Greater China was 378,506 RMB, a year-over-year decline reflecting both high base in last year and a more severe competitive environment, including the impact of the delivery platform subsidy competition. Even so, Our commitment to maintain premium position and the brand integrity remains central. Meanwhile, overseas markets continue to show substantial progress, with GMV increasing 75.3% year-over-year and a 27.7% quarter-over-quarter to $300.3 million. This growth is mainly driven by structuring. store expansion and growing brand awareness, positioning the overseas market as a key pillar of our future growth. In the third quarter, We expanded our overseas presence by adding a net 54 stores, bringing our total store number to 262 stores as of September 30th, 2025. This growth was fueled by our successful entries into Philippines and the Vietnam, as well as we continued a steady expansion in Malaysia, Thailand, and Indonesia. During the quarter, we added 18 new stores in Malaysia and nine each in both Thailand and Indonesia. Our commitment to being an exceptional employer has earned the prestige award in key markets, including HR Asia's best companies to work for in Asia 2025 in Malaysia, and a certified OJP Center plus NS Mark Gold status in Singapore. These honors strengthen our brand and help us attract the top talent needed for the growth. While our store expansion continues, we recognize pressure on GMV performance at existing stores. with domestic and overseas fees for sales generally declining by 27.9% and 23.4% respectively. This softness is attributed to a high base from the same period last year and intensified competitive pressure. However, our franchisees' fundamentals remaining solid as evidenced by consistently low closure rate. we expect the same store GMV growth to remain under pressure in the near term. Turning to margin, our gross profit calculated by excluding cost of material storage in the logistics from net revenue reached 1,726.5 million this quarter, resulting in a strong gross margin of 53.8%. This marks a solid improvement both year over year, up from 50.1% in the third quarter of last year. The margin improvements results primarily from two factors. First is the benefit of expanding economic upscale, and the second is decreased purchase costs driven by our persistent procurement optimization initiatives. On operating expenses, Share-based compensation expenses this quarter were $104.9 million. This reflects our commitment to long-term employee engagement and align their goal with shareholders to provide greater credit on underlying operational performance. We will reference this non-GAAP operating results. with a full reconciliation available in our earning release in the form 6K. Operating income was $454.4 million, representing an operating margin of 14.2%. Excluding share-based compensation expenses, non-GAAP operating income was $559.3 million, representing a 17.4% margin. The above-mentioned margin differences reflects our step-up investment in talent recruitment for global expansion, including brand building to support new product launches, R&D to enhance our offering, and the digital infrastructure to elevate customer experience. The operating costs for company-owned tea house were $271.4 million, up 94.7% from a year ago and up 47.4% from the second quarter of 2025. As of September 30th, we operated 367 company-owned tea houses, up from 239 in the second quarter of 2025. On a per-store basis, operating costs have decreased compared to the second quarter of 2025, showing continually improved efficiency at the store level. Other operating costs increased by 7.3% to $178.9 million, largely due to high payroll supporting to the extension of our global store network. On an organic basis, other operating costs account for 5.4% of revenue compared to 4.7% a year ago. Sales and marketing expenses for the quarter were $304.5 million, down 13.4% from a year ago. Achieved through disciplined branding promotion. On a gap basis, sales and marketing expenses representing 9.2% of revenue compared to 9.9% a year ago. General and administrative expenses reached 500 to 17.4 million, up 59.7% year-over-year, driven by an expanded workforce and additional office facilities supporting global operations. On a non-GAAP basis, GMA expenses represented 13.4% of revenue compared to 9.1% a year ago. Income tax expenses represent 21.4% of income before tax, slightly higher than 20% a year ago. This was primarily driven by the impact of share-based compensation expenses recognized during the quarter. We achieved our 11th consecutive quarter of profitability with gap net income of $397.9 million. Non-gap net income excluding share-based compensation expenses was $502.8 million with a non-gap net income margin of 15.7% compared to 18.3% last year. This demonstrates our ability to maintain healthy profitability in the margins while continuing to invest for future growth. During the quarter, basic net income per ordinary share was RMB 2.07 and diluted net income per ordinary share was RMB 2.03. On a gap basis, Basic net income per ordinary share was RMB 2.63, and the diluted was RMB 2.57. Turning to liquidity, we ended the quarter with roughly $9,142 million in cash and cash equivalents, which is cash and time deposits. This robust balance sheet coupled with our 11th consecutive quarter of profitability provides a solid foundation. Our board has approved a special cash dividend of US dollars 92 cents per ordinary share or ADS totaling approximately US dollar 177 million. Payable on or around December 15th, 2025 to shareholder of record as of December 8th, 2025. This distribution underscores our commitment to enhance shareholder value and reinforce investor confidence in our business model. Our strong cash generation ability enables us to return capital while continue to invest in growth. This specificity also demonstrates our conviction in the company trajectory and our dedication to reinforce our market confidence in our long-term prospects. At this time, we were not providing formal financial guidance. Our strategic focus is on key pillars that foster sustainable long-term shareholder value. We are dedicated to continue product innovation and strategic brand investment to enhance market presence. At the same time, we are boosting operational efficiency to optimize resources and drive improved performance, positioning the company for agile and sustained growth. We are confident in delivering our long-term strategy and growth potential. We are persistent with prudent management, strategic investment in future drivers. and the commitment to creating durable value for shareholders. We believe our solid financial foundation, clear strategic roadmap, and exceptional team will help us capitalize on long-term opportunities despite the market dynamics. With that, I will turn the call back to the operator to begin the Q&A session. Operator, please go ahead.

Thank you. We will now begin the question and answer session. To ask questions on the phone, please press star 1-1 and wait for your name to be announced. To cancel your request, you can press star 1-1 again. One moment for the first question. Our first question comes from the line of C.J. Lee from CICC. Please ask your question.

Thank you, Mr. Junjie and Mr. Aaron. I'm Lin Cijie, an analyst at Zhongjing. 我的问题主要是,可不可以你们阐释一下刚才CEO提到的这个高质量发展战略具体将如何执行? 那我来翻译成英文。 So thank you, Junjie Zong and Aaron Zong. And Sijie from JCC, could you please speak more about how will the high quality development strategy be executed? Thank you.

好的,谢谢你的问题啊。 Regarding the strategy of high-quality development, our company has defined a clear execution route. We will systematically promote from brand, product, experience, and channel. First of all, in terms of high-end brand construction, we are doing a comprehensive brand upgrade. The core is to promote the construction of brand experience stores and optimize customers' full process experience. At the same time, we are also actively expanding the specialty stores such as tea culture theme stores and non-tourist theme stores. Thank you for your question.

Regarding our high-quality development strategy, we have a clear execution path across four core dimensions, brand, product, experience, and channels. First, in high-value brand building, we're upgrading our brand to speed up the launch of brand experience, T-Health. and streamline the customer journey. At the same time, we're growing specialty houses like tea culture themed locations and intangible culture heritage themed tea houses to deepen our cultural roots and highlight what makes the brand stand out.

第二是高质量的产品体系打造。 在这一方面我们有四个重点。 一是明确并严格执行好查的品质标准。 Second, we will upgrade the basic core materials. Third, we will strengthen the construction of a full chain of food quality from the source to the store. Our previous food quality will be greatly improved this time. The fourth point is also very important. We will fully implement the 4.0 menu. and create a system of product quality consistent protection to ensure that every consumer can enjoy the same high-quality product at any store.

Meanwhile, we're building a high-quality product system with four core priorities. First, we will define and uphold strict premium tea standards. Second, we'll enhance our core raw materials. Third, we'll improve food quality from end to end. Finally, we will introduce the 4.0 menu and guarantee uniform quality for all customers wherever they are.

The third is to promote the expansion of new products and products in multiple categories. We will cooperate with the 4.0 menu to launch new categories such as special pure tea. At the same time, we strive to expand new consumer scenarios, such as breakfast and dinner times. In addition to increasing the efficiency of the time of the store, we will also enhance the customer experience by optimizing the presentation method in the production process.

Next, we're driving cross-category innovation and new consumption scenarios. With the 4.0 menu, we're adding exciting new categories like special tea to mix things up. We're also expanding into additional consumption scenarios, including breakfast and evening hours to improve store utilization across different times. In addition, we'll fine-tune how products are shown while they are being prepared to make the experience even better for customers.

We're also enhancing the membership experience with the revamped membership system to build a true member community and mutual benefit network.

This will boost the thickness and repeat purchases for our 222 million members. At the same time, We're optimizing store facilities and technologies to improve efficiency and customer satisfaction.

最后是执行高级量的渠道策略。 我们在稳定规模下,我们会持续保持健康的生产。 本季度,我们近生产了300家航天。 未来计划维持稳健的拓电节奏。 Finally, we're reshaping a strong channeled strategy

Our tea house network is expanding at a healthy pace with 300 new tea houses added this quarter, and we will maintain a steady pace to tea house expansion. We're also pushing ahead with standout flagship tea houses such as the Charity House in Hong Kong and the pop-up store at 2025 Rolex Shanghai Masters. These showcases really highlight what the brand stands for and enhance our brand awareness. Thank you. Operator, next question, please.

Thank you. One moment for the next question. Our next question comes from Xiaobo Wei of Citigroup. Please ask your question.

Could you share more color on the overseas market network expansion as well as the store operating in the non-China regions? Thank you.

All right. Thank you, Xiaopo. So our overseas markets are a pivotal growth driver. The momentum is solid across the whole greenhouse. This quarter we enter into the two new markets, Philippine and Vietnam. While our stock count in Malaysia has exceeded 200 currently. So this is a big milestone. Our local operations are showing strong signal. our localized products and the marketing campaigns will achieve the greatest success. So for example, our September collaboration with Popmart generated a tremendous response across Southeast Asia. In Malaysia, the green grab series made up 50% of cups sold on the first day, making our all-time high. So during the campaign first week, tea houses in Singapore achieved average daily sales of over 500 cups of the product. Our Pichu Oolong milk tea also performed exceptionally well. It captured over 30% of cups sold in Indonesia within 15 days since launch and about 16% in Thailand, making a top seller in both markets. So these are successful local efforts combined with our steady expansion pace, giving us a strong confidence in overseas growth in Southeast Asia. So moving forward, we will continue deepening our presence in those markets we've entered, steadily expand into new markets and keep improving per store profitability and the brand impact. Operator, next questions, please.

Thank you. As there are no further questions, I would like to hand the conference back to management for closing remarks.

Thank you again for joining our call today. If you have any questions, please feel free to contact us or request through our IR website. We look forward to our next call with everyone. Have a great day.

This conference, thank you for participating. You may now disconnect.