{"text":[[{"start":9.74,"text":"On the surface, at least, a new Hong Kong IPO application last week from Gemilai Holdings Ltd. looks quite attractive, including hot-roasted expansion for China’s largest homegrown espresso machine maker. But beneath the impressive story, headlined by 44% revenue growth and a fivefold profit increase last year, are a host of warning signals coming from a Chinese economy and coffee market both showing signs of overheating."}],[{"start":40.49,"text":"On the commercial side, China’s coffee shop sector is becoming quite saturated, despite a shockingly low penetration of coffee drinking in this traditionally tea-oriented culture. The landscape is currently dominated by big names like Luckin and Starbucks, which had 29,000 and 8,000 stores in China as of last September, respectively. But the space is also crowded with a host of second-tier names like Manner and Cotti, not to mention standalone cafes that pop up like weeds in big cities like Shanghai."}],[{"start":75.94,"text":"On the consumer side, China’s rapid economic slowdown is resulting in growing consumer caution. That means that while consumers still have to eat and drink, many are opting out of some of life’s smaller luxuries by dining out less and spending less on more discretionary items like a home espresso maker."}],[{"start":97.62,"text":"Those elements are mostly absent from Gemilai’s latest financials, but you can’t help but wonder if this is a classic case of a company making an IPO at its peak, with a major slowdown lurking in the not-too-distant future. While most of its metrics are quite encouraging, one of the few that points to trouble ahead is falling prices for its commercial-use espresso machines, hinting at the oversaturated situation among coffee shops."}],[{"start":125.05000000000001,"text":"Prices for the company’s household-use espresso machines remain quite strong, more than doubling from an average of 781 yuan ($112) in 2023 to 1,680 yuan in the first nine months of last year, according to Gemilai’s listing document filed last Thursday. But commercial-use machines have moved in the opposite direction, falling from an average of 8,049 yuan to 7,426 yuan in the first nine months of last year, a drop of about 8%."}],[{"start":160.89000000000001,"text":"Third-party market data in the prospectus certainly looks impressive, especially the part about how underpenetrated China’s coffee market currently is. According to the document, the average Chinese drank just 14.3 cups of coffee annually in 2024, averaging just over 1 cup per month. By comparison, each coffee-crazy European consumed an average of 567.9 cups of brew each year in 2024, while South Koreans weren’t far behind at 415.6 cups per person."}],[{"start":197.28000000000003,"text":"That under-penetration means China has lots of catching up to do. Its coffee machine market averaged 21.5% growth annually between 2019 and 2024, well ahead of the 14.9% growth for the global market over that time. What’s more, the China market for such machines is expected to continue growing by 18.7% annually between 2024 and 2029 to reach 12.5 billion yuan in annual sales by the end of that period."}],[{"start":230.77000000000004,"text":"Gemilai is nicely positioned in the middle of that boiling growth, commanding 7.5% of China’s market for coffee makers in 2024, according to its listing document."}],[{"start":244.12000000000003,"text":"Hot growth"}],[{"start":245.66000000000003,"text":"Gemilai’s own growth is well ahead of the market. As we previously noted, its revenue rose 44% to 449 million yuan in the first nine months of last year from 312 million yuan a year earlier. Household espresso machines are its biggest revenue contributor, accounting for 37.8% of its total in the first nine months of last year. Multi-use espresso machines were the second largest, accounting for 30.3% of revenue, while commercial use machines made up 16%. The company also makes coffee grinders, though they are a relatively small percentage of sales."}],[{"start":288.16,"text":"The company breaks out its revenue in quite a few ways, including by domestic versus overseas sales, online versus offline and revenue from its own brand versus brands for other companies. Most of the trends look relatively encouraging, showing the company is moving towards higher margin businesses."}],[{"start":307.96000000000004,"text":"Sales of its proprietary Gemilai brand are rising steadily, accounting for 83% of its revenue in the first nine months of last year from 69% of the total in 2023. That’s extremely important for the company’s bottom line, since proprietary brand products typically carry much higher margins than sales for other brands. At the same time, the company’s online sales rose to 58% of its total in the first nine months of last year from 41% in 2023. Again, that’s important since online typically carries higher margins than offline sales."}],[{"start":349.26000000000005,"text":"While most Chinese companies are looking to go abroad these days, Gemilai is doing just the opposite. Its domestic sales as a percentage of the total have actually been growing steadily over the last three years, rising to 80.9% of the total in the first nine months of last year from 70% in 2023. That’s probably the result of the Chinese market’s under-penetrated state, though it makes the company look vulnerable to potential domestic slowdowns that seem almost inevitable."}],[{"start":382.64000000000004,"text":"Gemilai has also done a good job of controlling most of its costs, with administrative and R&D spending holding roughly flat or even falling over the last three years, even as revenue has boomed. That prudent spending, combined with the move toward higher margin business practices, fueled a fivefold increase in the company’s profit, which rose to 54 million yuan in the first nine months of last year from 11.6 million yuan a year earlier."}],[{"start":414.64000000000004,"text":"Despite its big talk, the company still has quite a small feeling to it. There’s very little in the prospectus on founder and Chairman Xie Jianping. And a look at the company’s history shows nearly all of the fundraising since its founding in 2011 has come from Xie’s various friends and family. What’s more, a price-to-earnings (P/E) ratio of around 17, which is where global giant De'Longhi Group (DLG.MI) trades, would give Gemilai a relatively modest valuation of just 1.22 billion yuan, or around $175 million, based on its expected profit for last year."}],[{"start":456.44000000000005,"text":"At the end of the day, it’s really up to investors to decide whether Gemilai is a cup that’s half-full or half-empty. The half-full camp would probably argue the company is well positioned to thrive as coffee drinking levels in China get closer to other countries. The half-empty camp could argue China’s coffee economy may be due for a slowdown after a period of rapid growth, which in turn could put a big damper on Gemilai’s future growth."}],[{"start":496.75000000000006,"text":""}]],"url":"https://audio.ftcn.net.cn/album/a_1770027266_7019.mp3"}