Summary of the Conference Call on China's Bubble & Brew Sector Industry Overview - The report initiates coverage of China's "bubble & brew" sector, highlighting a shift in consumer behavior where coffee and tea have become accessible daily commodities rather than elite status symbols. The current per capita consumption in China is 22 cups of coffee per year, significantly lower than over 300 cups in the US, Japan, and South Korea [2][26] - The top 8 companies are projected to dominate 25% of total outlets by 2025, up from 10% in 2022 [2] Key Growth Areas - Low-tier cities are expected to see a compound annual growth rate (CAGR) of over 20% in store count from 2024 to 2028 [2] - The mid- to low-priced segments (under RMB 20) are anticipated to grow at a CAGR of approximately 20% [2] Company Ratings and Preferences - The report ranks companies based on their growth potential and market positioning: - **Top Picks**: Luckin Coffee (Overweight) and Guming (Overweight) - **Other Notable Mentions**: Mixue (Overweight), Nongfu (Overweight), Eastroc Beverage (Neutral), CR Beverage (Neutral), Chagee (Underweight) [2][26] Market Dynamics - Freshly made drinks (FMD) and soft drinks are expected to grow at CAGRs of 12% and 4% respectively from 2025 to 2030, while traditional alcoholic beverages like baijiu are projected to decline by 1.2% annually [5] - The aggressive expansion of coffee and tea houses is likely to impact the market share of juices, carbonates, and sweetened ready-to-drink teas, although the effect on sugar-free tea and bottled water will be minimal [5] Competitive Landscape - The report emphasizes the importance of scale, attractive pricing, supply chain efficiency, product innovation, and marketing in securing a competitive position in the market [5] - Luckin, Guming, and Mixue are expected to continue their rapid expansion, with net openings projected at 9,000, 4,800, and 3,300 stores respectively by 2026 [5] Catalysts to Watch 1. New product launches and entry into new categories (coffee, milk, finger food) [5] 2. Starbucks China aims to increase its store count to 20,000, intensifying competition in low-tier markets [5] 3. Luckin, Chagee, and Mixue's entry into the US market in 2025 [5] 4. Annual distributor reviews in November-December may lead to shifts in partnerships among beverage distributors [5] Valuation Insights - The sector experienced a significant correction, with share prices retreating 30%-60% from peak to trough, despite strong same-store sales growth (SSSG) [5] - Current valuations for Luckin, Guming, and Mixue are attractive, trading at 14-19x 2027E P/E with earnings CAGRs of 20-28% from 2024 to 2027 [5][37] Financial Metrics - The report provides detailed financial projections for key players, indicating robust revenue growth and profitability metrics for Luckin and Guming, with expected revenues of RMB 49 billion and RMB 12 billion respectively by 2025 [38] Conclusion - The bubble & brew sector in China presents significant growth opportunities, particularly in low-tier cities and affordable segments. Leading players like Luckin and Guming are well-positioned to capitalize on these trends, supported by favorable market dynamics and consumer behavior shifts [2][5][37]

Investment Rating - The report indicates a positive outlook for the retail and consumer sector, suggesting that consumption has bottomed out and is expected to continue growing, particularly during holiday periods [1][10]. Core Insights - Retail sales growth during the Labor Day holiday was better than expected, with key retail and restaurant enterprises reporting a year-over-year growth of 6.3%, up from 4.1% during the Chinese New Year holiday [1][10]. - Tourism sales also showed strong performance, with an 8% year-over-year increase, reaching 136% of pre-COVID levels, supported by a 6.4% increase in tourism traffic [1][10]. - Spending patterns indicate a rational approach from consumers, with per capita tourism spending growing by only 1.5% year-over-year, still below pre-COVID levels [3][10]. Summary by Category Retail and Catering - Home appliances, auto, and telecom equipment saw significant sales growth, with key enterprises reporting increases of 15.5%, 13.7%, and 10.5% respectively [2][23]. - Catering services also performed well, with an 8.7% increase in sales, particularly benefiting from strong traffic and consumer willingness to pay for experiences [2][22]. Tourism - Domestic tourism sales grew by 8% year-over-year, with total tourism sales recovering to 123% of pre-COVID levels, driven by increased traffic [10][11]. - Outbound travel showed solid momentum, with a 21% year-over-year increase, particularly to Hong Kong and Macau [11][10]. Regional Performance - Consumer spending growth was balanced across different tiers of cities, with key tourism cities and lower-tier cities benefiting from increased traffic [9][26]. - Major cities like Shanghai and Beijing outpaced the national average in consumption growth, aided by domestic tourism and visa-free policies [28][26]. Specific Categories - Jewelry sales improved due to better sentiment around gold prices, with notable growth from brands like Chow Tai Fook [24][19]. - The box office experienced a significant decline of 51% year-over-year, attributed to a lack of blockbuster films [25][10].