Is new consumption stagnating? Bank of America downgraded MIXUE ICE CITY's rating to "Underperform," stating that "the stock price has significantly outpaced the fundamentals."

Is new consumption stagnating? After a recent surge, the stock price of MIXUE Ice City faces a reality check.

On June 5th, the "three treasures of new consumption" - Pop Mart, MIXUE GROUP, and Laopu Gold all fell, with Laopu Gold dropping over 9% and MIXUE GROUP down 7.8%.

According to news from Chasing Wind Trading Platform, Bank of America downgraded the rating of MIXUE Ice City from "Neutral" to "Underperform" in its research report on the 5th, raising the target price from HKD 400 to HKD 465, believing that the stock's "price has significantly outpaced its fundamentals."

Bank of America revealed three key risks in its report: short-term fundamentals are difficult to support high valuations, overseas expansion and coffee business obstacles limit long-term growth potential, and valuation bubbles driven by capital flow may face corrections.

As of the time of publication, MIXUE Ice City's stock price fell 7.72% to HKD 568, indicating about an 18% downside to Bank of America's target price.

Incredible Growth Since IPO but Overvalued

Bank of America's rating adjustment highlights the valuation challenges faced by new consumption concept stocks after significant increases.

Bank of America stated, MIXUE Ice City's stock price has risen 204% since its IPO, while the MSCI China Index has only increased by 1% during the same period. The stock recently hit a new high and is currently trading at a forward price-to-earnings ratio of 40x/33x for 2025/26.

Bank of America analysts believe that although MIXUE Ice City is the largest and most outstanding fresh tea beverage company in China, with a strong supply chain and brand power, its recent fundamentals cannot justify the current valuation.

Analysts raised the target price to HKD 465, based on a 25x forward price-to-earnings ratio for 2026, but this still implies an 18% downside from the current stock price of HKD 568. This target multiple is 10% lower than the average level of peers in the new consumption concept stocks listed in Hong Kong, reflecting MIXUE Ice City's relatively slower growth rate.

Three Recent Fundamental Concerns

Bank of America identified three key risks that MIXUE Ice City may face.

First, the delivery subsidies from online platforms have indeed helped boost same-store sales growth, but these subsidies are unsustainable, which may create a challenging comparison base in 2026. Analysts remind that a similar situation with delivery subsidies occurred in 2017, and when subsidies were reduced in 2018, the same-store sales performance of dining companies weakened.

Additionally, the company is also facing downward pressure on gross margins. The market has not fully acknowledged MIXUE Ice City's previous guidance that profit margins will be above trend levels in 2024, as the company will pass on supply chain efficiency gains to franchisees in 2025 to ensure ecosystem health. Coupled with rising costs of coffee beans and milk powder this year, Bank of America expects the gross margin to normalize to 30.5% in 2025, a decrease of 2 percentage points from 32.5% in 2024 Finally, overseas business (6% of GMV in 2024) remains a drag factor. In 2024, the overseas single-store GMV is expected to decline by about 30% year-on-year, due to high comparison base, various operational issues, intensified competition, and lack of pricing attractiveness compared to the Chinese market. Lucky Coffee (the coffee brand under MIXUE GROUP, accounting for less than 5% of GMV in 2024) is also under pressure, facing fierce competition.

Valuation logic faces challenges, Bank of America raises financial data but downgrades rating

Bank of America believes that capital flow has played a key role in the recent valuation expansion of MIXUE GROUP, including crowded trades in the new consumption concept, limited free-floating shares, non-compliance with short-selling conditions, inclusion in the Hang Seng Composite Index in May, and potential inclusion in the Hong Kong Stock Connect.

However, the recent upward trend has already absorbed most of the positive factors, and capital flow cannot support stock prices indefinitely; the fundamentals will ultimately become the decisive driving factor for stock prices.

The company's long-term growth potential is also in doubt. MIXUE GROUP currently has a market value of RMB 214 billion, implying an exit price-to-earnings ratio of about 20 times for 2028/29 (based on a widely assumed 100,000 stores and approximately RMB 10 billion net profit).

For fundamental investors seeking investment opportunities at current levels, it is necessary to assume that MIXUE GROUP can maintain double-digit growth after exceeding 100,000 stores, which depends on the progress of globalization and the coffee business as two new growth drivers. Considering the setbacks in these two areas in recent years, this will be a contentious long-term judgment.

Although Bank of America raised its earnings per share expectations for 2025/26 by 3% to RMB 14.16 and RMB 17.12, respectively, it still downgraded the investment rating.

Analysts expect a compound annual growth rate of about 19% in earnings per share from 2025 to 2027, but believe that the profit growth potential of MIXUE GROUP is much smaller compared to intellectual property companies like Pop Mart, as its profit model still relies on store expansion, and the large store base (46,500 stores by the end of 2024, the largest in the world) determines that its recent growth is more likely to be around 20%