Gu Ming (Minutes): Will continue to build supply chain barriers in the future
$GUMING(01364.HK) The following are the minutes of the Gu Ming FY25H1 earnings call organized by Dolphin Research. For the earnings interpretation, please refer to "Gu Ming: Left Hand Takeaway, Right Hand Coffee, Is the 'Costco of the Tea Beverage Industry' Smiling Again? - "
I. Review of Core Financial Information
1. Important Reminders:
a. GMV Metric: The industry-standard "product list price + original delivery fee" metric is used. Due to fluctuations in the takeaway proportion, this metric may lead to inflated GMV growth data.
b. Introduction of a new metric "Adjusted Core Operating Profit": Excludes accounting impacts from company structure and dividend decisions (such as accrued income tax) to more accurately reflect the profitability of core business. This allows investors to fairly compare us with companies of different structures, such as those listed on the H-share market.
c. Explanation of Net Profit for the First Half: The reported net profit of 1.6 billion includes over 500 million in "fair value changes of preferred shares," which is a one-time non-operating gain. Attention should be paid to "adjusted net profit" or "adjusted core operating profit," which better reflect true performance.
2. Dividends: Management is aware that high dividends can reduce book profits due to tax costs and reduced interest income, potentially negatively impacting P/E valuation. Nevertheless, the company firmly believes that returning excess cash to shareholders is the best choice and currently has no intention of changing the existing policy.
a. Special Dividend: The original plan is maintained, with an expectation to distribute no less than 2 billion RMB by the end of 2025.
b. Regular Dividend: The policy of using no less than 50% of net profit for dividends each year is maintained.
II. Detailed Content of the Earnings Call
2.1 Executive Statements on Core Information
Looking ahead to the second half of 2025, we will continue to execute our established strategy: first, to continuously expand the store network, consolidate our leading position in the industry, and evaluate new markets domestically and internationally; second, to increase investment in brand upgrading and product innovation.
2.2 Q&A Session
Q: How do you view the trend of takeaway platform subsidies in July, August, and the second half of the year? What impact will it have on our business? Considering the strong performance of the dine-in business in the first half, how does the company view the internal competition and balance between takeaway and dine-in businesses in the future?
A: Regarding competition on takeaway platforms, its impact was limited in the first half as the competition only truly began in the second quarter. Although takeaway subsidies attracted some customer traffic, our core dine-in business remained robust. Entering July and August, platform subsidies intensified, although our same-store growth exceeded 20% under the GMV metric, this was indeed significantly influenced by the increased proportion of takeaways. We judge that such large-scale subsidies are unsustainable, and over-reliance would harm the long-term profitability of franchisees, which is the foundation of the system. Therefore, we choose to participate cautiously, focusing on dine-in to ensure that we remain the consumer's first choice after the subsidies recede.
Regarding concerns about a high base next year, we acknowledge that same-store growth in the second half poses challenges, but we are confident and have strategies to improve single-store performance and will not forgo growth opportunities to control the base. More importantly, the overall revenue growth of the company is solidly supported by store expansion. As of now, our total number of stores has exceeded 12,000, with a net increase of over 2,100 this year, exceeding the annual target, which will provide strong momentum for overall growth next year.
Q: What is the pace and layout of store openings in the second half and next year? What are the specific expansion strategies and plans for existing mature cities, new provinces in China, and overseas markets?
A: Regarding store expansion, our peak of store openings this year was concentrated in the second quarter, and next year's pace is expected to be similar to this year. Our current core strategy is to deepen existing markets, especially in newly entered areas last year such as Hainan, Guangxi, and Shandong, to thoroughly develop the market and consolidate our leading position. For example, the performance in the Shandong market has recovered quite ideally. We insist that expansion must be based on ensuring the healthy profitability of franchisees and matching our organizational capabilities, as we believe blindly pursuing quantity will deplete brand momentum and cause irreversible damage. Therefore, for the development of new provinces, we will maintain a steady pace of entering 1 to 3 new provinces each year. As for overseas markets, we are actively planning and will soon hold internal meetings to discuss specific timelines and strategies, but it is not currently a top priority in the short term, so there is no clear timeline to share.
Q: Did the promotion and development of the coffee business in the first half meet the company's internal expectations? Can you share the current overall operation of the coffee category, such as its contribution to single-store revenue (e.g., GMV proportion or cup volume) and quantitative data? How do you currently evaluate the role of the coffee category in "attracting new customers"? Considering the complementary nature of coffee and milk tea consumption times, how does this complementary effect manifest in actual operations?
A: Regarding the coffee business, our comprehensive promotion actually only officially started in late June this year, with the first half mainly focused on equipment installation and regional testing. We chose this timing to avoid the transition from spring to summer, focusing marketing efforts on seasonal fruit tea. Currently, the daily sales of stores with coffee machines have stabilized at 60 to 80 cups, showing significant growth compared to last year, and can reach over a hundred cups during peak times; this sales volume fluctuated in July due to the takeaway subsidy battle but stabilized in August. More importantly, the strategic role of coffee has already become apparent: it has successfully attracted many new customers who originally did not drink milk tea, effectively broadening our user base. Comparative data shows that stores with coffee machines have already shown a significant difference in overall performance compared to those without. We believe that the advancement of coffee is only in its first stage, and there is still huge growth potential, and we will continue to invest resources.
Q: Theoretically, with the scale effect becoming apparent and the high subsidy base after last year's "315 incident," why did the gross margin in the first half remain flat and not improve as expected? Besides the sale of coffee machines (hardware) lowering the overall gross margin, are there other factors affecting the gross margin performance in the first half? What is the company's outlook or guidance on the trend of gross margin and overall expense ratio in the second half? What is the pace of sales expenses? Will the intensity of investment in the second half differ from the first half?
A: Regarding the flat gross margin in the first half, the main reason is the sale of coffee machines. We sell coffee machines to franchisees at a low profit, and there was almost no such business in the same period last year, which significantly lowered the overall gross margin. In fact, if we look at material sales alone, its gross margin has improved due to supply chain optimization. However, we strategically passed on this part of the benefit to franchisees to alleviate their financial pressure from opening new stores and purchasing additional equipment, without raising prices. At the same time, coffee-related materials also adopted a low-price strategy in the initial promotion phase. Looking at the whole year, the overall gross margin is expected to be between the first half of 2023 and 2024. In terms of expense ratio, management and R&D expenses show good operating leverage, with a significant decrease in proportion; while sales expenses (including manpower, warehousing, etc.) grow in line with revenue, keeping the expense ratio stable. We expect the gross margin and expense ratio in the second half to continue the trend of the first half, and we suggest focusing on "core profit" excluding non-operating factors, which can more stably reflect the true operating condition.
Q: Given the company's strong supply chain capabilities, what new layouts or improvement plans are there in upstream raw materials, factory operations, warehousing, and logistics in the coming years? Considering the fast pace of new product launches in the industry, what level of self-built/self-controlled proportion of core ingredients (or upstream assets) does the company consider most appropriate in the long term to balance efficiency and flexibility?
A: Regarding the supply chain, we want to clarify a common misconception that its core is "cost reduction." In fact, our supply chain strategy serves three goals in order of priority: first, to ensure quality, second, to build barriers, and finally, to control costs. Based on this, we adopt a "key link self-control" rather than a full industry chain self-build model. For example, our self-built factories focus only on core processes with high technical difficulty that determine product quality, such as juicing and sterilization; while for heavy asset, non-core links like packaging, we choose to outsource. Looking ahead, one important improvement direction is to upgrade cold chain logistics from "next-day delivery" to "same-day delivery," which will greatly enhance product quality and build a barrier difficult for peers to replicate, thereby supporting our "high quality at a fair price" positioning. As for asset proportion, we have no rigid indicators, and the decision logic is to prioritize self-control of links that determine key flavors or bring significant cost advantages, but we clearly will not engage in upstream agricultural planting.
Q: How is the single-store profitability of franchisees this year? Considering they also need to bear part of the subsidies, what is their actual profitability compared to last year or the year before? For franchisees who joined this year, what are their expectations for medium- to long-term investment returns in this business model?
A: Regarding franchisee profits, although it is inconvenient to disclose specific figures, the actual profit amount of franchisees this year has indeed increased compared to last year and the year before. We are clearly aware that this growth is mainly due to the operating leverage effect brought by the rapid increase in sales , which fully covers the decline in average profit margin caused by the "takeaway battle". We remain cautious about this because when future sales growth slows, the pressure on profit margins may become apparent. Here, I can share a key data point to prove our efforts: after intense competition, through fine-tuned pricing strategy adjustments, the "actual receipt rate" of our stores in the first half of this year is basically the same as last year. This is because we always prioritize franchisee profits, and it is precisely because of this that our franchisees have achieved growth against the trend in the context of generally declining industry profits. We will continue to closely monitor and ensure the long-term health of the system.
Q: Given the net increase of 2,100 stores this year (as of August 27, 2025), what is the company's reasonable expectation or guidance for the net increase in store numbers for the entire year of 2025 and 2026?
A: Regarding store expansion, I can share some key information. First, this year's momentum is very strong, and as of today, the number of new stores signed (including those under renovation) has exceeded 3,000. For the future, many investors worry about the "big and small year" cycle of store openings, but we can clearly state that next year will continue to maintain an absolute value of store openings similar to or possibly higher than this year, and our guidance is not less than 3,000 stores. More importantly, the impact on performance: this year's GMV is mainly contributed by about 10,000 stores because many new stores opened mid-year; by the beginning of next year, we will have a much larger store base than last year, with the goal of moving towards a scale of 20,000 stores. This means that even without considering same-store growth, the structural expansion of store scale alone will bring a significant boost to next year's GMV. Although detailed planning is not yet determined, maintaining high-speed expansion is our clear direction.
Q: The company mentioned that the store scale will approach 20,000 next year, which means significant progress must be made in national layout, requiring strong brand power as support. To support this nationwide rapid expansion, what new thoughts, plans, or key investments in brand building can management share with investors?
A: Our past brand building indeed needed improvement, but this year we have begun a comprehensive upgrade. Core initiatives include launching a more brand-oriented "sixth-generation store" image, with more than half of the stores expected to complete the upgrade next year, and the internal visual and IP system will also be unveiled from the second half of this year to next year. However, to support the move towards 20,000 stores (a longer-term goal, not a target for next year), we believe the two more critical things are: first, the improvement of internal organizational capabilities to ensure that the talent pipeline and operational efficiency can handle the large scale, which is our focus of investment this year; second, the digitalization and intelligence of stores, with our smart store system developed over the years to be applied starting in the second half of this year, to improve single-store efficiency and quality stability. We will adhere to a prudent expansion principle, opening only a small number of new provinces each year, and will never sacrifice the healthy operation of existing stores to pursue quantity, which is the cornerstone of our expansion. We are confident that the current organizational adjustments are sufficient to support future development.
Q: Can you specifically describe what types of incremental customer groups coffee brings? Looking to the future, besides the customer traffic brought by coffee, what new consumer groups does the company plan to focus on expanding? What specific means (such as student cards) will be used to reach and convert them?
A: We focus on two main groups: first, through means such as student cards, to re-attract younger student groups who were partially lost due to brand upgrades and pricing increases; second, we are more focused on meeting and retaining those "aging" core users (such as those born after 1985) by launching new products like coffee. This group has strong consumption power in lower-tier markets, but their repurchase rate for traditional milk tea is declining, and coffee can well meet their new needs, thereby increasing their continued consumption in our stores.
Q: For northern stock markets like Shandong, which performed relatively weakly in the past but showed positive changes this year, can you explain in detail the key levers that contributed to these positive changes? Based on these changes, what are the company's expectations for the future development of these northern markets?
A: For the previous setbacks in northern markets like Shandong, our review suggests that it was due to human errors in strategy and execution rather than market issues; the core lever for improved performance this year was correcting these mistakes and returning to normal levels.
Q: When does the company expect to achieve or project the goal of "single-store daily sales of 8,000 yuan"?
A: The goal of single-store daily sales of 8,000 yuan is what we strive for, but it is uncertain when it will be achieved, especially with the main stores located in third- and fourth-tier cities, which presents a significant challenge. To achieve this goal, the core is to expand consumer coverage and increase repurchase rates. One of our specific measures is the upcoming comprehensive promotion of the breakfast business, which internal tests show can bring significant performance growth to stores. Additionally, it is important to clarify a key statistical difference: the daily sales of over 7,000 yuan in our current financial report includes the markup and delivery fees of takeaway platforms in GMV, while our internal target of 8,000 yuan refers to the actual store revenue excluding these fees. Therefore, by the same metric, we are still some distance from the target and cannot easily achieve it in the short term.
Q: How does the company foresee the evolution of the competitive landscape in the online tea market? Will there be more participants, or will it become more concentrated and shrink? What will be the core barriers to winning this competition? Is it supply chain capability, membership system operation, or other key factors?
A: We predict that the trend in the online tea market over the next 3-5 years is towards concentration among leading brands. Although there are still opportunities for innovative brands in niche areas, the speed of new brand emergence has slowed. The core reason is that the profitability pressure and survival threshold in the current catering industry are increasing, only brands that can ensure healthy single-store profitability for franchisees and have broad expansion space can continue to develop, which naturally leads to resource concentration among leading brands. As for competitive barriers, supply chain, membership, etc., are basic capabilities that leading players must have and cannot have weaknesses.
However, we believe that the key to the endgame of competition in milk tea, as a super high-frequency consumer product, is whether it can continuously win users' "repurchase." While early marketing and traffic attraction are important, only brands that can retain users, satisfy them, and keep them consuming will win, which can be said to be "those who win repurchase win the world."
Q: How does the company view the topic of "going overseas"? Are there any related plans? Is there a difference in investment value and "gold content" for brands going overseas in different price ranges or categories? Is there a bubble component in the current hot topic of "going overseas"? For the company, would prioritizing resources in the domestic "lower-tier market" and doing it thoroughly bring more valuable returns to shareholders than rashly going overseas at this stage?
A: We believe that going overseas is both an opportunity and a challenge, but the opportunity is not as optimistic as portrayed by the outside world, and there may be more bubble components at this stage. Going overseas in the catering industry is much more complex than ordinary consumer goods, greatly influenced by local culture. Although we have started preparations for going overseas, it is not a top priority in the near term. Our logic is clear: when the domestic market is saturated and there is no growth space, going overseas is the inevitable choice. Currently, we still have huge development space in the domestic market, especially in lower-tier markets. Therefore, our current strategic priority is clearly domestic, and thoroughly developing the domestic market is our core task.
Q: Can you share more detailed data or trends on the company's overall "same-store performance"? How is the same-store performance in the company's traditional advantage areas? How is the same-store performance in the areas newly expanded between 2023 and 2024?
A: Regarding same-store performance, we have not disclosed specific data in the performance announcement, but I can share a key trend: nationwide, our "same-store data" is basically on par with or slightly higher than the "single-store average data," so you can consider them as similar levels. There are indeed differences between regions, but the overall difference is not significant.
Additionally, I want to clarify a common misconception that our performance is only outstanding in traditional advantage provinces like Zhejiang and Fujian. This is not the case. For example, the average single-store performance in new markets like Guangdong and Guangxi has now surpassed some old regions; at the same time, the performance in markets like Hunan and Hubei is also very close to the average level in Zhejiang. This indicates that stores in newly developed provinces also show strong growth potential and healthy operational performance.
Q: Can you specifically reveal the current level of same-store sales in traditional advantage areas like Zhejiang and Jiangxi?
A: We are currently unable to disclose specific same-store data for individual provinces. But as I emphasized earlier, the overall performance difference between regions is not significant.
The actual situation is not as speculated by everyone—for example, old regions are completely stagnant, new regions are growing rapidly, or vice versa. What we see is a relatively average and balanced state. Of course, individual regions may experience annual fluctuations due to special circumstances, such as the Shandong market, where last year's base was low, leading to particularly high growth this year, but this is a special case and does not represent a general rule.
Q: What specific improvements have been made to the single-store model after introducing coffee and breakfast businesses? For example, have there been positive changes in key indicators such as total store transaction volume (GMV), profit margin, and user repurchase rate?
A: Regarding the impact of introducing coffee and breakfast on the single-store model, our core strategy is to broaden user coverage and consumption time, building the brand into a more comprehensive channel platform rather than focusing solely on specific users. Under this strategy, our evaluation focus is on whether the overall profitability, performance output, and investment return ratio of single stores are optimized. In terms of specific indicators, first, GMV has certainly increased because the new categories successfully attracted new customer groups who would not have consumed or needed to purchase elsewhere, achieving "one-stop" consumption and bringing clear increments. As for the repurchase rate, our historical data was already high (about 53%), and what we currently observe is "slight growth" rather than rapid growth. This is mainly because the new categories, while increasing the cross-purchase frequency of old customers, also attracted a large number of new customers, and the influx of new customers naturally dilutes the overall repurchase rate statistics, so direct comparison is not very meaningful. In summary, the new business has played a positive role in attracting new customers, increasing total revenue, and optimizing the overall profitability model of single stores.
Q: Are there any difficulties in the process of "breaking the circle"?
A: We believe that expanding categories and continuously improving single-store profitability is much more difficult than simply expanding store scale. The main challenges we face are reflected in the following aspects:
First is the mastery of internal product capabilities. When you expand from a single category to two or three or more, whether you can be professional in each field is a huge test. Take coffee as an example, we were initially "amateurs" and had to quickly master all core capabilities from product development, quality stability control to supply chain cost management, ensuring that our coffee can compete with professional brands in the market, which is a very difficult process.
Second is the "breaking the circle" of consumer mindset. We have already established a strong "milk tea" perception in consumers' minds, but there is no "coffee" or "breakfast" mindset. How to break this inherent impression and make consumers recognize and be willing to try our new categories is a core marketing and operational challenge.
Finally, it is about maintaining and iterating core advantage categories. While developing new categories, we must ensure the continuous innovation and iteration of existing advantage categories. For example, the fruit and vegetable juice series we launched this year is not simply opening up a new category, but a deepening and continuation of the core "fruit tea" category. Only in this way can we retain loyal old customers while continuously attracting new customers. Balancing innovation and inheritance, ensuring that existing advantages are not weakened, is a very difficult part of this process.
Q: Considering the current high profit margin level and the operating environment of franchisees, what is the company's future profitability strategy? Is it planned to maintain profitability at the current level, or is there still room for further improvement?
A: Our outlook on the company's future profitability is always centered on "single-store profitability first." Only by first improving the single-store profitability of franchisees can we, as a brand, be qualified to receive more returns. Based on this concept, our strategy can be understood from two levels:
First, at the store level, our goal is to increase the average daily sales of single stores to over 8,000 yuan, which will bring more considerable profits to franchisees and naturally lead to a qualitative leap for the company. To achieve this goal, we have already taken effective measures: first, by upgrading the brand (such as the sixth-generation store's daily performance being more than 1,000 yuan higher than the fifth-generation store) to enhance brand premium; second, by innovating product strategies (such as introducing coffee) to expand customer groups and consumption scenarios, which has significantly helped this year's performance improvement.
Second, at the company level, as our overall revenue scale continues to grow, the operating leverage effect will continue to manifest. Especially on the fixed cost side of headquarters and R&D, its proportion of revenue will naturally decrease. Although we will increase investment in brand upgrades and promotions in stages, leading to a relatively stable sales expense ratio, the overall operating leverage trend is positive.
Finally, I want to emphasize that we do not pursue our profit margin as an isolated primary indicator. We are more concerned about the comprehensive competitiveness of the entire system (company + franchisees) in the market. Whether it is brand upgrading or responding to the "takeaway battle," our ultimate goal is to have stronger competitiveness, a larger market share, and a more stable consumer mindset after the market competition ends. We view the company and franchisees as a community of interests, and the profitability of the entire system is the key to our competition with opponents.
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