On January 17, 2024, Ba Ma Tea Co., Ltd., a notable player in the Chinese tea industry, unveiled its prospectus for a public offering on the Hong Kong Stock Exchange, marking a significant step into the capital markets after a tumultuous journey over the past five years.

Struggling to enter China's more restrictive A-share market, Ba Ma's recent move signals its determination to broaden its financial horizonsThe firm experienced multiple rejections from the Shenzhen Stock Exchange's growth enterprise market and main board, attempting to list in A-shares two times without successNow, with a renewed focus on overseas markets, the company aims for a three-pronged approach at an IPO.

Ba Ma is distinguished as a national chain brand focusing on tea and related products, including the well-known brands of "Ba Ma Tea," "Xin Ji Hao," and "Wan Shan Hong." The enterprise is deeply rooted in its family structure, which sees founding members, including Wang Wenbin and Wang Wenli, holding significant shares of 25.28% and 20.38% respectively—with key family members controlling around 55.9% of shareholder voting rights during company meetings.

As of the end of 2023, Ba Ma reportedly held the top position in the tea chain industry by outlet count

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Simultaneously, it led in sales revenue within the high-end tea market and also ranked number one for its products in the oolong and black tea segmentsHowever, the path to capitalizing on its success through public markets has been riddled with difficulties.

The saga of Ba Ma's ambitions traces back to 2013 when the company initially aimed for a listing on the Shenzhen Stock Exchange's small and medium enterprises boardUltimately, rather than proceeding with that route, it opted for Hong Kong's New Third Board, which it exited in 2018, claiming the decision was aligned with a long-term strategic redirection.

In 2021, Ba Ma turned its sights once more to the growth enterprise board, adopting a retail-oriented frameworkHowever, that endeavor was met with three separate inquiries from regulators concerning its R&D investments and business positioning

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By mid-2022, the Shenzhen Stock Exchange allowed Ba Ma to withdraw its application—a pattern that recurred in late 2023 when the regulatory authority again accepted its withdrawal, citing changing market conditions and regulatory environments that introduced uncertainties to the listing schedule.

The challenges faced by Ba Ma Tea are reflective of broader industry realitiesSeveral recent attempts by tea companies to enter the capital markets have faltered, despite growing interest and demand for tea productsFor instance, while Ba Ma failed in its ambitions, Langhe Ancient Tea succeeded with its IPO in Hong Kong after several setbacksMeanwhile, China Tea Company has yet to successfully start trading publicly.

Industry analysts attribute the hurdles faced by tea companies to factors such as inadequate financial transparency, insufficient scale, and intense market competition

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These elements make it challenging to meet the stringent requirements of A-level listingsMoreover, idiosyncratic characteristics of the tea industry—like product variability and complex supply chains—further complicate regulatory evaluations.

Nevertheless, as Ba Ma pivots to the Hong Kong market, some perceive this shift as a strategic advantage, emphasizing the relative flexibility that the Hong Kong Stock Exchange demands regarding financial disclosuresThis flexibility, combined with Hong Kong's status as a conduit to global investors, could amplify Ba Ma's market profile and broaden its financing avenuesHowever, the downsides also include potential challenges given the unique dynamics of international investor engagement and the associated costs of listing.

Revenue Streams from Franchise Operations

In Ba Ma’s recent prospectus, financial forecasts reflect promising trends

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Revenue figures indicated growth from approximately 1.818 billion yuan in 2022 to 2.122 billion yuan in 2023, with net profits rising from around 166 million yuan to 206 millionThe first three quarters of 2024 show promising revenue of approximately 1.647 billion yuan and net profits around 208 million yuan.

The report highlights that Ba Ma's revenue generation heavily relies on physical storefronts, franchised shops, and a steady e-commerce platformDuring the reporting period, revenue from physical sales constituted about 70% of total income, with online sales capturing the remaining 30%. This indicates an entrenched reliance on traditional sales methods alongside emerging digital platforms.

Significantly, revenue from franchise operations has become a cornerstone for Ba Ma

Between 2022 and 2024, franchise sales accounted for approximately 50% of total revenue annually, highlighting both the scale of Ba Ma's franchising model and its critical contribution to cash flow.

While the franchise segment is vital, it has the lowest profit margins compared to direct salesNotably, the profit margin from sales to franchisees was about 46% for the first nine months of 2024, significantly lower than the higher margins of 78.2% from direct store sales.

As of September 2024, Ba Ma operates 3,498 brick-and-mortar stores across China, with over 90% of them being franchisesThis underscores the critical role of franchisees in bolstering the company's revenue, a trend that is anticipated to continue as the primary channel for market penetration.

Despite occupying a significant revenue share, Ba Ma has faced criticism over its relatively low investments in R&D juxtaposed with high sales and marketing expenditures

For 2022, 2023, and the first nine months of 2024, Ba Ma's sales expenses comprised approximately one-third of total revenues, while R&D spending remained below 1%, raising concerns over long-term sustainability and innovation potential.

Ba Ma’s manufacturing strategy leans toward a “private-label” framework, where its role predominantly involves sourcing and logistics, relegating product creation and packing to third-party manufacturersA significant proportion of Ba Ma's products in recent years have fallen under this category, further complicating quality assurance since the company has less direct control over product consistency and standards.

Indeed, past years have seen Ba Ma wrestle with numerous customer complaints and issues regarding product quality

In the years leading up to its proposed listing, the company faced 113 complaints, covering false advertising and product quality, raising questions regarding consumer trust and the brand's market resilience.

In its most recent prospectus, Ba Ma has not explicitly detailed the financial uses of its IPO proceeds but has generally indicated the focus will be on expanding production capabilities, enhancing brand recognition, and escalating investments into digital business operations, crucial for aligning with evolving consumer trends.

The Chinese tea market is characterized as large with many small enterprises, lacking robust brandingThe overall market size reached approximately 334.7 billion yuan at the end of 2023, while the high-end tea segment stands at around 105.2 billion yuan