BofA Securities cuts Mixue Group stock rating on valuation concerns

BofA Securities downgraded Mixue Group (2097:HK) to Underperform from Neutral due to valuation concerns, despite raising the price target to HK$465.00 based on strong China sales. The analysts noted the stock's 204% surge since its IPO, trading at 40x and 33x projected 2025 and 2026 P/E ratios, respectively, and highlighted potential pressures on same-store sales growth due to unsustainable delivery subsidies, as well as margin erosion from rising costs and planned supply chain efficiency gains passed to franchisees.

Analysis

BofA Securities has downgraded Mixue Group (2097:HK) to Underperform from Neutral, primarily due to valuation concerns, despite simultaneously increasing the price target by 16% to HK$465.00, reflecting strong sales projections in China. The stock's substantial 204% appreciation since its IPO, starkly contrasting with the MSCI China index's 1% rise, has pushed its valuation to 40 times projected 2025 earnings and 33 times projected 2026 earnings. While Mixue is acknowledged as China's leading freshly made tea provider with robust supply chains, BofA analysts highlighted several headwinds. These include the potential unsustainability of online platform delivery subsidies, which could challenge same-store sales growth by 2026. Furthermore, the market may have overlooked Mixue's guidance on above-trend margins for 2024 and its intention to pass supply chain efficiency gains to franchisees in 2025, which could impact profitability. The report also flagged potential pressures on the company's overseas expansion and coffee business, potentially constraining long-term growth, compounded by rising input costs like coffee beans and milk powder, which are anticipated to cause a 2% erosion in gross profit margin in 2025.

Key Decisions for Investors

• Investors should critically assess Mixue Group's current valuation in light of the significant post-IPO stock appreciation and the 40x projected 2025 P/E ratio, despite strong sales outlook in China.
• Monitor the sustainability of same-store sales growth, particularly in relation to online delivery subsidies, and the company's ability to manage margin pressures stemming from rising input costs and the strategy to pass efficiency gains to franchisees.
• Closely evaluate the performance and growth prospects of Mixue's overseas and coffee segments, as these are identified as potential limitations to its long-term growth trajectory.
• Consider the implications of the BofA downgrade to Underperform and the raised price target, weighing the positive sales forecast against the highlighted valuation and operational risks.