Chagee Holdings Limited ($CHA)

Good morning, and good evening, ladies and gentlemen. Thank you for standing by, and welcome to Chagee's Fourth Quarter 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] Please note that today's event is being recorded. With that, I will now turn the call over to the first speaker today, Ms. Alicia Gur, Investor Relations Director of the company. Please go ahead, Madam.

Thank you. Hello, everyone, and welcome to Chagee's Fourth Quarter 2025 Earnings Call. With that, I'll now turn the call over to the first speaker today, Ms. Alicia Guo, Investor Relations Director of the company. Please go ahead, ma'am.The company's financial and operating results were released by the news were earlier today and are currently available online. Before we continue, I refer you to our safe harbor statement in the earnings press release. which applies to this call. Any forward-looking statements that we make on this call are based on assumptions as of today, and that does not undertake any obligation to update these statements. Also, this call includes discussions of certain non-GAAP financial measures. Please refer to our earnings release, which contains a reconciliation of non-GAAP measures to GAAP measures. With that, I will turn the call to our CEO, Mr. Jin Jiang. Please go ahead, sir.

[Interpreted] Hello, everyone. Thank you all for joining Charge's Fourth Quarter 2005 Earnings Conference Call. Over the past year, the market has experienced get volatility and the competitive landscape has grown even more probe, as a new listed young company, we engaged encountered some ups and downs on our 2025 journey, took a few words and a time faced moments of uncertainty in our decision-making. The management team has conducted a deep review and a reflection on these reviewing them as vital nourishment to drive the company's evolution and build long-term competitiveness. Looking back at our journey, 2023 to 2024 for a period of ripped expansion in Greater China market. Our primary strategy was quality see health expansion, with the core objective of securing prime location across major commercial districts nationwide, leveraging a standardized business model to achieve rapid scale. This strategy delivered significant results. We now have over 7,000 household cations across and China, and through Voya LAP, our broadcaster product, we successfully pioneered the fresh TV category and accumulated a total of nearly 240 million members registered with our membership program. These achievements have formed the foundation of our durable competitive moat. Over the past years, the market enters in US and consumers have shown a key shift to divergence in spending habits. One side chasing extreme value, the other seeking premium experiences through superior product and service. The ongoing price war among the third-party delivery platform has further intensified this divergence. For charging, we have a strong foundation in premium experiences with over 7,000 prime offline locations, a core fresh TV by pay, driving over 90% of revenue at a loyal membership base. We underinvested here before. Now we are ready to expand categories and fully unlocked our offline potential. Last year, time and we entered high-quality development. We recognize that expansion phase inertia no longer met the demand of recurring management and operational excellence. Starting in the second half of 2025, we advanced the experience of internal adjustments, including organizational restructuring and business model transition, while strategically slowing down the pace of new product launches. This had a measurable impact on our revenue. We also underestimated a delivery platform high-cost on off-line sales. We stay true to our long-term strategy, avoiding short-term trends. Today, I would like to share the clear insights from these experiences and our definitive 2026 direction. We believe a team that faces have had learned from them and sharpen this thinking delivers long-term trust -- in this way, we aim to deliver enduring value to our shareholders, our consumers, society and large. I can now share with confidence that our internal realignment is largely complete, and we have returned to steady operations and border. Looking ahead to 2026, our core strategy will remain centered on high-value brand positioning and consumer value with full focus on refining every day every detail that shapes the consumer experience. Specifically, we will focus on 5 key areas: brand upgrades, product innovation, scenario expansion, experience enhancement and organizational improvements. These initiatives will bring us closer to our customers and support sustainable high-quality growth. At the brand level, we will launch new formats for regular and personalized canes complemented by various product line to see diverse occasions in emotion. We will elevate the opine experience creating a true force space that connects emotionally with customers and showcases charges unique term. We will innovate across categories by anchoring our 18 to 30 demographics ordinate and developed new offerings in special Hill, HLA and more aligning our portfolio with consumer multi-scenario lifestyle. We will penetrate new scenarios that morning and even specific products such as energizing morning and even in locating drinks to complete our all-day lineup, we will also grow in towards celebrations, birthdays, schools and wedding, leveraging scenario marketing to win lasting mindshare and waste tragedy into everyday and special occasions. Chennai consumer experience and organizational strength underpin our strategy will enhance the health environment through improved ambience and differentiated design for flagship Landmark and boutique houses. On service, we will overhaul after scale systems, rolling out company-wide training, launched a SVIP hotline and create back channels that directly ship improvements based on real consumer input. is essential to delivering our core strategic growth. In 2026, we will advance digital tools to optimize processes and standardize best practices in operation, R&D, supply chain and beyond. This will create a leaner, more agile structure perfectly synced with our brand expansion. We understand that high-quality approach is a long-trend process requiring patients and the results and we must consistently do what is right for the long term. In 2026, all of our strategic execution and resource by location is centered on consumer value. We believe that only by truly understanding consumers, meeting their needs and creating value that exceeds their expectations and a brand achieved long-term steady development. We also look forward to working with our partners to advance these strategies and build on an even more vibrant cage. Over 8 years, extended from 1H to 7,453 key houses. This growth reflects the strength of our sustainable business model, adaptive organization and demanding brand equity. Due to the comprehensive organization of adjustments in the second half of the year and a delivery cost in new product launches, we experienced a slower growth in top line. our same-store sales in the fourth quarter declined 25.5% year-over-year. This was indeed our biggest challenge in 2025. But what I want to emphasize is not just this number, but also the fact that despite short-term pressure did not resort to short-term tactics. Instead, we held firmly to our long-term pro -- in 2020, recent domestic same-store sales showed sequential improvement, reinforce our confidence in a full year trajectory of stabilizing in the first half and improving in a second. From a long-term perspective, we will continue to make overseas operations a powerhouse growth driver, and we are unwavering in our goal to evolve tragedy into a global key leader originating from China but resonated universally. With that, I will now turn the call over to our CFO, Aaron, who will provide detailed impacts into the financials.

Thank you, Ginger, and hello, everyone. Thank you for joining us our earnings call today. And as Jin outlined, we have gained valuable clarity from 2025. That positions us well for 2026 execution. I will focus on remarks on the metrics that support this outlook. Before we begin, please note that all amounts are in RMB and all comparisons are on a year-over-year basis, unless otherwise stated. For the full year 2025, total GMV reached RMB 31.6 billion, representing a 7.2% increase from CNY 29.5 billion in 2024. In the fourth quarter, total GMV was $7,322.9 million, reflecting the challenging environment in our own market, but also strong growth momentum overseas. As of December 31, 2025, our Tea House network totaled 17,453 locations across Greater China and overseas. A 15.7% increase from 6,440 a year ago. Specifically, our franchisee house accounts for 6,83 compared to 6,970 in the third quarter, while company owned those reached 615, representing a net increase of 248 sequentially. This change was primarily because we can run some of our franchisee house into company-owned ones in China. In Greater China, average monthly GMV per house was $337,000 in fourth quarter of 2025 and $387,000 for the full year, consistent with same-store and the mix dynamic that Gunter discussed. At the same time, overseas GMV for the fourth quarter grew 84.6% year-over-year to CNY 371.9 million, and for the full year, our international market at an increasing meaningful contribution to overall growth. On the revenue line, first quarter 2025 net revenue were 2,974.5 million compared to 3,334.4 million in the same quarter of 2024. For the full year 2025, net revenue increased by 4% to CNY 12.9 billion. In the fourth quarter, net revenues from franchise DT houses were $2,434.9 million, representing 81.9% of total net revenues compared to CNY 3,959 million a year ago. This reflects the cadence of the new product launch and the impact of subsidy competition on the delivery platform. Net revenue from the company-owned, those were 539.6 million, up 126.2% from million in the fourth quarter of 2024, mainly as a result of our delivery development of the company-owned those network in both Greater China and overseas markets. Turning to margin. Our gross profit calculated by excluding cost of material storage and logistics from net revenue which is 1,581.9 million this quarter, resulting in a gross margin of 53.2%. This marks an improvement from 51.6% last year. The margin improvement results primarily from lower packaging material costs, equipment and the supply chain costs. On operating expenses, share-based compensation expenses this quarter were $66.1 million. This reflects our commitment to long-term employee engagement and aligning this year goal with stakeholders. To provide greater rarity on underlying operational performance, we will reference non-GAAP operating results, with the full organization available in our earnings release and the Form 6-K. We recorded an operating loss of $35.5 million compared to operating income of $642.5 million last year. Based on management accounts, the operating loss was mainly attributable to the operational change in the fourth quarter with an impact of approximately $320 million. which includes organizational structural optimization and business model transition costs. Excluding share-based compensation expenses, non-GAAP operating income was $30.5 million, representing a 1% margin. The above-mentioned margin difference reflects our step-up investment in talent recruitment for global expansion including brand building to support new product launch, R&D to enhance our offering and the digital infrastructure to elevate customer experience. Operating costs for company-owned houses were $376.8 million, up 130.8% from $3.2 million a year ago. As of December 31, 2025, we operated 615 company-owned teahouse up from 169 in at year-end 2024. Other operating costs increased by 26.9% to $231.4 million, largely due to higher payroll supporting the expansion of our global -- those network. On a non-GAAP basis, other operating accounts for 7.6% of revenue compared to 5.5% a year ago. Sales and marketing expenses for the quarter were CNY 373.6 million down 5.6% from RMB 395.7 million a year ago. On a non-GAAP basis, sales and marketing expenses representing 12.2% of revenue compared to 11.9% a year ago. General and administrative expenses reached CNY 635.6 million, up year-over-year from $336.3 million. This includes costs associated with a targeted organizational restructuring to position the company for more efficient, leaner operation going forward. The higher G&A reflects our continued investment in global corporate infrastructure, and to support international expansion alongside the costs associated with ongoing initiatives to optimize internal process and the resources allocation. On a non-GAAP basis, G&A expenses represented 19.7% of revenue compared to 10.1% a year ago. Beyond operating income, we generated a positive financial income, reflecting interest earned on our current cash and investment balance as well as a position -- a positive other income, which was mainly comprised of government grants largely in line with prior year periods. On a non-GAAP basis, excluding share-based compensation, our full year 2020 tax rate was 18.4%. Importantly, we delivered another profitable quarter on both GAAP and a non-GAAP basis. making -- marking our 12th consecutive quarter of profitability at the net income level, even though this transitional period. GAAP net income was $33.9 million. Non-GAAP net income, excluding $66.1 million of share-based compensation expenses was $100 million. with a non-GAAP net margin of 3.4% compared to 9.3% last year. For the full year net income was CNY 1,186.3 million, and the non-GAAP net income was CNY 1,909.9 million. For the fourth quarter, basic and diluted net income per ordinary share were both RMB 0.15. On a non-GAAP basis, Basic net income per ordinary share was RMB 0.50 and the diluted net income per ordinary share was RMB 0.49. For the full year 2025 basic net income per ordinary share was RMB 6.27 and diluted was RMB 6.18. On a non-GAAP basis, basic and RMB basic was RMB 101 and diluted was RMB 0.10 and $0.07. Turning to liquidity. We ended the quarter with 7,924 million in cash and cash equivalents, restricted cash and time deposits. up from Y4,8068.7 million at year-end 2024. This robust balance sheet provides ample flexibility to execute our growth investments while delivering shareholder return. In closing, our fourth quarter and the full year 2025 results demonstrate our durable profitability and our commitment to returning value to shareholders through disciplining capital allocation. This positions us strongly as we execute our 2026 priorities. With that, I will turn the call back to the operator to begin the Q&A. Operator, please go ahead.

[Operator Instructions] Our first question comes from the line of Lillian Lou of Morgan Stanley. Lilia.

[Foreign Language]

Thank you for your question. We conducted a deep review of our same circle performance, and we think it reflects both external challenges and our internal strategy adjustment pace. As you mentioned, we underestimate the complexity of a company who have over 3,000 employees, which has delayed our strategy rolling out for the year of 2025. For that, I apologize or I'm still sorry for the market. Market competition in 2025 exceeded our expectation. The intense third-party platform competition impacted all client operations and our short-term market package were not as strong as they needed to be. In this environment, we chose not to chase low-price traffic blindly. Instead, we stopped to our premium brand positioning. At the same time, we were very focused on internal adjustments and slow our new product cadence, which create short-term pressure on cap volume. Even so, we believe growth based on healthy business model is sustainable, meanwhile, we are reflecting on how to actively adapt to market changes with flexible short-term tactics while maintaining our high value brand positioning. We took some detours in new product launch rhythm and marketing execution, and we did not fully keep pace with how fast the market was moving. The positive side is that these lessons has made us more alert and agile. You can already see this in our C1 campaign in February, where we reached quickly and capture the opportunity, which shows the team's agility as getting back to the normal level. For 2026, we're not going to pursue growth for its own sake. We want to get back to a cycle of higher quality operations with same-store recovery as our top KPI, we will focus on forcing store operation, consumer experiences, product innovation and organizational efficiency. First, on operations, we will focus on existing group new openings. We will moderate this year's expansion pace and prioritize healthy operations at currency Hanson. For underperforming ones, we will keep optimizing and upgrading. And in parallel, we are building a full chain quality management system from sourcing all the way to after sales to lay a solid foundation for long-term operations. Experience, we are focused on enhancing brand value we won't trade price cuts for traffic. Instead, we attract consumers through high-quality product and innovation and superior in-store service experiences. Third, on innovation. On the 1 hand, we will keep innovating across multiple categories while reinforce our core fresh lease milk tea franchise. Our new product signature launched in December provides a strong example with a dormant membership reactivated rate as high as 51%. May 1 in every member buying this product and all comers for helping consumers consume by previous month. Position 2 weeks over during the upper in the launch week, significantly exceed the historical average for all new products. This example proves that our product in line facility is our coal drivers for medicating cycles and we're working for sales. On the 1 hand, on the other hand, we are exploring more consumer scenarios such as galleries, ready, day and other moments, and extending to all the occasions to deepen the brand warrants and texture in consumers' life. Last, on the efficiency, we have now completed the major organizational adjustments, and we will continue to refine the structure so that we can maximize efficiency. Overall, we expect 2026 to be a year where we are very focused on high-quality growth rather than rapid expansion for scale, and our goal is to keep revenue and profit broadly flat year-on-year. We're seeing same-store growth trend stabilized at the operating level. And we believe in the second half, the overall same-store sales and operation will be healthier. And also, we want to focus that our priority for this year is to secure the market share rather than for the net profit. So if we have a conflict used be 3 market share versus profitability, we will choose the formal one. To come up, the priority for this year 2016 is to both elevate the user experiences and keep the same store sales getting back to the healthy level. Management asks that all who ask their questions in Chinese, please translate your questions to English. For the convenience of everyone on the call.

Our next question comes from the line of Shao. Your line is open.

Thank you, Java. In your prepared remarks, you briefly touched base on the business model transition. And could you share with us what have been motivating you to execute such a business model transition? And could you give us more update on the status of our transition.

Thank you. Our model transition has 1 core motivation that is to build true shared risk, shared reward strategic partnership with franchisees. Last year, industry price was in wars intensified franchisees face the dual pressure of sales decline and rising costs, the old model offered insufficient buffer in downturn. So we restructured the incentive shifting from traditional supply relation to a GMV-based revenue share model. In the new model, brand fees do go up slightly, but those fees come with 2 strong offsets. First, we offer enhanced discount management through marketing intelligence and targeted campaigns. Second, we cut raw material cost ratio at franchisees and sharply. Now our revenue is up and down with their GMV sales when they succeed, we succeed. We fully roll out the new model. This unites our interest in both. We look forward to even tighter collaboration to drive sustained GMV growth.

Our next question comes from the line of CJ Lin of CICC.

So thank you, management. My question is that can you provide an update on the performance of our overseas markets? And what are your expansion plans basing and overseas market.

Thank you for your question. Let me start with our overseas performance in. In the fourth quarter, our international markets showed strong and healthy growth. We added a net 3,000 revenue total to 345 in the overseas market. GMV grew 23.9% quarter-over-quarter and 84.6% year-over-year. More importantly, the average monthly GMV as for overseas tee houses outperformed the domestic ones. Preliminarily capability and strong vitality of our business model overseas. In 2025, we entered 4 new markets, Indonesia, the United States, Vietnam and Philippines. Currently, our overseas footprint covers 7 countries, Singapore, Malaysia, Thailand, Indonesia, Vietnam, Philippines and the United States. In Vietnam, our first in-house opening generated over 20,000 cuts across 3 key houses in the first 3 days. with brand voice rapidly climbing to second in the local tea category. At year-end 2025, our HKD IP co-branded Coco Ulang, launched pro 5 Southeast Asian countries achieving a 75% new product sales shared on launch day in Thailand of 38.3% in the Asia Pacific region over the first 3 days, topping regional key brand voice. These achievements have demonstrated that Chase brand power can transcend broader. Our Break 236 strategy into domestic national for domestic markets, we focus on is are already tightening quality. This way, we will moderate domestic expansion pace and shift our focus to same-store sales growth. and ensuring store-level health and profitability. We plan about 300 net new those opening in strategic locations in Mainland China. The number is not the goal. We prioritized healthy profitability for each new house while supporting existing same-store growth through optimizing and reinforcing key location resources. Additionally, we may make strategic adjustments to our expansion pace based on our performance this year. Overseas expansion will continue at a steady pace. In the fourth quarter, we added 21 houses in Malaysia, to Indonesia, 13 in Thailand, 12 in Vietnam and 11 in Singapore. This momentum carries into 2026. Thailand is now expanding from Bangkok to Qimai and our Korea debut is planned for the second quarter, making it our eighth overseas market. 2026 is our foundation building year. We target about 200 net new tea houses overseas. More importantly, in every market we enter, we will continue to refine business model and build a replicable template for future scale. Lastly, in terms of globalization, I have to add on a little bit of touch. We are doing something that is a must. This is something we have to do, but it is difficult. So we're not only investing the overseas market in several -- in the next several years. We're actually investing in the next decades, especially the market. And so we're not talking about a short-term sprint, but a long lasting Marathon. Our global expansion. And the thing of the priority for our overseas market is to refine the business model as we go. And also the priority is to keep a unit economics. Especially for the U.S. market, which is the second largest market, except for China. We believe there are a lot of business model that we can adopt like license or franchisee, but we choose the hard way to bring it out because we not only want to open dozens or agri stores in the U.S., but we want to bring the drinking habits of tea into the U.S. market. But like has been doing for the past several years when they entered into the Chinese market. So we chose we chose route that is more difficult and requires higher CapEx, and we might make me safe. But I'm here to ask for the capital markets to give us more confidence and understanding about our overseas market expansion. Lastly, to add on a little bit, chassis not adopting the normal way to grow, especially as a listing company. But we believe we want to bring the higher value and making a high-value branding oriented company in the future. In the short term, we believe most of the capital markets or investors is focusing on P&L. In the long term, wants to grow the company as a new category in year, which not only provides freshly brewed drinks to our customers, but also to free a new luxstyle to our customers such as RTV and also different scenarios of consumption. So in the short term, we might see volatility from our financial performance. But in the long term, we believe Trade has the possibility to evolve from a freshly root maker to a lifestyle change worldwide to the global consumers. So hopefully, we have your -- all the investors long-term support, and we welcome your comments and your advice as well. Thank you.

Our next question comes from the line of Jessica of JPMorgan.

Jessie from Morgan. 2025 was a tough year, but I think it's fair to say that the most difficult time seems already behind us. investors had been looking forward to a marginal improvement in same-store sales trends. And I think 4Q plan already provides some reasons for investors to turn more positive from here. Management mentioned cost reduction initiatives on the earnings call last quarter. So could the management introduced the concrete measures what did we do, how it's progressing? And any initial feedback or efficiency gains from these initiatives? And lastly, how should we -- the OpEx ratio for this year?

Thank you for your question. Our cost reduction and efficiency efforts are not short-term fixes for a single quarter performance. they're part of a bigger long-term push to make the organization healthy overall. Things are moving forward well, and we're already seeing some early results. We've wrapped up Phase 1. That means combining mid- and back-office functions and cutting out duplicative work. As Ginger just mentioned, we opened a lot of new stores during the year of 2023 and 2024. And in 2025 alone, we opened more than 800 stores as well. . Now we are focusing on the same-store sales and shifting more resources to the front line for better execution and faster response. This is not about a smarter structure, not just trimming headcount. We've put in stricter controls and better budgeting. It covers everything from targeted marketing spending down to a daily operation. Looking at 2026, we expect our overall fee rate stable, especially for sota marketing, we'll keep investing in this area. And also, we'll keep on investing in efficiency and crude shows without hurting core growth areas. The game is better quality inputs leading to strong output, no matter the environment. Tease out post highway quite undeletable. For the G&A expenses, our goal is to keep optimizing the overall efficiency with the precondition that without impact our overseas market expansion.

There are no further questions, I'd like to hand the conference back to management for closing remarks. Thank you, again, for joining our call today. If you have any further questions, please feel free to asked for requests through our IR website. We look forward to our next call with everyone. Have a great day ahead. Thank you. This concludes today's event. Thank you for participating. You may now disconnect.