Shares of the Chengdu-based company, also known as Chabaidao, posted the worst first-day performance since Sept. 2022 of any initial public offering that raised at least $300 million in Hong Kong. Analysts cited concerns about growing competition and still weak consumer sentiment in China as reasons for the disappointing start.

The dismal debut underscores the challenges that Hong Kong faces in reviving investor confidence amid slumping valuations and a dearth of deals. China’s securities regulator said last week it will support more IPOs in the city, which has seen fundraising through initial share sales drop for four consecutive years. IPO proceeds in 2023 slumped to the lowest level in two decades.

Chabaidao, which means “100 varieties of tea,” is China’s third-largest maker of fresh tea drinks by sales value. The company raised about HK$2.59 billion ($331 million) in what was Hong Kong’s biggest new share sale since November. The shares closed at HK$12.80 on Tuesday, after being sold at HK$17.50 apiece in the IPO. They sank as much as 38% during the session. 

“China’s freshly-made tea shop market is highly competitive and fragmented, with mounting pressure on selling prices, coupled with higher input costs,” said Ada Li, senior analyst for Asia Pacific consumer goods at Bloomberg Intelligence. “Consumers in China have been tightening their purse strings amid economic uncertainties and the ongoing property crisis.”

Chabaidao’s plunge may also influence decisions by other tea-chain operators that are considering to tap the market via new share sales. These include Hunan Chayue Cultural Industry Development Group Ltd., known as Sexy Tea, and Mixue Group. Play Video

Weak Market

Shares of Tianjin Construction Development Group Co., which provides engineering services, slid 39% in their debut in Hong Kong on Tuesday. The firm raised almost $20 million in its IPO.

Hong Kong’s ailing market is likely to face more pressure following the poor debuts. Last month, Alibaba Group Holding Ltd. called off a $1 billion-plus listing of its logistic unit due to poor market conditions. At the same time, firms like Samsonite International SA and L’Occitane International SA have been weighing an exit from the city’s bourse due to low valuations.

Chabaidao’s listing performance was the worst for any Hong Kong IPO that raised at least $300 million since Zhejiang Leapmotor Technology Co. saw its shares tumble 34% on their debut in Sept. 2022. Over the past two years, there were 10 firms that raised such amounts via IPOs in Hong Kong, with their shares dropping an average 2.6% in the first session, data compiled by Bloomberg show.

Considering the IPO price, Chabaidao’s estimated price-to-earnings ratio for 2024 is about 14.7 times, a discount to its peers’ median multiple of 15.2, according to calculations by Arun George, an analyst at Global Equity Research Ltd. who tracks IPOs in Hong Kong.

Bubble tea, a sweet drink filled with sticky balls of tapioca, has been gaining popularity, creating at least a half-dozen billionaires in China in the past few years. Growing competition, however, threatens to take out some of the weaker players.

“The poor performance of Chabaidao is probably the reflection of the nervousness with which investors are looking at the China and Hong Kong markets where consumer sentiment has been under pressure,” said Nirgunan Tiruchelvam, head of consumer and Internet at Aletheia Capital. “The price-to-earnings multiples that consumer companies trade at are far higher than the market globally usually. And perhaps the market is worried that this company can’t deliver on the valuations.”

Chabaidao founders opened the company’s first outlet in 2008 in a 215-square-foot shop in Chengdu, the capital city of Sichuan province. A franchise model in 2018 turbocharged growth, taking the number of shops across China to more than 8,000. In January, Chabaidao opened an outlet in Seoul, its first outside China.

The firm expects to use about half the proceeds from the IPO to improve operations and strengthen its supply chain, according to terms. China International Capital Corp. is the sole sponsor of the IPO.