20-F: Chagee Holdings Limited Franchise Contract Analysis

Analysis of Chagee Holdings Limited's franchise contract (Exhibit 4.4) reveals detailed terms for franchisee operations, fees, and obligations, alongside the company's 20-F filing detailing its 2025 financial performance and expansion strategies.

Summary

• This filing includes Exhibit 4.4, an Individual Store Franchise Contract for Chagee teahouses, outlining the terms of the franchise agreement between Party A (Chagee) and Party B (Franchisee).
• The contract details the scope of intellectual property rights granted, the term of the franchise, fee structures (franchise fee, deposit, licensing, promotional, supply chain, operation, and technical service fees), and opening requirements for franchised teahouses.
• It also specifies the rights and obligations of both parties, including liability for breach of contract, intellectual property protection, non-competition clauses, and dispute resolution mechanisms.
• The filing also contains Chagee Holdings Limited's 20-F annual report for the fiscal year ended December 31, 2025, detailing financial performance, operational data, risk factors, and corporate governance.
• Chagee reported a net income of RMB 1,186.3 million (US$169.6 million) in 2025, a decrease from RMB 2,514.6 million in 2024, attributed to increased operating expenses and strategic investments.
• The company expanded its teahouse network to 7,453 locations by December 31, 2025, with 6,838 being franchised.
• Significant risks highlighted include competition, evolving consumer preferences, reliance on franchise partners, and regulatory changes in China.

Sentiment

Score: 3

Explanation: StockSavvy.ai views this filing as negative due to the significant decrease in net income, increased operating expenses, and negative same-store GMV growth, despite continued network expansion.

Positives

• Chagee Holdings Limited reported a total net revenue of RMB 12,907.4 million (US$1,845.7 million) in 2025, an increase of 4.0% from 2024.
• The company expanded its teahouse network to 7,453 locations by December 31, 2025, with a net increase of 1,013 teahouses in 2025.
• Company-owned teahouse revenue increased significantly by 92.7% to RMB 1,490.3 million (US$213.1 million) in 2025, reflecting the expansion of company-owned locations.
• The franchise contract includes provisions for renewal, giving franchisees priority under certain conditions.
• Chagee has a robust membership program with over 238 million registered members as of December 31, 2025, indicating strong customer engagement.

Negatives

• Net income decreased to RMB 1,186.3 million (US$169.6 million) in 2025 from RMB 2,514.6 million in 2024, primarily due to increased operating expenses.
• Total operating expenses as a percentage of total net revenues increased to 89.6% in 2025 from 76.7% in 2024, driven by investments in global corporate infrastructure and internal process optimization.
• General and administrative expenses increased significantly by 119.6% to RMB 2,450.4 million (US$350.4 million) in 2025, largely due to increased payroll and professional service fees.
• Same-store GMV growth in China and overseas turned negative in 2025, showing a decrease of 24.2% compared to 2024.
• The franchise contract imposes strict penalties for breaches by the franchisee, including termination and forfeiture of deposits.
• The company faces significant risks related to its reliance on franchise partners, with limited control over their operations.

Risks

• The franchise contract outlines that Party A (Chagee) makes no guarantee for the profitable operation results of Party B's franchised teahouses.
• Party B (Franchisee) must pay franchise fees and deposits, and failure to replenish the franchise deposit can lead to contract termination and penalties.
• Party B is responsible for obtaining all necessary administrative permits and qualifications for operation, and failure to do so constitutes a material breach.
• The 20-F filing highlights risks related to managing growth, competition in the freshly-made tea drinks market, and evolving consumer preferences.
• There are risks associated with the company's franchise model, including limited control over franchise partners' operations and potential conflicts of interest.
• Regulatory risks in China are significant, including potential changes in policies affecting the industry, cybersecurity, data privacy, and overseas listings.
• The company faces risks related to supply chain disruptions, maintaining product quality, and managing inventory effectively.
• There is a risk of intellectual property infringement and unauthorized use of brand names and trademarks.
• The company is subject to risks associated with data security and privacy regulations.
• The franchise contract includes strict non-competition clauses for Party B during and after the contract term.
• The franchise contract includes confidentiality obligations for Party B regarding Chagee's proprietary information.

Future Outlook

Chagee Holdings Limited plans to continue expanding its teahouse network both in China and overseas, focusing on enhancing operational efficiency and consumer experience. The company intends to continue investing in branding, marketing, and technology to support its growth strategies. However, the company acknowledges challenges in managing growth, increasing competition, and evolving consumer preferences, which could impact future performance.

Management Comments

• Mr. Junjie Zhang, Chairman and CEO, founded CHAGEE in 2017, inspired by transforming tea drinking into a modern lifestyle and social concept.
• The company's strategy focuses on a simple core menu, advanced extraction technology, and digitalization to empower operations from product development to storefront management.
• Chagee aims to maintain consistency in product quality and consumer service across its franchise network through standardized operating procedures and digital monitoring.
• The company is committed to corporate social responsibility, including environmental sustainability, promoting healthy lifestyles, and supporting charitable causes.
• Management acknowledges that store-level performance in China transitioned to a more moderated phase in 2025, with a decrease in average monthly GMV per teahouse and deceleration in same-store GMV growth.

Industry Context

StockSavvy.ai notes that Chagee Holdings Limited operates in the highly competitive and rapidly evolving freshly-made tea drinks market. The company's expansion strategy, reliance on franchise partners, and focus on technology and brand building are common themes among successful players in this sector. However, the reported slowdown in store-level performance and increased operating expenses highlight the challenges of scaling in a mature market.

Comparison to Industry Standards

• Chagee's expansion to 7,453 teahouses by December 31, 2025, demonstrates a rapid growth trajectory, comparable to leading players in the global beverage and fast-casual restaurant sectors that leverage franchise models for scale.
• The company's focus on digitalization and automated tea-making machines aligns with industry trends towards operational efficiency and consistent product quality, seen in companies like Starbucks with its technology investments.
• The reported decrease in average monthly GMV per teahouse in China and negative same-store GMV growth in 2025 suggests increased market saturation and competitive pressures, a trend observed across various retail and food service sectors facing post-pandemic normalization and economic headwinds.
• Chagee's significant investment in sales and marketing (10.6% of net revenues in 2025) is consistent with industry benchmarks for brands seeking to maintain market share and attract consumers in a crowded marketplace.
• The increase in general and administrative expenses, particularly payroll and professional services, reflects the costs associated with operating as a public company and expanding internationally, a common challenge for companies at a similar stage of growth.

Corporate Governance

Legal Proceedings

• Two lawsuits filed in February 2026 in New York County Supreme Court (Li v. Chagee Holdings Ltd., et al. and Sun v. Chagee Holdings Ltd., et al.) alleging violations of Sections 11 and 15 of the Securities Act of 1933, claiming the IPO registration statement was misleading due to failure to disclose adverse financial impacts of price competition in Chinese food delivery services. Cases were consolidated on April 3, 2026, with a consolidated complaint due May 26, 2026.

Related Party Transactions

• Services and sales to investees amounted to RMB 32.7 million in 2025.
• Loans advanced to related parties (Junjie Zhang, Xianggui Peng, Peibang Gong, Jiangmen Pengjiang District Yu Sheng Beverage Plant) totaled RMB 34.0 million in 2023.
• Repayments of these loans totaled RMB 38.0 million in 2023.
• Bridge loans totaling RMB 305.0 million were provided to XVC Group, Qiushi Chenxing, and Fosun Group related to the Restructuring in 2023 and fully repaid in 2023.
• Share-based compensation related to ordinary shares exchanged for preferred shares for Partea Ltd, TasTea Ltd, and TEALATTE Ltd. amounted to RMB 7.0 million in 2023.

Stakeholder Impact

• Shareholders may experience reduced returns due to the decrease in net income and negative same-store GMV growth.
• Franchisees face strict contractual obligations and potential penalties for non-compliance, impacting their business operations.
• Employees may be affected by increased G&A expenses and potential restructuring, although the company highlights efforts to retain talent.
• Consumers may experience price changes or shifts in product offerings due to market competition and cost management efforts.
• Creditors and suppliers are subject to the company's financial performance, with no specific mention of direct impact in the filing.

Next Steps

• Continue to expand the teahouse network in China and overseas.
• Focus on enhancing operational efficiency and consumer experience.
• Invest in branding, marketing, and technology to support growth strategies.
• Address challenges related to market competition and evolving consumer preferences.
• Manage operating expenses and improve profitability, particularly for company-owned teahouses.
• Continue to monitor and comply with evolving PRC regulations.
• Respond to ongoing legal proceedings related to the IPO registration statement.

Key Dates

Recommendation

While Chagee Holdings Limited continues to expand its network, the significant decline in net income, increased operating expenses, and negative same-store GMV growth in 2025 indicate operational challenges and increased competitive pressures. The company's ability to manage these factors and leverage its franchise model effectively will be crucial for future performance. Given the mixed results and ongoing risks, a 'hold' recommendation is appropriate, pending signs of operational improvement and stabilization.

Keywords

Chagee, Franchise Contract, SEC Filing, 20-F, Tea Drinks, Retail, Food and Beverage, Intellectual Property, Financial Performance, Corporate Governance, Risk Factors, China Market