TradingKey - MIXUE Group's stock, after an impressive surge, has finally faced a reality check. 

On Thursday, June 5th, and Friday, June 6th, MIXUE Group faced consecutive downgrades from two major investment banks, Bank of America (BofA) and UBS. BofA revised its rating from “Neutral” to “Underperform,” while UBS adjusted its rating from “Neutral” to “Sell.” 

Despite the downgrades, BofA increased the target price from HKD 400 to HKD 465, and UBS from HKD 435.59 to HKD 477.13. 

Both institutions argue that the stock is overvalued, significantly outpacing its fundamentals.

The impact was clear as MIXUE Group's stock fell 7.72% to HKD 568 on Thursday and continued to decline over 5% to HKD 536 on Friday. This two-day drop erased nearly HKD 30 billion from its market value.

[Recent Stock Price Movement of MIXUE Group (2097.HK), Source: TradingView]

Fundamentals Not Supporting High Valuation

BofA analysts highlighted that since its IPO, MIXUE Group's stock has surged 204%, whereas the MSCI China Index has only gained 1% in the same period. The stock is trading at 40x and 33x the expected P/E ratios for 2025 and 2026, respectively, raising concerns about its current valuation.

UBS forecasts MIXUE Group will trade at 43x and 36x P/E ratios for 2025 and 2026, with a PEG ratio of 2.2x, higher than the 1.9x average for other new Chinese consumer stocks. They believe the current valuation excessively prices in the long-term growth potential of overseas expansion.

Rising Costs Cut Into Margins, Overseas Business Lags

BofA analysts noted that the market might have overlooked MIXUE Group's prior guidance, which indicated plans to pass supply chain efficiency gains to franchisees in 2025, to maintain ecosystem health due to higher-than-trend profitability in 2024. Coupled with rising coffee bean and milk powder costs, BofA projects a 30.5% gross margin for 2025, down 2 percentage points from 32.5% in 2024.

Moreover, BofA points out that MIXUE Group's overseas business continues to drag on growth, with a projected 30% year-over-year decline in single-store GMV for 2024. Additionally, its brand Luckin Coffee, accounting for less than 5% of 2024 GMV, faces intense competition.

UBS also noted that the recovery in MIXUE Group's overseas business has been slower than expected and anticipates the company will lower overseas franchisees' gross margins to enhance profitability and competitiveness.

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