J.P. Morgan shifts its top picks in China's made-to-order beverage sector to Luckin Coffee and Chagee

Overview

This report focuses on investment opportunities in China's made-to-order coffee and tea chain sector amid the unwind of delivery subsidies in 2026, a high same-store-sales base and a changing competitive landscape. J.P. Morgan believes that while the 2025 subsidy war boosted traffic for some mid-priced brands, it also diluted store operating margins; normalization of subsidies in 2026 may create revenue pressure, but it also sets the stage for margin recovery among leading brands.

Core views

The key view is that the sector will remain volatile and subject to profit-taking in the near term, but the investment narrative is shifting from pure traffic growth to sustainable profitability, product innovation and international expansion. The report switches its top picks to Luckin Coffee and Chagee: Luckin Coffee should benefit from margin recovery and extensions into Coconut Latte and ready-to-drink coffee products; Chagee has room for re-rating through customer re-engagement and overseas expansion. Guming's long-term brand strength and earnings growth can still support alpha, but near term it may be weighed down by slower same-store sales and a high base. Mixue is viewed more cautiously due to a sudden slowdown in growth, coffee-machine rollout, and the potential internal cannibalization risk from Lucky Cup.

Analysis framework

The report assesses sector rotation using share-price performance, management guidance, same-store sales assumptions, subsidy-unwind impact, recent industry news and rating changes. It focuses on comparing the traffic contribution of delivery subsidies across different price tiers, the dilution of store margins from promotions, and the support for 2026 operating recovery from new products, store mix and overseas expansion.

Methodology notes

• equity_researchsector rotation and relative preference

  sector relative preference shift

  Within the same industry, compare companies' growth momentum, margin-recovery potential, valuation re-rating catalysts and near-term trading crowding in order to adjust top picks.

• operating_analysissame-store sales growth sensitivity

  same-store sales sensitivity to subsidy unwind

  Using the incremental traffic generated by 2025 subsidies as a baseline, estimate the y/y pressure that same-store sales may face after subsidies exit in 2026, and assess whether new products, coffee, baked snacks and 24-hour stores can offset it.

• margin_analysispromotion and delivery mix normalization

  margin recovery from promotion and delivery-mix normalization

  Subsidies and a high delivery mix suppress store operating margins; when promotions ease and the delivery mix falls, revenue growth may slow, but earnings quality and sustainability may improve.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Luckin Coffee (LKNCY)

  One of the new sector top picks, rated Overweight

  Strengths

  Strong expected margin recovery; the Coconut Latte category has brand equity; the RTD coffee launch can open an approximately Rmb 100bn market; the controlling shareholder's planned acquisition of Blue Bottle Coffee signals long-term investment in the coffee business.

  Weaknesses

  If BABA and other platforms maintain aggressive subsidies, the pace of margin recovery could come under pressure.

  Comparison

  It was hit more negatively in the 2025 subsidy environment, but if subsidies normalize in 2026 it has greater recovery flexibility.

  Risks

  Renewed delivery competition, RTD launch falling short of expectations, and continued coffee price competition.

• Chagee (CHA)

  One of the new sector top picks, upgraded to Overweight on April 2, 2026

  Strengths

  Same-store sales recovery, customer re-engagement and overseas expansion could drive a full-year re-rating.

  Weaknesses

  Still affected in the near term by sector sentiment and a high base.

  Comparison

  Compared with mid-priced brands that rely more heavily on subsidy-driven traffic, Chagee was hit harder by the 2025 subsidy shock, so its rebound potential is more pronounced after subsidy unwind in 2026.

  Risks

  Execution risk in overseas expansion, weaker-than-expected customer repeat rates, and renewed industry promotion intensity.

• Guming - H (1364.HK)

  Maintained at Overweight, but no longer the sector top pick

  Strengths

  Strong brand and earnings growth could still support alpha over the next 6-12 months.

  Weaknesses

  After outperforming year-to-date, it faces profit-taking pressure, and same-store sales growth may slow sequentially after April, with a high base in the summer.

  Comparison

  The 2025 subsidy war brought it 5-10% incremental traffic, so a 2026 subsidy unwind will create a more obvious y/y pressure.

  Risks

  If subsidies fully exit, same-store sales may fall 5-10%, and short-term trading crowding may unwind.

• Mixue Group - H (2097.HK)

  Rated Underweight

  Strengths

  It can partially offset same-store sales pressure through coffee, baked snacks and store extensions.

  Weaknesses

  Slower 2026 expansion, weaker margin guidance, and coffee-machine rollout may cannibalize Lucky Cup internally.

  Comparison

  Compared with Luckin and Chagee's margin-recovery logic, Mixue faces more growth and structural uncertainty right now.

  Risks

  Lucky Cup closure rates are higher than historical levels, and the report assumes a net reduction of 200 Lucky Cup stores in 2026.

• Cotti Coffee

  Industry competition reference company

  Strengths

  Benefited from 2025 delivery subsidies and aggressive expansion.

  Weaknesses

  Stopped accepting franchise applications in provincial-capital and larger cities in 2026, slowing expansion and potentially leading to net store closures.

  Comparison

  Its contraction reflects the unsustainability of large-scale cash-burning promotions, and together with Manner Coffee's price increases it suggests industry competition may be normalizing.

  Risks

  Store contraction, fading brand heat, and traffic loss after subsidy unwind.

Key data

• Mixue guidance miss share-price performanceMixue -13%, Guming 0%, Luckin 0%, Chagee -4%Period from March 24, 2026 to the report reference date.
• Guming closing priceHK$27.1Down 5% on April 10, 2026, versus +0.55% for the HSI.
• 2025 subsidy war traffic contribution to Guming5-10%The company estimates subsidies contributed incremental traffic for the full year.
• SSS pressure if subsidies fully unwind in 2026Average SSS may fall 5-10% y/yThe report says same-store sales across the industry may come under pressure if subsidies fully exit.
• Manner Coffee SOE beverage price increaseRaised from Rmb 20-25 to Rmb 25-30Effective from April 7, 2026, a Rmb 5 increase.
• Luckin Coconut Latte cumulative salesMore than 2 billion cupsAround 1.88 million Whole Coconut limited-edition products were launched for the fifth-anniversary event at the end of March 2026.
• China RTD coffee market sizeAbout Rmb 100bnLuckin plans to launch RTD coffee products in April 2026, citing Euromonitor data.
• Nestlé China RTD coffee retail sales share36%2025 market share.
• Blue Bottle Coffee recent 12-month revenueAbout US$250mnAs of June 30, 2025, of which US$150mn was in the U.S. and US$100mn in Asia-Pacific.
• Blue Bottle Coffee global stores140 storesAs of the end of 2025.
• Blue Bottle Coffee acquisition valuationBelow US$400mnLuckin controlling shareholder Centurium Capital plans to acquire its global store business.
• Lucky Cup store assumptionNet decrease of 200 stores in 2026Mixue's coffee-machine rollout may intensify internal cannibalization with Lucky Cup.

Impact & implications

The investment implication is that the unwind of delivery subsidies is not simply a negative catalyst: it may hurt traffic and same-store sales, but it will also reduce low-quality promotions, improve store margins, and allow companies with stronger product offerings, brand power and operating efficiency to regain valuation support. The market may continue to be volatile in the short term because of high summer comps and subsidy-policy changes, so portfolio selection should place more weight on earnings recovery and re-rating catalysts.

Risks

• The pace and magnitude of delivery-subsidy unwind are uncertain; if subsidies fully disappear, average same-store sales may fall 5-10% y/y.
• High summer comps could turn same-store sales negative for previously benefited names such as Guming.
• If platforms increase food-delivery investment again, the price war could last longer, weighing on Luckin Coffee and Chagee margin recovery.
• Mixue's coffee-machine rollout may cannibalize Lucky Cup internally, causing Lucky Cup closure rates to exceed historical levels.
• New products and RTD coffee expansion face risks around consumer acceptance, channel execution and intensified competition.
• Overseas expansion may face risks related to store model validation, supply chain and local demand.

What to watch

• Whether BABA and other platforms reduce spending intensity on delivery subsidies.
• April and summer same-store sales growth, especially whether Guming turns negative y/y.
• Whether Luckin Coffee's margins recover as promotions ease and the delivery mix falls.
• Chagee's customer re-engagement, same-store sales recovery and overseas expansion progress.
• Mixue's store performance after nationwide coffee-machine rollout, and whether Lucky Cup closure rates exceed expectations.
• The channel rollout, repeat purchases and complementary effect of Luckin's RTD coffee launch on its made-to-order coffee business.
• Whether the industry shows more signs of price increases, franchise application freezes or promotion cuts.