This article first appeared in The Edge Malaysia Weekly on January 27, 2025 - February 2, 2025

Oriental Kopi Holdings Bhd’s (KL:KOPI) share price closed at 87.5 sen, almost double its initial public offering price of 44 sen, on its maiden trading day last week, giving the café chain a staggering valuation of RM1.7 billion.

With only 20 stores and revenue of RM277 million in its last financial year, ended September 2024, Oriental Kopi has analysts and investors excited about its growth. A few analyst reports pointed to the café chain’s growth rate, which is faster than that of its competitors, and its ability to maintain its profit margin as strong points for its valuation.

Oriental Kopi started operating in August 2020. It generated a profit of RM20.1 million on revenue of RM133 million in FY2023. In FY2024, its bottom line stood at RM43 million on a turnover of RM277 million, which means a net profit margin of about 15% per annum.

Analysts have forecast the company’s profit to reach RM101 million on revenue of RM615 million by 2027, effectively maintaining its average net profit margin of 15%. By then, the café chain is projected to have 40 stores, which is double the number of outlets now.

While it is not wrong for the analysts to forecast a revenue of RM600 million by September 2027, the question is whether Oriental Kopi can maintain its profit margin.

The competition in the café business is tough. It is a crowded field in the world of fast-moving consumer goods with no barriers to entry. A lot of coffee chains fade away as they grow due to their inability to maintain consistency in the quality of food served as well as the competitive pricing of new entrants to the market.

There are no fewer than 15 established coffee chains in the country, including ZUS Coffee and Hometown Hainan Coffee. China’s largest coffee chain, Luckin Coffee, which has overtaken the likes of Starbucks in that country, is the latest to enter the local market.

It has been reported that Luckin Coffee, with its franchise partner Hextar Industries Bhd (KL:HEXIND), has opened two outlets as part of its strategy to ease into the domestic market.

According to a report, the average net profit margin of industry players is 5.2%, which is three times lower than Oriental Kopi’s average of 15%. One may argue that Oriental Kopi is a different kettle of fish compared with ZUS or Starbuck. Still, a pertinent question arises that ts the exuberance overdone? How long would the long queue last?

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