Adds deal detail and background from fourth paragraph

By Scott Murdoch and Julie Zhu

SYDNEY/HONG KONG, Feb 11 (Reuters) - China's largest bubble tea firm, Mixue Group, will begin bookbuilding for its Hong Kong initial public offering by the end of February to raise about $500 million, according to three sources with direct knowledge of the matter.

Mixue plans to start trading on the Hong Kong Stock Exchange in early March, one of the sources added. It has 40,000 stores across China, according to its regulatory filings.

The sources asked not to be identified discussing confidential information. Mixue declined to comment.

Mixue had planned to raise up to $1 billion in its Hong Kong IPO. However, the size of the share sale has been scaled back as the company is not in desperate need of cash, two of the sources said.

Mixue's net profit was 3.5 billion yuan ($478.96 million) in the nine months to Sept. 30 last year, up 42.3% year-on-year, according to its regulatory filings.

The firm plans to use the money raised in its IPO to expand production facilities and help increase its range of drinks, the filings showed.

The deal comes after rival bubble tea operator Guming raised $232 million in its Hong Kong IPO which priced at the top of the price range. The IPO size was increased following strong demand from investors.

Guming shares start trading in Hong Kong on Wednesday and the stock was up 12% on Tuesday in gray market trading operated by brokerage Phillip Securities.

Guming and Mixue's IPOs signal the freeze on approving bubble tea firms' listing applications by regulators last year has now eased.

Regulators were concerned about the bubble tea firms listing in Hong Kong after Sichuan Baicha Baidao 2555.HK fell by 27% on its first day of trading in April last year following its $330 million share sale.

The stock is now down about 45%.

($1 = 7.3075 Chinese yuan renminbi)

(Reporting by Scott Murdoch in Sydney and Julie Zhu in Hong KongEditing by Peter Graff and Aidan Lewis)

((Scott.Murdoch@thomsonreuters.com;))