Company Reports

Narrow-moat Nongfu Spring reported solid 2023 earnings with key highlights in the tea category, which doubled in sales and drove margin expansion for the company. Revenue was slightly higher than our forecast, whereas net profit beat our estimate due to a lower selling expenses ratio. Net margin reached a record high of 28.3%, thanks to operating leverage. We slightly lift our five-year revenue and net profit projections by 3% on average, taking into account the higher base in 2023. We project revenue growth from 2024 onward to revert to a more normalized level of below 20%. This marginally raised our fair value estimate to HKD 42.50 per share from HKD 42.00, which implies 33 times 2024 P/E, 20 times EV/EBITDA, and a 2.5% dividend yield. We think shares are currently fairly valued.

Nongfu Spring upholds its market leadership in the packaged water market in China through scalable distribution and production network. In a commoditized category with high price elasticity, Nongfu Spring strives to control costs such that a balance can be achieved between properly incentivizing channel partners and generating economic profits for the company. Through endeavors in product development and brand building, Nongfu Spring has expanded from packaged water to nonwater ready-to-drink, or RTD, beverages such as tea, functional and juice beverages. These nonwater categories have contributed almost half of the revenue growth for the company in the past five years. Notably, the company has expanded its tea segment in recent years led by sugar-free products.

We revised our earnings forecasts for narrow-moat-rated Nongfu Spring and Tingyi after a fresh look at their growth outlook in the China ready-to-drink, or RTD, beverage market. We lifted our 2023-24 net income forecasts for Nongfu Spring by 9%-16% but lowered estimates for Tingyi by 6%-22%. Nongfu Spring has gained market share over peers including Tingyi in the RTD tea category, resulting in robust revenue growth in the second half of 2023. We expect Nongfu’s operating outperformance in this segment to continue in 2024. Tingyi, on the contrary, is set to face sales headwinds across the beverage and instant noodle categories.

Nongfu Spring upholds its market leadership in the packaged water market in China through scalable distribution and production network. In a commoditized category with high price elasticity, Nongfu Spring strives to control costs such that a balance can be achieved between properly incentivizing channel partners and generating economic profits for the company. Through endeavors in product development and brand building, Nongfu Spring has expanded from packaged water to nonwater ready-to-drink, or RTD, beverages such as tea, functional and juice beverages. These nonwater categories have contributed almost half of the revenue growth for the company in the past five years. Notably, the company has expanded its tea segment in recent years.

Narrow-moat Nongfu Spring delivered strong interim results that beat Refinitiv consensus and our estimates. Reviving on-the-go demand as well as efforts to solidify point-of-sale coverage drove resilient sales growth for ready-to-drink tea and water. Nongfu Spring raised its 2023 top-line growth guidance from the low teens to the mid- to high teens, consistent with our pre-earnings view that previous guidance was conservative. We lift our 2023 revenue estimate and expect the company to hit the high end of this guide. But our net margin projection is slightly below the company’s expectations, as we forecast elevated channel expenses while Nongfu pushes forward new products and expansion in distribution.

Nongfu Spring upholds its market leadership in the packaged water market in China through scalable distribution and production network. In a commoditized category with high price elasticity, Nongfu Spring strives to control costs such that a balance can be achieved between properly incentivizing channel partners and generating economic profits for the company. Through endeavors in product development and brand building, Nongfu Spring has expanded from packaged water to nonwater ready-to-drink, or RTD, beverages such as tea, functional and juice beverages. These nonwater categories have contributed almost half of the revenue growth for the company in the past five years.

Narrow-moat Nongfu Spring reported 2022 results that largely met Refinitiv consensus on the top line and gross profit, and beat expectations on net profit primarily due to nonoperating items. Management cast a cautious tone on the top-line growth outlook for 2023, as it targets a more stable growth trajectory in the medium term. We retain our fair value estimate at HKD 37 per share but lower our 2023 top-line and net profit estimates. We continue to view the stock as overvalued and our fair value implies 2023 P/E of 40 times and PEG ratio of 2.5 times.

Nongfu Spring upholds its market leadership in the packaged water market in China through scalable distribution and production network. As a commoditized category with high price elasticity, Nongfu Spring strives to control cost such that a balance can be achieved between properly incentivizing channel partners and generating economic profits for the company. Through endeavors in product development and brand building, Nongfu Spring has expanded from packaged water to nonwater ready-to-drink, or RTD, beverages such as tea, functional and juice beverages. These nonwater categories have contributed almost half of the revenue growth for the company in the past five years.

We initiate coverage on Nongfu Spring with a narrow moat rating and fair value estimate of HKD 37. Nongfu Spring’s scale in distribution and efficient operations are the key drivers to its superior margin levels and return on invested capital, or ROIC, in our view. These competitive advantages also place the company in a favorable position to grow sales and profit in the medium term. We believe Nongfu Spring will focus on volume growth by utilizing its channel network as outlets for both its water and nonwater beverage products. Our fair value estimate implies 39 times 2023 P/E, 23 times 2023 EV/EBITDA and 2% free cash flow yield. The valuation multiples are higher than for most domestic food and beverage peers due to Nongfu Spring’s stronger growth prospects. But we consider the current share price, with an implied PEG ratio of 2.4 times, as overvalued. We posit that the company’s channel strength and longer-term growth have mostly been priced in.

Nongfu Spring upholds its market leadership in the packaged water market in China through scalable distribution and production network. As a commoditized category with high price elasticity, Nongfu Spring strives to control cost such that a balance can be achieved between properly incentivizing channel partners and generating economic profits for the company. Through endeavors in product development and brand building, Nongfu Spring has expanded from packaged water to nonwater ready-to-drink, or RTD, beverages such as tea, functional and juice beverages. These nonwater categories have contributed almost half of the revenue growth for the company in the past five years.