Nongfu Spring Earnings: Channel Expansion of Tea Leads Resilient Sales and Profit Growth

Narrow-moat Nongfu Spring 09633 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.

We left our fair value estimate unchanged at HKD 37 per share despite a higher net income estimate for 2023. Our fair value estimate implies 37 times 2023 price/earnings, while the market values Nongfu at 43 times. We continue to see the shares as overvalued.

With 60% growth in RTD tea revenue, Nongfu Spring appeared to have built a stronger foothold in this category despite its products’ price premium over those of Tingyi and Uni-President China. We think the company has bolstered its premium positioning in the nonwater beverage categories through scalable distribution and its brand popularity. This helped the company to deliver 23% year-over-year sales growth in the first half. Higher input costs were offset by operating leverage, leaving gross margin broadly stable. The company also increased investments in branding and distribution in the first half as the impact of channel disruption dissipates post-COVID-19 measures. As a result, sales and marketing expenses rose 30% year on year.