Solid Channel, Product Execution To Boost Nongfu Spring’s Long-Term Growth; Initiate at HKD 37 FVE

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.