Nongfu Spring: Ready-to-Drink Tea to Drive Earnings Growth in 2025; Retain Fair Value Estimate

We review our earnings assumptions for narrow-moat Nongfu Spring and slightly reduce our 2025-28 revenue and net income estimates by 2%-3%, while keeping our 2024 forecasts. The revisions are mainly due to lower top-line growth and gross margin expectations for the water segment in 2025, given the ramp-up of the lower-priced pure water lineup as an alternative for price-conscious consumers. We think the cheaper offerings could help Nongfu gain market share in the near term, following the online backlash against the company in the first half of 2024. However, we believe Nongfu Spring would avoid cannibalizing demand for its natural water lineup in the long run. We think the ready-to-drink tea segment should continue to outperform the water segment in 2024 and beyond. We retain our fair value estimate of HKD 39.50 per share, which implies 31 times 2025 price/earnings and 18 times enterprise value/EBITDA. We see shares as fairly valued.