A Less Aggressive Sales Push by Nongfu Spring in 2023; Retain HKD 37 FVE

Narrow-moat Nongfu Spring 09633 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.

Sales for 2022 grew 11.9% year on year, thanks to strong momentum in ready-to-drink, or RTD, tea, as Nongfu Spring expanded point-of-sale coverage and launched new products under Oriental Leaf and Tea π. The water business recorded 7.1% growth as reduced foot traffic dragged first-half sales, in particular for small packages, which hinge largely on on-the-go demand. Gross margin fell 2 percentage points due to higher polyethylene terephthalate, or PET, costs, which affected second-half profitability as the company prepared lower-cost inventory in the first half. Net profit exceeded expectations and increased by 19% year on year, with the beat primarily coming from nonoperating items.