Insight on Nongfu Spring Co., Ltd.: China’s largest packaging water supplier

Current price: HKD60.8   Target Price: HKD70   Recommendation: Buy

Nongfu Spring Co., Ltd., established in 1996, one of the top 20 beverage companies in China, is a leading soft beverage player with scale, growth potentials and profitability. Their products span packaged drinking water (“PDW”), tea beverage (“TB”), functional beverage (“FB”) and juice beverage (“JB”).

Revenue Analysis

Due to the impact of the COVID-19, the group booked revenue of RMB11,545M in 1H20, down 6.2% over 2H19, while the gross margin rose 3.8ppts to 59.9%, primarily due to the lower procurement price of PET and changes in the product mix. As the pandemic is under control in China, it is expected the COVID-19 outbreak would not have a material adverse effect on the group’s long-term business development.

Market Analysis

China is one of the largest soft beverage markets in the world. The market size of the soft beverage market in China was RMB991.4B in terms of retail sales value in 2019, representing a CAGR of 5.9% in 2014-2019. Among these categories, packaged drinking water, which had been the largest category in terms of retail sales value, reached a market size of RMB201.7B in 2019.

Nongfu Spring ranked first in China’s packaged drinking water market in terms of market share for eight consecutive years, with business stretching to tea beverage, functional beverage and juice beverage in the soft beverage market. With the economy gaining momentum, the demand for packaged drinking water continuously swelled as natural and healthy products become popular

Risk

Fierce Competition
The soft beverage market in China has a relatively low market concentration with the top ten players only occupying an aggregate market share of 42.5%, implying fierce competition. In order to hold the lead, more unique new brands and products needed which product requires a lot of financial and material resources on marketing.

Unpredictable Consumer Tastes Change
Consumer tastes are gradually becoming diversified and changeable, requiring timely introduction of attractive new products and new marketing strategies. It is difficult to maintain strong growth and high profit under fierce market competition.

Recommendation

Nongfu Spring has maintained the leading position in China’s packaged drinking water market share for eight consecutive years. Sales and profit growth far exceeded the industry average, whilst profit margin was much higher than peers. P/E ratio was at 123. Our target price sets at 70.