• Buy Entry – 42.8 Target – 48.85 Stop Loss – 39.8
  • Nongfu Spring Co Ltd is a company mainly engaged in manufacturing and sales of packaged drinking water. The company operates five segments. The Water Products segment is involved in production and sales of packaged drinking water, and its brand is Nongfu Spring. The Functional Drinks Product segment produces and sells functional beverages, and its brands include Scream and Victory Vitamin Water. The Ready-To-Drink Tea Product segment is engaged in the production and sale of ready-to-drink tea, whose brands include Oriental Leaf. The Juice Beverage Product segment is engaged in the production and sales of fruit juice beverages, and its brands include Farmer’s Orchard, Water Soluble C100 and Not-from-concentrate (NFC). The Other Products segment produces and sells agricultural products and other beverage products, such as apple, rice and plant yogurt products.
  • The company is the absolute market leader in China’s packaged drinking water. The key competitive moat is the multiple water resources owned by the company. Producing packaged drinking water does not require advanced technological know-how, but the source of water supply sets a relatively high entry barrier for the sector. 
  • 2H20 revenue slightly dropped by 3.2% YoY to RMB11.3bn. Gross profit margin edged up by 3.5 ppts YoY to 58.2%. 2H20 net profit grew by 18.9% YoY to RMB2.5bn. Net profit margin edged up by 4.5 ppts YoY to 21.7%. 
  • Shares have been correcting since mid-February but have reversed the downturn since mid-May. The strong upward momentum was with an increase in volume. 
  • Updated market consensus of the estimated growth of net profit in FY21 and FY22 are 14.9% and 17.1% respectively, which translates to 67.0x and 57.2x forward PE. The current PE is 76.4x. Bloomberg consensus average 12-month target price is HK$45.7.
9633 HK (Source: Bloomberg)