Nongfu Spring has been pursuing the “dual-engine” development of drinking water and beverages. On
one hand, it meets the daily drinking needs of consumers and on the other hand, it satisfies the diverse
and personalized drinking demands of consumers. Diversified product varieties enhancing flexible
product mixes has enabled companies and distributors to achieve differentiating advantages in different
markets and channels, to improve scale of business, distribution efficiency and profitability.
The world’s second largest packaged drinking water company
Nongfu Spring’s packaged drinking water products include natural drinking water and natural mineral
water. The company is the second largest packaged drinking water company in the world in terms of
sales volume. It is also the only company, among the top 5 PRC packaged drinking water companies,
that uses solely natural water to produce packaged drinking water, pledging “Every drop of Nongfu
Spring has its source”. In 2020, the company’s market share of packaged drinking water in China reached
20.9% (in terms of retail sales value), which is 1.5 times that of the second largest player. In 2018, 2019
and 2020, the revenue generated from packaged drinking water products accounted for 57.5%, 59.7%
and 61% of the company’s total revenue, respectively.
Profitability is comparable to the strongest companies in the soft beverage industry around the world
Nongfu Spring’s gross margin of 59.1% in 2020 is well ahead of its peers, Tingyi Holding Corp.(33.2%)
and Uni-President(34.4%); and is comparable to Coca-Cola(59.3%), the No. 1 soft drink company in the
global soft beverage industry. Net profit levels were also much higher than the average in the soft
beverage industry in China and also globally over the same period, reaching 17.6%, 20.6% and 23% in
2018, 2019 and 2020. High profitability levels are expected to remain stable in the long term.
Nationwide sales network with in-depth market penetration and Quality Distributor
Nongfu Spring’s sales network is nationwide, accounting for approximately 11% of the 22 million retail
points of sale in China, covering a wide area and not limited to first and second tier cities. The Company
has partnered with local distributors who have extensive experience in the distribution of soft beverage
products, leveraging their financial strength, professional teams and facilities to penetrate the local
retail network. Besides, the “Nongfu Spring” branded refrigerators installed at nearly 500,000 retail
points of sale have particularly enhanced the Company’s brand display and share of shelf, thereby
boosting sales volume. The Company’s annual evaluation and screening of distributors has helped the
distributors to improve their business capabilities, so that the overall quality and business capabilities of
the cooperating distributors have gradually stabilized and matured.
Nongfu Spring is the leader in the soft beverage industry, with a significantly faster growth rate than the
industry average in all its product categories. In addition, fruit juice, tea beverage and functional
beverage products are bringing new development focus to the company. With reference to the average
valuation of the company in the past year, we give the company a minus 1 standard deviation target P/E
ratio of 63x for 2022, and estimate the company’s EPS for 2021/2022/2023 to be RMB 0.7/0.8/1.0. The
target price forecast for 2022 is HK$64.59, which corresponds to PE ratio of 74.1x/ 63x/ 53.5x for
2021/2022/2023 respectively. The Company is given a “Buy” rating (initial coverage).
The recovery of COVID-19 might not be as expected and the price of raw materials might increase.