Nongfu Spring: "The carrier of nature" can not carry?

On the afternoon of March 25, Beijing time, Nongfu Spring (9633.HK) released its H2 2024 performance, with all core businesses falling short of market expectations.

The key points are as follows:

1. Decline in bottled water sales has widened: The bottled water business achieved revenue of 7.42 billion yuan in H2 2024, a year-on-year decline of 24%, continuing to slow down from the first half of the year (-18%), significantly below market expectations (10.09 billion yuan).

The market originally expected that in the second half of the year, as the impact of public opinion weakened and the green bottled water was expanded, the bottled water business would recover significantly. However, the actual situation is: on one hand, market competition has intensified, with Wahaha, Yibao, and others accelerating market expansion by leveraging public opinion benefits; on the other hand, the factory price of the green bottle water heavily promoted by the company in the second half of the year is relatively low (5-6 yuan lower than the red bottle), which, although helped the company somewhat boost its market share, had limited impact on the overall revenue of bottled water.

2. Tea beverage growth slows under high base: The tea beverage business achieved revenue of 8.32 billion yuan in H2 2024, a year-on-year increase of 12.8%. Although the company continued to broaden its consumer base in the second half of the year through new product iterations (spring limited Longjing tea, black oolong, etc.) and extensive distribution of 900ml large-sized cost-effective packaging, the growth rate slowed down compared to the high base in the same period last year, also missing market expectations (9.19 billion yuan).

3. Functional beverages & juice performance is mediocre: Due to the lack of first-mover advantage in functional beverages and juice, the resource investment in these two businesses is relatively low compared to bottled water and tea beverages. According to channel research information, although some individual products (such as NFC) performed well in the second half of the year, overall, these two businesses did not have many highlights.

4. Increase in green bottled water proportion, declining gross margin. In terms of gross margin, due to the company's increased distribution of low-margin green bottled water and significant subsidies in the second half of the year (according to channel research information, the proportion of green bottled water could reach up to 50%), although the costs of core raw materials like PET fell in the second half of the year, the gross margin still declined to 57.3%.

5. Stable expense ratio: Since the green bottled water itself is priced low, the required channel promotion costs are relatively low, so the overall control of expenses exceeded market expectations. Despite the company's repeated cost controls, the core operating profit for H2 2024 still declined by 11% year-on-year, falling short of market expectations.

6. Financial information overview:

Dolphin Research's overall view:

Overall, Nongfu Spring's performance this time was comprehensively below expectations. Due to the extensive distribution of low-margin green bottled water, although the bottled water business lowered the company's overall profitability was already anticipated, the significant shortfall in revenue can only indicate that the increase in green bottled water shipments did not offset the factors of price decline. Dolphin Research emphasizes in the article “Plunge” Nongfu Spring: Don't be scared, will the richest still pass the baton? Nongfu Spring's short-term push for green bottled water is to proactively attack and suppress competitors' expansion, while the core long-term goal is to further increase the market share of packaged water through the combination of “red bottle + green bottle.”

Since most consumers cannot currently distinguish between different water sources, their purchasing motivation is primarily driven by the immediate need to quench their thirst. Therefore, the sales of packaged water still rely heavily on channel push, which means that the ability to occupy a wider range of terminal displays is key to increasing brand share.

Nongfu has successfully achieved this goal by offering benefits to distributors and increasing the distribution of green bottles to capture more terminals in lower-tier cities, but the impact on short-term performance is inevitable. Since the nature of the public opinion event does not damage Nongfu's ability to sell water, Dolphin Research believes that it is highly likely for Nongfu's market share in packaged water to recover to the level before the public opinion event, but how to balance the proportion of red bottle water and green bottle water during this process is key to performance.

As for the company's tea beverage business, Dolphin Research believes the performance is still acceptable. According to research information, although a large number of new entrants have flooded into the sugar-free tea sector in 2024, the market share of the company's flagship product, Dongfang Shuye, has not only not been diverted by new entrants but has instead increased to about 70%, indicating that the company still holds a cliff-like leading position in the sugar-free tea sector.

From a valuation perspective, in the first half of the year, investors were concerned that the competitive landscape of packaged water due to price wars would affect the company's profitability, causing the company's valuation to drop to a low of 25x. However, based solely on this financial report, aside from profitability, the growth potential of the company's revenue seems to be in question. From this perspective, the current valuation level of Nongfu is indeed on the high side.

However, Dolphin Research believes that Nongfu in the second half of the year is basically in the most difficult stage. With the reduction of green bottle distribution intensity and weakening subsidies in 2025, the marginal improvement of the company's profitability is relatively strong. Therefore, if the opportunity arises for the valuation to drop, it may actually provide an entry opportunity.

The following is a detailed interpretation of the financial report:

I. Overall Performance: A Big Surprise

In the second half of 2024, the company achieved a revenue of 20.72 billion yuan, a year-on-year decrease of 6.7%, and a net profit of 6.07 billion yuan, a year-on-year decrease of 3.8%. All core businesses fell short of market expectations, marking the first negative growth in semi-annual performance for the company in nearly three years.

II. Bottled Water Business: Once Again Underperforming

In 24H2, the bottled water business achieved revenue of 7.42 billion yuan, a year-on-year decline of 24%, continuing to slow down compared to the first half of the year (-18%), significantly below market expectations (10.09 billion yuan).

The market originally expected that in the second half of the year, with the weakening of public opinion, the expansion of green bottled water distribution, and the bottled water business could significantly recover. However, the actual situation is: on one hand, market competition has intensified, with Wahaha, Yibao, and others accelerating market development by leveraging public opinion benefits; on the other hand, due to the low ex-factory price of green bottled water heavily promoted by the company in the second half of the year, although it helped boost market share to some extent, it had limited impact on overall bottled water revenue.

According to channel research information, the ex-factory price of green bottled water is 15 yuan per box (24 bottles), which is a reduction of 5-6 yuan compared to the previous red bottled water. As shown in the chart below, for distributors, Nongfu Spring's green bottled water is the product with the highest gross profit among mainstream bottled waters on the market. Therefore, with the company fully benefiting the channels, distributors are highly motivated to stock up, rapidly expanding nationwide in the second half of the year and penetrating many newly developed outlets.

According to research information, driven by green bottled water, the company's market share in bottled water rebounded from a low of 27% to around 30% but still fell short of the normal level before the public opinion (around 35%).

From a profitability perspective, due to the increase in the proportion of green bottled water, the operating profit margin of the bottled water business in 24H2 fell to 30%, which is the lowest level in recent years.

III. Tea Beverage: Operating Profit Margin Hits New High

In 24H2, the tea beverage business achieved revenue of 8.32 billion yuan, a year-on-year increase of 12.8%. Although in the second half of the year, the company continued to broaden its consumer base through new product iterations (spring limited Longjing new tea, black oolong, etc.) and extensive distribution of 900ml large specification cost-effective packaging, the growth rate slowed down compared to the high base in the same period last year, also missing market expectations (9.19 billion yuan). However, Dolphin Research believes that the performance of tea beverages is relatively good.

From the perspective of market share, although a large number of new entrants have flooded into the sugar-free tea track in 2024, their scale is not comparable to the company's Dongfang Shuye. According to research information, Dongfang Shuye's share has not only not been diverted by new entrants but has instead increased against the trend to around 70%.

From a profitability perspective, tea beverages are the most profitable category among Nongfu Spring's various categories. Due to relatively cautious spending on expenses, the operating profit margin in 24H2 further increased to 46%, which also boosted the company's overall profitability. Many investors may wonder why Dongfang Shuye can dominate the market with a 70% share. Dolphin Research must say that this is due to Nongfu Spring's extraordinary strategic determination. As early as 2011, the company launched sugar-free tea, but at that time, it had not yet reached the tipping point, and sugar-free tea faced seven consecutive years of losses. However, the company still invested a lot of time and energy in consumer education, establishing the perception that "sugar-free tea = Dongfang Shuye." Ultimately, when the sugar-free tea industry exploded, the company naturally became the most beneficial brand due to its strong first-mover advantage.

IV. Functional Beverages & Juices: Mediocre Performance

Due to the insufficient first-mover advantage of functional beverages and juices for the company, the resource investment in these two businesses is relatively low compared to packaged water and tea drinks. According to channel research information, although some individual products (such as NFC) performed well in the second half of the year, overall, these two businesses did not have many highlights.

V. Gross Margin Declines Further

In terms of gross margin, the company increased the launch of low-margin green bottle water in the second half of the year and significantly provided subsidies (according to channel research information, green bottle water can account for up to 50%). Although the costs of core raw materials such as PET fell in the second half of the year, the gross margin still further declined to 57.3%.

VI. Expense Ratio Remains Stable

Due to the low price of green bottled water, the required channel promotion costs are relatively low, so the overall control of expenses exceeded market expectations. Despite the company's repeated control over expenses, the core operating profit for 24H2 still declined by 11% year-on-year, falling short of market expectations.