Nongfu Spring: Green bottle exits, red bottle takes the stage, the 'Water Moutai' makes a comeback!

$NONGFU SPRING(09633.HK) Nongfu Spring: Green Bottle Exits, Red Bottle Takes Over, 'Water King' Returns!

On the afternoon of August 26th, Beijing time, Nongfu Spring (9633.HK) released its 2025 H1 performance. As the impact of public opinion gradually faded in the first half of the year, Nongfu increased the promotion of red bottle water and reduced subsidies for green bottle water, leading to a comprehensive recovery in the company's overall performance, exceeding market expectations, and presenting a good set of results.

Key points are as follows:

1. Packaged Water Returns to Positive Growth: In 25H1, the packaged water business achieved revenue of 9.44 billion yuan, a year-on-year increase of 10.7%. After two consecutive financial reports of decline, the packaged water business has returned to positive growth. Breaking it down, with the weakening of public opinion impact, Nongfu significantly reduced the distribution of green bottle water (pure water) in the first half of the year and increased the promotion of red bottle water. According to research information, the proportion of red bottle water in packaged water revenue increased from about 75% in 24H2 to over 78% in 25H1. Additionally, with the increase in the proportion of red bottle water, the operating profit margin of the packaged water business rose back to 35%, basically returning to the level before the impact of public opinion.

2. Tea Beverage Profitability Reaches New High: The tea beverage business achieved revenue of 10.09 billion yuan in 25H1, a year-on-year increase of 19.7%. Considering the current scale of tea beverages breaking 10 billion in half a year, the growth has slowed compared to the explosive growth of the previous two years, which is within expectations. Starting in April, the company launched the 'One Yuan Enjoyment' campaign for the major unsweetened tea product, Oriental Leaves, and increased penetration in the lower-tier markets. In the second quarter, the market share of Oriental Leaves in unsweetened tea once increased from 70% to about 75%. Additionally, with the release of operating leverage, the more impressive aspect is that the operating profit margin of the tea beverage business increased by 4 percentage points to 48%, reaching a historical high.

3. Functional Drinks & Juice Accelerate Distribution: Benefiting from high temperatures and high demand in sports scenarios, Nongfu's electrolyte water (Power King) accelerated distribution, accounting for nearly 50% of the entire functional beverage category. In terms of the juice business, benefiting from the cooperation with Sam's Club at the end of last year, the new product 17.5° NFC orange juice entered Sam's Club and became a hot-selling item in the first half of the year, effectively expanding consumption in family scenarios, and performed beyond expectations.

4. Gross Margin Slightly Rises. In terms of gross margin, on one hand, the prices of key raw materials and packaging materials (PET, corrugated paper) decreased in the first half of the year, coupled with the increase in the proportion of red bottle water and other high-margin categories (unsweetened tea, NFC juice), the company's gross margin in 25H1 slightly increased by 1.5 percentage points to 60.3%.

5. Expense Ratio Significantly Declines: Due to the company's significant reduction in subsidies for green bottle water in the first half of the year, combined with more precise expense allocation, the sales expense ratio fell by 2.8 percentage points to 19.6%, while the management expense ratio remained stable, ultimately achieving a net profit margin of 29.8%, exceeding market expectations.

6. Overview of Financial Information:

Dolphin Research Overall View:

Overall, the company's performance in the first half of the year has largely dispelled the market's previous doubts about 1) the price war leading to a deterioration in the competitive landscape of packaged water, resulting in a decline in profitability, and 2) the 'second growth curve' of tea beverages losing market share with the entry of many new players.

Firstly, regarding the first point, as the company increased the promotion of red bottle water and canceled subsidies for green bottle water in the first half of the year, the operating profit margin of the packaged water business returned to the level before the price war. Not only that, but Nongfu also achieved a higher market share in packaged water, indicating that Nongfu has always fully controlled the pace of the price war, and the green bottle water has basically completed its historical mission—suppressing competitors' expansion while increasing its market share in lower-tier markets. With the continued increase in the proportion of red bottle water in the second half of the year, higher profit margins in the packaged water business can be expected.

Regarding the second point, with the challenges from new entrants like Guozi Shule and Tea Xiaokai, Nongfu has appropriately increased the discount intensity through 'One Yuan Enjoyment', resulting in a market share increase from 70% to 75% in the unsweetened tea field, reinforcing its dominant position.

Behind this, apart from the strong product power of Oriental Leaves itself and its first-mover advantage in the category, what is actually reflected is the company's decades-long effort in shaping a healthy brand mindset through various marketing activities, which is Nongfu's true barrier.

The 'healthy' brand mindset itself also strengthens the endorsement of a series of healthy categories launched by Nongfu, including electrolyte water and NFC beverages.

Finally, from a valuation perspective, assuming the proportion of red bottle water further increases in the second half of the year, raising the company's profitability level, and other business rhythms remain unchanged, the corresponding annual profit is 15.5 billion yuan, which is about 31x, basically returning to the level before Nongfu first launched the green bottle water and actively initiated the price war in May last year. This indicates that the market has already priced in the impact of the price war on Nongfu's performance at the current stage.

In fact, compared to last year, although Nongfu sacrificed short-term profitability through green bottle water, it brought a higher market share. Therefore, if the proportion of red bottle water further increases in the second half of the year, strengthening profitability, there is still room for further valuation improvement.

Below is a detailed interpretation of the financial report:

Since Nongfu's performance is disclosed by four major categories: packaged water, tea beverages, functional drinks, and juice, we will also analyze them in this order in the following text.

I. Overall Performance: Back on Track

In 25H1, the company achieved revenue of 25.62 billion yuan, a year-on-year increase of 15.6%, and net profit of 7.62 billion yuan, a year-on-year increase of 22.1%. As the impact of public opinion gradually faded in the first half of the year, Nongfu increased the promotion of red bottle water and reduced subsidies for green bottle water, leading to a comprehensive recovery in the company's overall performance. On the other hand, with the improvement of the company's operational capabilities, the release of operating leverage led to record high operating profit margins in categories such as tea beverages and functional drinks, overall presenting a very good set of results.

II. Packaged Water Business: Achieving Positive Growth Again

In 25H1, the packaged water business achieved revenue of 9.44 billion yuan, a year-on-year increase of 10.7%. After two consecutive financial reports of decline, it has returned to positive growth. Although it has not yet reached the scale before the impact of public opinion, it can be confirmed that the packaged water business is marginally recovering.

Breaking it down, with the weakening of public opinion impact, Nongfu significantly reduced the distribution of green bottle water (pure water) in the first half of the year and increased the promotion of red bottle water. According to research information, the proportion of red bottle water in packaged water revenue increased from about 75% in 24H2 to over 78% in 25H1.

In terms of specific strategies, on one hand, Nongfu significantly reduced the subsidy intensity for green bottle water (25H1 subsidy reduced to 1 yuan per case, significantly lower than 2 yuan in 24), although currently, from the perspective of channel profits, green bottle water is still higher than red bottle water, the actual gap between the two has significantly narrowed.

According to feedback from terminal research, with the slowdown in green bottle water subsidies, currently, over 70% of husband-and-wife stores tend to promote red bottle water, mainly because consumers have a high recognition of the health label of red bottle water, resulting in a significantly higher repurchase rate than green bottle water.

On the other hand, Nongfu began to intensify the promotion of large-packaged red bottle water (1.5L, 2L, 4L, etc.) in 2025. Since the main distribution channels for large packages are family and catering, replacing tap water for cooking, tea brewing, and other high-frequency needs, consumers often pay more attention to the health of the water source, which is more in line with the positioning of red bottle water.

Additionally, with the increase in the proportion of red bottle water, the operating profit margin of the packaged water business rose back to 35%, basically returning to the level before the impact of public opinion.

III. Tea Beverages: Profitability Reaches New High

Benefiting from the 'One Yuan Enjoyment' campaign launched by the company for the major unsweetened tea product, Oriental Leaves, starting in April (lasting until September 30th), effectively increased consumer repurchase rates, coupled with the introduction of new composite flavors such as Chenpi White Tea and Chrysanthemum Pu'er, the tea beverage business achieved revenue of 10.09 billion yuan in 25H1, a year-on-year increase of 19.7%. Exceeding market expectations (9.7 billion yuan).

From the perspective of market share, although a large number of new entrants flooded into the unsweetened tea track in 2024, their scale is completely incomparable to Oriental Leaves. According to research information, with the promotion of the 'One Yuan Enjoyment' campaign, Oriental Leaves continued to increase penetration in lower-tier markets, and in the second quarter, the market share once increased from 70% to about 75%.

In terms of profitability, tea beverages are the most profitable category among Nongfu Spring's various categories, although 'One Yuan Enjoyment' diluted some of the profit space of tea beverages, with the company continuously increasing distribution density, driving the release of scale effects, the operating profit margin of tea beverages increased to 48%, reaching a new high.

IV. Functional Drinks & Juice: Accelerating Distribution

Although functional drinks & juice are not the company's first-mover advantage compared to packaged water & tea beverages, and relatively fewer resources are invested, their performance in the first half of the year was still very impressive.

Functional drinks (including brands like Scream and Power King) achieved revenue of 2.9 billion yuan in the first half of the year, a year-on-year increase of 13.6%, with a slight acceleration in growth. According to research information, benefiting from the high demand in summer high temperatures and sports scenarios, electrolyte water (Power King) accelerated distribution, with outlets increasing from 1.2 million at the end of 2024 to 1.8 million, accounting for nearly 50% of the entire functional beverage category.

Juice beverages achieved revenue of 2.56 billion yuan, a year-on-year increase of 21.3%, with the standout performer being 17.5° NFC orange juice, benefiting from the trend of health, after the company reached cooperation with Sam's Club at the end of last year, NFC orange juice entered Sam's Club and became a hot-selling item, effectively expanding consumption in family scenarios.

IV. Gross Margin Slightly Increases

In terms of gross margin, on one hand, the prices of key raw materials and packaging materials (PET, corrugated paper) decreased in the first half of the year, coupled with the increase in the proportion of red bottle water and other high-margin categories (unsweetened tea, NFC juice), the company's gross margin in 25H1 slightly increased by 1.5 percentage points to 60.3%.

V. Expense Ratio Significantly Declines

In terms of sales expenses, on one hand, due to the company's reduction in promotion expenses for green bottle pure water in the first half of the year, focusing instead on high-margin natural water (red bottle) and unsweetened tea beverages, and on the other hand, due to the continuous expansion of the company's terminal outlets (currently reaching 3 million), unit distribution costs significantly decreased, resulting in a sales expense ratio decline of 2.8 percentage points to 19.6%, the lowest level in recent years.

The management expense ratio remained stable overall, ultimately achieving a net profit margin of 29.8%, exceeding market expectations.