Nongfu Spring (Minutes): first steps finally made towards global markets
$NONGFU SPRING(09633.HK) The following are the minutes of Nongfu Spring's Q2 2025 earnings call organized by Dolphin Research. For earnings interpretation, please refer to "Nongfu Spring: Green Bottle Exits, Red Bottle Takes Over, 'Water Mao' Makes a Comeback!"
I. Review of Core Financial Information:
(1) Performance by Product Category
Packaged Drinking Water Products: Revenue achieved steady recovery, growing by 10.7% year-on-year. This was mainly due to the fading impact of last year's online public opinion and ongoing brand-building activities.
Tea Beverage Products: Revenue continued to maintain strong growth momentum, increasing by 19.7% year-on-year. The main driving factors were the sustained popularity of the Oriental Leaves brand and the launch of new products.
Functional Beverage Products: Revenue grew by 13.6% year-on-year, reflecting the growing consumer demand for healthy sports drinks.
Juice Beverage Products: Revenue performed impressively, growing by 21.3% year-on-year, thanks to high-quality products gaining market recognition.
(2) Profitability and Cost Structure
Gross Margin: 61.3%, an increase of 2.5 percentage points compared to 58.8% in the same period of 2024. The main driving factors were:
1. Decline in PET (Polyethylene Terephthalate) raw material procurement prices.
2. Decrease in procurement costs for packaging materials such as cartons.
3. Decline in procurement costs for bulk raw materials such as sugar.
Sales and Distribution Expenses: RMB 5.01 billion, accounting for 19.6% of total revenue (22.4% in the same period of 2024). The decrease in proportion was mainly due to reduced advertising and promotional expenses, as well as optimized logistics rates due to changes in product structure.
Administrative Expenses: RMB 1.068 billion, accounting for 4.2% of total revenue, remaining basically flat compared to the same period last year (4.1%).
(3) Strategic Initiatives and Business Progress
Water Source Layout: Added three new water sources in Hunan Badagong Mountain, Sichuan Longmen Mountain, and Tibet Nianqing Tanggula Mountain, and put them into use. As of now, the group has laid out 15 major high-quality water sources nationwide.
Brand Building and Marketing Activities:
1. Continuously deepening the "Transparent Factory of Natural Water Sources" sourcing activities nationwide, inviting people from all walks of life to visit water sources and production bases, strengthening the core brand concept of "natural and healthy."
2. During the 2025 Lunar New Year, launched the Snake Year Zodiac commemorative bottle mineral water and invited brand ambassadors to shoot themed promotional videos to strengthen emotional connections.
3. Oriental Leaves brand launched consumer interaction activities such as "Open the Cap to Win" and introduced new flavor "Chenpi White Tea," completing the layout of six major tea categories.
4. Launched innovative product "Cloud Tea" (carbonated tea beverage), using 100% real tea extraction, focusing on refreshing taste.
Product Innovation:
1. Launched 17.5° NFC mixed juice new product, using Northeast Blue Honeysuckle, adopting fresh pressing technology.
2. Launched "High Transparency Ice" product, entering the edible ice market, reflecting the extension capability of production technology.
Channel Expansion and Cooperation:
1. Cooperated with new retail channels such as Sam's Club to launch customized products (such as 17.5° orange juice, birch sap beverage, etc.) to meet the needs of mid-to-high-end niche markets.
2. In June 2025, core products (natural drinking water, Oriental Leaves, Tea π, etc.) officially entered the Hong Kong market, covering over 3,500 terminal outlets, taking an important step towards internationalization.
Industry Chain Construction:
1. Donated and built 5 modern tea primary processing facilities in Pu'er City and Lincang City, Yunnan Province, practicing "industry helps farmers," ensuring raw material quality from the source and supporting rural revitalization.
II. Detailed Content of the Earnings Call
2.1, Executive Statements of Core Information
1. Growth Drivers: All categories achieved double-digit growth, mainly benefiting from product innovation, channel optimization, and brand building;
2. Gross Margin Improvement: Mainly due to the decline in costs of raw materials such as PET, cartons, and sugar, expected to remain stable in the second half;
3. Expense Control: Sales expense ratio decreased due to optimized advertising and promotional expenses and improved logistics efficiency;
4. Long-term Strategy: Adhering to "long-termism," focusing on the two core categories of water and tea, continuously investing in water source and supply chain construction;
5. Overseas Expansion: Using Hong Kong as a pilot, gradually exploring Southeast Asian and European and American markets.
2.2, Q&A Analyst Questions and Answers
Q: What is the outlook for growth in the second half and the strategy for water and tea categories?
A: The group remains confident in achieving mid-double-digit growth in revenue for the year. Water and tea as core categories have consistent growth strategies: continuously driving growth through product innovation (such as introducing new flavors and new forms), channel deepening and optimization (covering more terminals, enhancing single-point output), and brand value communication (such as water source sourcing activities). Considering the low base of the water business in the same period last year, the growth rate in the second half is expected to perform better.
Q: Is the current high profit margin level sustainable? What is the plan for sales expenses in the second half?
A: Profit margin levels are greatly affected by bulk raw material prices. Currently, it is expected that the prices of major raw materials such as PET will remain relatively stable in the second half, so the gross margin is expected to maintain at the current good level. However, in the long run, maintaining extremely high profit margin levels is challenging as scale expands and the industry evolves. Sales expense ratio will not have a fixed target, and management will dynamically adjust and optimize investment based on market competition, brand building stages, and consumer activity needs, pursuing maximum efficiency. The decline in expense ratio in the first half partially reflects this optimization.
Q: How do you view and respond to the development of new retail channels such as Sam's Club and discount stores?
A: The group values and actively cooperates with emerging retail channels. Currently, cooperation with channels such as Sam's Club (such as customized products) has been effective, proving that the company's product strength meets the needs of their customer base. Such cooperation not only brings incremental sales but also inspires product innovation ideas, helping the company better respond to niche market demands. Future similar cooperation opportunities will continue to be explored.
Q: How is the recovery of the packaged water business? Will future growth mainly come from distribution or single-point growth?
A: The water business is on a steady recovery path. Future growth will be multidimensional: on one hand, there is still room for channel penetration (such as remote areas, specific scenarios); on the other hand, through water source education and quality communication, enhancing consumer awareness, promoting consumption upgrades (such as shifting from purified water to natural water), thereby increasing single-point sales and repurchase rates. Household consumption and office scene water use are also important sources of growth.
Q: Will the rapid growth of sugar-free tea (Oriental Leaves) slow down? Is there still room for its gross margin to rise?
A: After explosive growth in the sugar-free tea track, future growth may tend towards a more stable level, but the market potential remains huge. Oriental Leaves continues to attract new customers and enhance stickiness through new launches (such as Chenpi White Tea) and consumer interaction activities (Open the Cap to Win). The gross margin of tea beverages is already at a high level, with limited room for further significant improvement. Future key investments will focus on deepening the supply chain (such as building tea factories in Yunnan) and strengthening brand awareness to build long-term competitiveness.
Q: How will the group balance the development resources of water, tea, juice, and functional beverages in the future?
A: Water and tea are absolute core and focus due to their scale and market position. However, for juice and functional beverages, the group will also capture growth opportunities. Juice growth relies on the company's long-term deep cultivation at the raw material end and high-quality product positioning such as NFC; functional beverages focus on maintaining brand vitality through youthful marketing and product innovation. Resource allocation will be based on investment returns and strategic synergy effects.
Q: What is the strategy and plan for overseas expansion? Is there a timetable for overseas factory construction?
A: Internationalization is a long-term strategy. Currently, using the Hong Kong market as a pilot and bridgehead, accumulating operational experience. The next step will focus on exploring the Southeast Asian market and gradually studying the feasibility of the European and American markets. Overseas factory construction is a long-term possibility, depending on the scale of the target market, localization needs, and economic feasibility, with no clear timetable at present.
Q: What is the company's cash management and dividend policy?
A: The company adheres to a prudent financial policy. The dividend ratio does not have a predetermined fixed target, but the board promises to comprehensively consider future capital expenditure needs, business development opportunities, cash flow status, and shareholder returns to decide the dividend plan. The company is committed to providing shareholders with continuous and stable cash returns.
Q: How do you view the competition between freshly made tea drinks (such as milk tea shops) and bottled beverages?
A: Freshly made tea drinks and packaged beverages are businesses that meet different consumption scenarios and needs. Freshly made tea drinks emphasize immediacy, customization, and social experience, while packaged beverages emphasize convenience, consistency, and storability. There is certain competition between the two, but more of a symbiotic and integrated relationship. The popularity of freshly made tea drinks has educated the market, enhancing consumer requirements for tea flavor and quality, which is a long-term benefit for Nongfu Spring with strong product strength.
Q: What is the reason for the increase in inventory? Does the gross margin improvement mainly come from cost reduction or price increase?
A: The increase in inventory is mainly to support business growth, new store stocking, and strategic raw material reserves. The improvement in gross margin is mainly due to the decline in procurement costs of major raw materials (such as PET, cartons, sugar), rather than proactive price increase behavior.
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