In early May this year, the stock price of Nongfu Spring once broke through the range of nearly three years of horizontal market and hit a new high, but the stock price plummeted again soon afterwards, with a 30% decline in just two months and a market value evaporating over HK$150 billion.

At this point, the controlling shareholder, Yangshengtang, couldn't sit still. Recently, Nongfu Spring announced that it will increase its H-share holdings within six months, with a total amount not exceeding HK$2 billion. However, its stock price quickly fell back into a downward trend after a brief rebound.

In recent months, the drinking water market has seen a fierce competition, with Nongfu Spring, Yibao, Wahaha and other brands competing to lower prices and promote sales. Some categories of bottled water even killed back to the "1 yuan era".

Recently, the Hong Kong Consumer Council published an article entitled "Source of Drinking Water 30 Bottles of Water Flavors, Minerals, Safety Testing", which stated that bromate was detected in Nongfu Spring's bottled water samples at a level of 3 micrograms per liter, reaching the maximum limit of bromate for natural mineral water and spring water applicable to those subjected to ozone treatment in the European Union. Although Nongfu Spring has responded clearly at the first time, it still causes further market concerns, and Nongfu Spring's share price has also fallen sharply in the past two days.

What is the market worried about?

01

In March of this year, the Hurun Rich List of Mainland China was released, and 70-year-old Zhong Shanshan became China's richest man for the fourth consecutive time. It is worth noting that he relies on Nongfu Spring, a wealth mine, with a massive 84% shareholding.

In fact, Nongfu Spring has been winning easily in several soft drink sub-competitions.

From 2017 to 2023, the company's revenue increased from 17.5 billion yuan to 42.9 billion yuan, with a compound annual growth rate of 16%. Net profit increased from 3.38 billion yuan to 12.1 billion yuan, with a compound annual growth rate of 23.6%.

In 2023, revenue and net profit increased by 28% and 42% respectively, reaching a new high since the disclosure of financial data. In addition to maintaining 11% growth in the drinking water business, the tea drink business has exploded against the trend - with an annual income of 12.7 billion yuan, an increase of 83% year-on-year. This is thanks to the rapid growth of Dongfang Shuye's distribution rate and network. In addition, the company's functional drinks, juice drinks and other businesses have achieved double-digit growth.

Looking at its profitability, the company's latest sales gross margin is 59.55%, a new high over the years. On the one hand, the company optimizes its product structure and increases the proportion of high-profit tea drinks. On the other hand, the prices of packaging materials such as packaging materials and PET have also declined to a certain extent.

In addition, the latest net margin is 28.15%, up 2.79% year-on-year, and up 10.5% significantly from the low in 2018. The reason for this is that in addition to optimizing the product structure, the scale effect has significantly pushed down the expense ratio, including sales, management, and financial ratios, which have all been falling for years. In terms of absolute net profit level, Nongfu Spring far exceeds the industry performance - Yibao is 9.9%, Kang Shifu is 4.4%, and Dongpeng Beverage is 18.3%.

Nongfu Spring's continued high growth in performance and substantial improvement in profitability are due to the incremental cake in the packaging water and tea drink segments behind it, and its ability to continue to seize market share from competitors.

According to Zhuyi Consulting's report, the size of China's packaged drinking water market will be 215 billion yuan in 2023, with a compound annual growth rate of 7.1% in the past five years, and it is expected to reach 314.3 billion yuan by 2028.

In terms of market share, Nongfu Spring's market share will be 23.6% in 2023, Yibao will be 18.4%, Jingtian, Wahaha, and Kang Shifu will be 6.1%, 5.6%, and 4.9%, respectively. Among them, Nongfu Spring's market share has been steadily increasing, while Wahaha and Kang Shifu have seen declines.

In 2023, the tea drink market size will exceed 100 billion yuan and has not yet recovered to pre-epidemic levels. However, there has been a significant structural change in this market, with sugar-free tea rising sharply. In the past five years, the compound annual growth rate has exceeded 20%. According to the data of Xiaoshidai, Nongfu Spring (mainly Dongfang Shuye), Suntory and Genki Forest have obtained 86% of the market share for sugar-free tea. This has allowed Nongfu Spring to continue to increase its share in the entire tea drink market.

Dongfang Shuye has been sitting on the "cold bench" for more than ten years. It is not accidental that it exploded in 2023. As early as 2011, when the sugar-free tea market was very small, Zhong Shanshan launched Dongfang Shuye, and the early sales also failed, but he still insisted on cultivating the brand.

In recent years, as consumers pay more attention to health, their enthusiasm for consuming "sweet" foods or beverages has declined, and the consumption trend of slowing down sugar and rising sugar-free has become a new trend. Against this backdrop, Dongfang Shuye finally had a big explosion.

Overall, the performance of Nongfu Spring has been good in the past few years. This is also an important logic for long-term valuation above 50 times (from September 2020 to 2023) in the context of a sharp decline in the Hong Kong stock market. In terms of product structure, the operating income of 10-30 billion yuan products is 401/1288/60 million yuan, respectively.

However, in 2024, several high-revenue sub-battlefields of Nongfu Spring have undergone major changes, and the good days of lying down and making money may be gone forever.

02

In February of this year, after the death of Zong Qinghou due to illness, the incident of Zhong Shanshan's absence from Zong Qinghou's funeral continued to ferment on the Internet, making Nongfu Spring and Zhong Shanshan unexpectedly become the targets of public criticism and fall into a public opinion storm.

The sales volume of Nongfu Spring brand also suffered a shock. According to media reports at the time, within 5 days of the public opinion fermentation, the sales volume of the official flagship store of Nongfu Spring plummeted by 90%. Offline, some supermarkets and convenience stores also once gave feedback that the whole series of Nongfu products were not as easy to sell as before.

At the same time, Wahaha products received support from the "wild consumption", and online sales surged. Some products even experienced stockouts. In addition, Wahaha also took the opportunity to accelerate the layout of offline channels, laying products and investing in refrigerator cabinets, trying to seize a portion of Nongfu Spring's market share.

At the time when Nongfu Spring was in deep trouble, Yibao, the industry's second in command, suddenly announced on April 22 that it had submitted an IPO application to Hong Kong. You should know that Yibao once surpassed Nongfu Spring to become the leader of the packaged water market in 2015, and then was surpassed again, always ranking the second place. During this period, Nongfu Spring went public in Hong Kong and used the power of the capital market to widen the gap with Yibao.

Now, Yibao is also going public, with an obvious intention to expand production capacity and market share through the power of the capital market. You should know that Yibao's market share in some important provinces is stronger than that of Nongfu Spring, such as Guangdong, Hunan, Sichuan, Hainan, Guangxi, and Hubei.

Faced with public opinion crises and the pressure from competitors, Zhong Shanshan is unwilling to "sit and wait for death" and dares to take the initiative to fight back.

On April 23rd, the second day after Yibao submitted its prospectus, Nongfu Spring suddenly announced the launch of green-bottle purified water, trying to gain a foothold in the purified water market. This move undoubtedly challenged Yibao and Wahaha.

The promotional copy boasted: "I have an obligation to inform, and you have the right to choose. One more choice and one more comparison. The green bottle is slightly sweet, and the red bottle is healthier." In the opinion of some market insiders, the existence of green bottles is also to set off the red bottles in terms of brand, to seize the minds of consumers who believe that natural water is healthier than purified water, and to indirectly undercut the brand positioning of Yibao and Wahaha.

In terms of price, the terminal sales price of green and red bottled water was mostly 2 yuan. However, the terminal purchase price of green bottled water is lower than that of red bottled water. This means that Nongfu Spring can drive new products to be deployed to offline terminals faster by giving benefits to channels. It can also squeeze its competitors.

Soon after its launch, Nongfu Spring's green bottled water quickly started a price war. During this year's June 18th Shopping Festival, the official flagship store of Nongfu Spring sold 12 bottles of green-bottled purified water for only 9.9 yuan, or 0.82 yuan per bottle, far lower than the prices of Wahaha and Yibao.

In offline channels, many supermarkets have also increased their promotion efforts, and the price of a single bottle of green bottled water has dropped to 1.2 yuan, or even less than 1 yuan, which is also lower than that of competitors.

In response, Yibao and Wahaha have followed suit and lowered their prices, bringing the price of bottled water to around 1 yuan. For example, on Dingdong Maicai and Xiao Xiang Supermarket, the price of 12 bottles of 555ml Yibao purified water is only 11.9 yuan and 10.9 yuan, and the price of a single bottle is as low as 0.91 yuan.

By launching new green-bottled products and starting a price war, Nongfu Spring is determined to target Yibao and Wahaha and seize the market share. The final result is uncertain.

Just as the battle in the bottled water market was heating up, the sugar-free tea market also showed signs of a major price war starting in June of this year. Various online promotions on e-commerce platforms have pushed offline mainstream prices below 5 yuan.

According to the Hangzhou Daily, in FamilyMart and Lawson stores in Hangzhou, there are 3 bottles of Oriental Leaves 500ml for 10 yuan, and 8.8% off Suntory Oolong Tea. In some supermarkets in Wuhan, 500ml Oriental Leaves jasmine tea, green mandarin Pu'er and oolong tea can be bought for 4.2 yuan. Some street vendors even sell them for less than 4 yuan.

The downward pressure on the price of sugar-free tea comes from the price war initiated by new domestic force brands in order to seize market share. For example, let tea lower prices by more than 14%, and the 970ml Longjing jasmine tea is nearly 10% off. Therefore, Oriental Leaves is also under considerable pressure and may be forced to follow suit and lower its prices.

In summary, Nongfu Spring packaged water, Dongfengshuye and other block products have been actively and passively involved in price wars. For the capital markets, this is not a good thing, as it directly implies a significant decline in profitability.

03

Topchoice Medical candidly pointed out in its 2023 annual report that the 'PDD Holdings effect' has appeared in almost all consumption sectors. It even mentioned that the 'PDD Holdings' model in the oral implant market may have a greater impact than the group procurement policy, implying that the trend of consumption downgrade may last for a long time.

Yes, from soy sauce, pickled vegetables, snack food, to even high-end baijiu and luxury goods, all have inevitably turned from consumption upgrade to consumption downgrade. In the macro trend, it is not difficult to understand why Nongfu Spring packaged water and Dongfengshuye are caught in a price war.

This kind of major transformation is not friendly to consumer goods companies like Nongfu Spring. The valuation level will only be more reasonable if it is discounted compared to the past, because performance and profitability will be suppressed in the medium and long term.

In the era of consumption upgrade, the soft drink market had a large scale, good market structure, and fast revenue growth, with strengthening profitability. The market gave Nongfu Spring a valuation of more than 50 times, which was not high. But now, the trend of consumption downgrade is becoming more and more obvious, and the soft drink market has not been able to escape the trend of internal competition and price reduction. So the latest P/E ratio is still high, with a valuation of 28 times. Investors may have to continue to endure. (End of article)