Nongfu Spring Co., Ltd (“Nongfu Spring”) (HKG:9633) is a leader in the packaged drinking water and beverage business in China with devotion to providing consumers with high-quality products. 

Shares of the company soared as much as 85% on their debut after the company’s initial public offering (IPO) on the Hong Kong Stock Exchange in September 2020. If you are looking at Nongfu Spring with interest, here are 11 things to know before you invest.  

1. Business model

According to the Frost & Sullivan report provided in the IPO prospectus, Nongfu Spring ranked first in the packaged drinking water market in China in terms of market share for eight consecutive years from 2012 to 2019. The company is among the top three players in tea beverage, functional beverage and juice beverage markets in China in terms of retail sales value in 2019. The table below sets forth the main categories of its products. 

(Source: IPO prospectus)

2. Products overview

Nongfu Spring has the following product categories:

  1. Packaged drinking water products, including natural drinking water and natural mineral water;
  2. Tea beverage products, primarily including tea beverage Tea π (茶π) and sugar-free tea beverage (东方树叶);
  3. Functional beverage products, including Scream (尖叫) and Victory Vitamin Water (力量帝维他命水);
  4. Juice beverage products, including low concentration juice Water Soluble C100 (水溶C100), medium concentration juice Farmer’s Orchard (农夫果园), and not-from-concentrate juice, including Nongfu Spring (农夫山泉) NFC juice series and 17.5° juice series; and
  5. Other products, primarily including other beverage products such as coffee beverage, soda water beverage, sparkling flavored beverage and plant-based yogurt products, and agricultural products such as fresh fruits. 

The table below sets forth a breakdown of revenue contribution from the company’s five product categories for the periods indicated. 

(Source: IPO prospectus)

3. Water sources

Since its establishment in 1996, the company has adhered to the principle that “every drop of Nongfu Spring has its source” (每一滴农夫山泉都有它的源头). The company has ten water sources located in different regions of China which cover the entire national market supply (as shown below). 

The company complies with the applicable RPC laws and regulations on water extraction from natural water sources. It obtains water-taking permits and mining permits (which are applicable to mineral water) after the approval by relevant government entities, or under a few circumstances, enter into water supply agreements with third-party state-owned water supply companies that possess water-taking permits. 

(Source: IPO prospectus)

4. Sales and marketing

Nongfu Spring has established a nationwide sales network with in-depth market penetration, covering all provinces, municipalities and prefecture-level administrative divisions across China. The company sells its products through traditional channel, modern channel, catering channel, e-commerce channel and other channels (such as the new retail channel represented by vending machines). As of 31 May 2020, it has more than 2.43 million retail points of sale across China through 4,454 distributors. 

In addition, the company has direct sales customers which mainly include national or regional supermarkets, chained convenience stores, e-commerce platforms, restaurants, airlines and large corporate customers. As of 31 May 2020, the company has 247 direct sale customers.

5. Production bases

Nongfu Spring’s production bases of packaged drinking water are built in close proximity to the water sources. The company has also built the processing and juicing production bases for oranges and apples in Jiangxi Province and Xinjiang Uygur Autonomous Region, respectively. As of 31 Mary 2020, the company has 12 production bases with 144 production lines of packaged drinking water and beverage, 7 production lines of fresh fruit juicing and 3 production lines of fresh fruit processing in aggregate.  

6. Overview of packaged drinking water market in China  

According to the Frost & Sullivan Report in the IPO prospectus, the market size of packed drinking water was RMB201.7 billion in terms of retail sales value in 2019. Packaged drinking water is divided into four categories, namely:

  • Natural water, which primarily originates from wells, mountain springs, reservoirs, lakes, alpine glaciers or underground sources (springs). 
  • Natural mineral water, which contains a certain amount of minerals or trace elements and emerges automatically from deep beneath the ground or is harvested after drilling.
  • Purified drinking water, which is derived from the ground, underground or public water supply system, and contains no minerals or trace elements. 
  • Other drinking water, which is the drinking water apart from natural water, natural mineral water or purified drinking water, and a certain amount of minerals could be artificially added. 

The table below sets forth the breakdown of the market size of the packaged drinking water market in China from 2014 to 2024 by category. The compounded annual growth rate (CAGR) of natural water and natural mineral water (where Nongfu Spring operates) is expected to be 15.2% and 14.1% from 2019 to 2024. 

(Source: IPO prospectus)

7.  Competitive landscape 

The packaged drinking water market in China is relatively concentrated. The top five players occupied an aggregate market share of 56.2% in terms of retail sales value in 2019. The largest player, Nongfu Spring, has a distinctive leading position. Its retail sales value was more than 1.6 times of the retail sales value of the second largest player in 2019. 

The chart below sets forth the details of market concentration, market shares and retail sales value of the top five players of the packaged drinking water market in China in 2019. 

(Source: IPO prospectus)

8. How the IPO proceeds are used

Nongfu Spring intends to use the net proceeds raised of approximately HK$7,768 million as follows:

  • Approximately 25% or HK$1.942 million for brand building;
  • Approximately 25% or HK$1,942 million will be used for purchasing equipment such as refrigerators, warm cabinets and smart retail equipment to expand its sales capabilities;
  • Approximately 20% or HK$1,553 million will be used to increase the company’s production capacity at its existing production facilities and building new production facilities;
  • Approximately 10% or HK$777 million will be used for developing information technology systems, R&D capability and human resources;
  • Approximately 10% or HK$777 million will be used for repaying bank loans; and
  • Approximately 10% or HK$777 million will be used for working capital and other general corporate purposes.

9. Controlling shareholders

Following the completion of the global offering, Mr. Zhong Shanshan (钟睒睒)

 will hold approximately 84.4% interest in the company, including approximately 17.2% direct interest and 67.2% indirect interest through Yangshengtang. 

The following chart illustrates the shareholding structure and simplified corporate structure of Nongfu Spring immediately following the completion of the global offering. 

(Source: IPO prospectus)

10.  Financial Highlights 

Years ended December 31,Five months ended May 31,
20172018201920192020
RMB (million)RMB (million)RMB (million)RMB (million)RMB (million)
Revenue 17,49120.47524,0219,9178,664
Gross profit 9,80910,92113,3115,5765,119
Profit after income tax 3,3863,6124,9542,3601,931
Gross profit margin (%)56.153.355.456.259.1
Net profit margin (%)19.417.620.623.822.3
Return on assets (%)23.119,225.6N/AN/A
Return on equity (%)35.028.240.8N/AN/A
As at 31 DecemberAs at 31 May
20172018201920192020
Gearing ratio (%)0.90.310.5N/A18.5
Current ratio (times)1.321.430.59N/A0.81
Quick ratio (times)1.041.130.35N/A0.61

(Source: IPO prospectus)

Some observations on their financials:

  • Revenue has grown from RMB17.5 billion in 2017 to RMB24.0 billion in 2019, this represents a CAGR of 17.2%. Meanwhile, profit after income tax has appreciated quicker from RMB3.4 billion in 2017 to RMB5.0 billion in 2019, representing a CAGR of 21.0%
  • Gross profit margins and net margins are very stable hovering at circa 55.0% and 20.0%
  • The company should not have any liquidity issues since its gearing ratio is low at 18.5% as at 31 May 2020. Its current and cash ratios are also at healthy levels of 0.81x and 0.61x as at 31 May 2020. 
  • Nongfu Spring’s return on equity of 40.8% and return on assets of 25.6% achieved in 2019 are commendable and demonstrates proper capital allocation by management. The company currently does not have a pre-determined dividend payout ratio. 

11. Current valuation    

With a closing share price of HK$45.35 as of 8th March 2021, Nongfu Spring is trading at a price to earnings (PE) ratio of 51, with a market capitalization close to HK$233.2 billion. While the company is a dominant player in China’s packaged drinking water market, it is still growing at a healthy pace. Investors should keep an eye on the company in spite of its current aggressive valuation. 

(Source: Google Finance)

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