Soft drinks are an industry with low barriers and high competition. At the same time, the profit margin of a single bottle is low, and high turnover is required to compete for the comprehensive capabilities of enterprises. Packaging faucets have gone through many changes. In the “1 yuan water” era, Wahaha led the way; in the “1.5 yuan water era”, Master Kong led with deep distribution and price advantages; in the “2 yuan water” era, after Yibao took a short lead with a combination of light assets and channels, the king of Nongfu Spring finally returned. At present, packaged water has entered a stage of medium- to low-speed growth. The future growth center of the industry remains between 3%-4%. The industry beta has weakened, but farmers' ability is better than the industry, and they will continue to gain market share, and will grow faster than the industry. Soft drink terminals have a high price increase ratio, but the manufacturer's profit per bottle is low, and the manufacturer must achieve high turnover to form a profit scale, requiring that no aspect of product/marketing/channel is left behind.
Why do farmers win? Brand is king: good products+good marketing, bring good brands.
(1) Good product: The SKU matrix is complete and excellent, achieving “packaged water+drink” two-wheel drive. The layout of each track is forward-looking. For example, Oriental Leaf, which has been growing rapidly recently, was introduced to the market in 2011, and patiently cultivated until the sugar-free tea track exploded. At the same time, the company also has a circuit for juice, energy drinks, coffee, etc., and the packaging design and flavors of each product have been refined to the extreme, and the big products will last forever. (2) Good marketing: The company has many classic marketing cases. Farmer's packaged water accurately positions the concept of “natural water” and continuously educates consumers through many “water wars” and “water type marketing” comparisons with pure water. The advertising slogans “Nongfu Spring is a bit sweet” and “We don't produce water, we are just nature's carriers” are classic marketing examples.
Why do farmers win? Channel victory: high channel investment, strong control, high turnover, high incentives. Farmer's distribution model is highly flat. It mainly uses a first-level distribution model and is deeply tied to major customers. Furthermore, the NCP system is used for information-based monitoring. Through this system, distributors are guided and expenses written off, and front-line sales personnel are also monitored, so the terminal situation can be grasped in real time, and the channel control is extremely strong. At the same time, farmers reserve sufficient profits for the channel, and the channel's momentum is strong. The retail price of the terminal is 2 yuan for 500ml Nongfu Spring. We estimate that the factory price is about 0.54 yuan, and the terminal price increase rate is 3-4 times.
What did the farmer's style of play bring? High turnover has achieved large-scale scale, and the effect of scale continues to be reflected. Good products, good marketing, and good channels bring rapid sales, making the whole chain have high turnover, and the business has a scale effect. (1) The scale effect of raw material procurement: The company has always enjoyed lower purchase prices than the industry due to large-scale procurement. The unit price of PET purchases is about 80-90% of the national average price, and the price locking operation is accurate. At the same time, we judge that the company's costs are also on a downward channel this year. (2) Scale effect of transportation costs: The increase in the scale of transportation has also increased the company's ability to bargain freight, and can even achieve special railway line transportation. At the same time, the company is also actively optimizing the regional layout. Soft drinks are large in size, heavy in weight, and low in value, and the economy weakens as transportation distance increases. In recent years, the company has continued to lay out new water sources such as Huangshan and Dujiangyan on a large scale to fill gaps in provinces. The production area is closer to the consumer market, shortening the transportation distance, which is conducive to the continuous reduction of the company's transportation cost rate.
Investment advice and profit forecasting. We expect the company's revenue for 2023-2025 to be 418.1/490.1/56.06 billion yuan, up 25.8%/17.2%/14.4% year on year; net profit to mother for 2023-2025 is 109.8/129.3/14.85 billion yuan, corresponding EPS is 0.98/1.15/1.32 yuan, respectively, up 29.2%/17.8%/14.8% year on year. The company is a scarce target for ultra-high ROE growth and enjoys a valuation premium. The company's historical ROE is around 35%. It is an absolute tier in the Hong Kong stock consumer market, mainly due to its high net sales interest rate and high asset turnover ratio. At the same time, the company's good growth, net profit from 2018 to 2022 was a CAGR of 23.9%, so historical valuations have enjoyed a certain premium. We gave Nongfu Spring 40x PE in 2024, with a corresponding target price of HK$50.0, with 12% upside. For the first time, coverage gave it a “superior to the market” rating.
Risk warning: Increased industry competition, fluctuating raw material prices, food safety risks.