Matters:
Nongfu Spring released its 2023 annual report. It achieved main revenue of 42,667 billion yuan for the full year of '23, an increase of 28.4%; net profit to mother was 12.079 billion yuan, an increase of 42.2%. 23H2 achieved main revenue of 22.205 billion yuan, an increase of 33.4%; net profit to mother was 6.304 billion yuan, an increase of 62.2% over the same period.
Commentary:
Multiple categories achieved double-digit growth, that is, the growth of tea drinking accelerated again. 23H2 packaged water achieved revenue of 9.82 billion yuan, an increase of 10.2%, mainly due to the steady recovery of the consumption scenario. The company also expanded the consumption scenario through the 4L upgrade. 23H2 beverage revenue also increased 60.3% to 12.385 billion, surpassing packaged water for the first time. By category, 23H2 revenue for ready-to-drink tea/energy drinks/juice/other beverages was 73.73/24.45/18.47/720 billion yuan, +104.8%/+34.7%/+15.2%/+1.6% compared with the same period last year. The growth of instant tea has accelerated again, mainly due to Oriental leaves continuing to lead the industry's growth through channel distribution, packaging and flavor expansion; energy drinks have benefited from the pandemic driving consumer education, and Scream and Power Emperor have strengthened sports and youth trend marketing respectively; the growth rate of juice has slowed month-on-month, mainly due to the impact of the Spring Festival stalled period, but maintained a relatively rapid growth rate of 23% throughout the year. Among them, 17.5° launched season-limited products and further breakthroughs in freshness. The performance of other beverages was lackluster, mainly due to the company's continued strategy of focusing on operating efficiency and resources.
The sales expense ratio was greatly optimized, combined with cost dividends and scale effects, and the performance exceeded expectations. Looking at overall financial indicators, gross margin for 23h2/full year was +3.3/+2.1pcts to 59.0%/59.5%, respectively. The main reason is that procurement costs for cartons, labels and some raw materials decreased compared to the same period last year. On the cost side, the sales expense ratio of 23H2 decreased by 4.6 pcts to 20.7%, driving a year-round decrease of about 1.8 pcts. The optimization margin exceeded expectations. The main reason was that the commissioning of the new base brought about supply chain cost optimization, compounding the impact of changes in category structure; the management expense ratio of 23H2 was -0.3/-0.4 pcts year-on-year, respectively. Looking at segmented profit levels, 23H2 packaged water/ready-to-drink tea/energy drinks/juice operating profit margins were +4.2/+6.5/+4.4/+5.9pcts, respectively, mainly due to the release of scale effects of benefits, cost dividends, and supply chain cost optimization. In summary, 23h2/full year net interest rates increased by +5.5/+2.8pcts to 28.4%/28.3% year-on-year, respectively, and net profit increased 65%/42%, respectively, exceeding market expectations.
From category card positions to supply chain layout, what is behind profit exceeding expectations is the implementation of long-term results. It is expected that growth will continue at a relatively rapid pace even after 24 years of high base. This time, sugar-free tea products have once again accelerated the release of scale effects, and the commissioning of new water sources promoted a decline in supply chain costs, prompting profit performance to exceed expectations, once again confirming the company's long-term philosophy and leading management capacity in the industry. Looking ahead to 24 years, although recent public opinion events have disrupted product sales to a certain extent, we believe that the company's underlying capabilities will not change. It is expected that packaged water, tea, energy drinks, juice, etc. will continue to achieve double-digit growth. Among them, tea drinks are expected to maintain a remarkable growth trend under a high base. However, in the medium to long term, the company's main business has a solid basic and long-term layout, with both new product release options and the potential to improve operational efficiency, and high-quality growth will continue to be realized.
Investment advice: Implement long-term principles, exceed expectations, maintain a “recommended” rating. Adhering to the long-term principle, the company continues to strengthen its competitive advantage. Medium- to long-term high-quality growth is well supported. It is expected to maintain a relatively rapid growth trend under a high base in 24 years. Considering the high increase in tea volume and efficiency optimization, the 24-26 EPS forecast was raised to 1.25/1.44/1.63 yuan (the original 24-25 forecast was 1.06/1.21 yuan). The current stock price corresponds to the 24-year PE 30 times, maintaining the target price of HK$52, corresponding 38 times PE in 24, and maintaining the “recommended” rating.
Risk warning: Demand for terminals is sluggish, new product expansion falls short of expectations, raw material prices fluctuate greatly, etc.