Value leader, ingenuity
The purpose of this article is to analyze why Nongfu Spring has a high ROE, how to build barriers, and where to explore medium- to long-term growth space. First, we believe that a high level of net interest is a core factor supporting the company's ROE to remain high, and can be further broken down into a “three high business model” with high pricing, high gross profit, and high cost efficiency.
Second, empowered by the combined strength of genes/brand/product/channel side, the company successfully established a high sense of value in the minds of consumers to achieve high premiums, cater to the consumer market that focuses on price-price ratio with high quality; achieve high efficiency within the organization to give full play to leading advantages to ensure superior cost control and cost investment efficiency.
Looking forward to the future, we believe that the company's main packaged water business is expected to maintain steady growth. The second-curve instant tea business has entered the fast track after years of cultivation, and the diversified new product matrix also has great potential for growth. EPS is expected to be 1.27/1.49/1.73 yuan for 24-26. Referring to the 24-year PE average of 22x (Wind's unanimous expectation), we approve the valuation premium and grant 38x PE for 24 years, with a target price of HK$52.50 (RMB 48.30) for the first time coverage and “purchase”.
Stable foundation: Building comprehensive competitive barriers in multiple dimensions. High ROE has certain sustainable high ROE and strong competitive barriers create Nongfu Spring's leading value base color: 1) High ROE: 23 Nongfu Spring ROE reached 45.9% (21-23 annual average is 41.1%), leading position in the industry; the main reason is high pricing (high brand quality, premium rights), high gross profit (scale advantage brings purchasing bargaining power), and high cost efficiency (scale advantage dilutes expenses), and high net profit margin supported by high cost efficiency (scale advantage dilutes expenses) A certain degree of sustainability.
2) Strong competitive barriers: From a multi-dimensional perspective, Nongfu Spring's comprehensive strength is outstanding; the unique genes of taking the slow path and taking the lead help the company form a solid bottom layer; the brand side seizes consumers' minds and stands out by creating differentiated concepts; the product side has a relatively higher price-quality ratio and a longer life cycle, has both breadth and depth on the channel side, and the channel model follows the trend, improving efficiency after development reaches a steady state.
Broad space: the advantages of bottled water are stable, that is, the volume of drinking tea is accelerated, and other categories have a good track, strong competitiveness, three-dimensional outlook growth space: 1) Bottled water: there is room for both market growth and share growth; on the one hand, China's drinking water packaging rate was only 7% in 2019, with reference to the United States/South Korea (37%/16%); on the other hand, benefiting from the accelerated reshuffle/stricter environmental protection/scale effect after the epidemic, the leading share is expected to rise steadily. 2) Ready-to-drink tea: The two major products, Oriental Leaf and Tea Pi, were rapidly released under the trend of health and low sugar. The company's ready-to-drink tea revenue was +83% year-on-year to 12.66 billion in '23, and the second curve gradually consolidated. 3) Other drinks: Products during the introduction period, such as milk tea, charcoal, coffee, vegetable yogurt, etc., all have certain volume potential; the company's product matrix is based on natural health, and is expected to enjoy the dividends of the health trend. I am optimistic that the company will continue to develop new products with keen consumer insight and strong channel power.
Expansive space to explore long-term value. For the first time, the “buy” rating is optimistic about the sustainability of the company's main business and growth space for diversified businesses. The expected EPS is 1.27/1.49/1.73 yuan for 24-26 years, giving 38x PE for 24 years, with a target price of HK$52.50, a “purchase”.
Risk warning: impact on water purifiers, food safety issues, increased industry competition, fluctuating raw material costs.