Investor's Network - Xie Yingjie.

From the 'public opinion turmoil' to the 'restart of purified water', to 'price war', and then to 'bromate', Nongfu Spring has fallen into a difficult time.

In the scorching summer, bottled water enters the peak sales season, but the industry leader Nongfu Spring (09633.HK) is mired in negative public opinion controversies. Recently, a notice of convenience store suspending sales of Nongfu Spring has been circulating on the internet.

In the past six months, Nongfu Spring has been attacked by various rumors on the internet about foreign control, pollution of water sources, and public donations. After several months of online criticism and questioning, the stock price has remained low, plummeting directly from a market cap of over 100 billion. On July 15th, Hong Kong Consumer Council released a drinking water testing report, once again putting Nongfu Spring on the edge of public scrutiny.

The news has attracted widespread attention throughout the network. It was not until recently that the Hong Kong Consumer Council website issued a clarification statement, giving Nongfu Spring a clean slate.

Public opinion controversy

On July 15, the Hong Kong Consumer Council revealed that 30 commonly used bottled water samples were tested on the local market. It was found that the bottled water samples from Nongfu Spring and Baishui Mountain from mainland China both contained 3 micrograms of bromate per liter, which is the maximum limit of bromate in natural mineral water and spring water in the European Union applicable to ozone-treated natural mineral water and spring water, but is far below the drinking water quality standards set by the United States, Japan, Britain, and the World Health Organization, which is no more than 10 micrograms of bromate per liter.

The report stated that bromate was detected in well-known domestic drinking water brands, Nongfu Spring and Baishui Mountain's products. Drinking large amounts of bromate can cause nausea, abdominal pain, vomiting, and diarrhea, and in severe cases, it can also affect the kidneys and nervous system.

The news has attracted widespread attention throughout the network.

On July 16th, Nongfu Spring wrote to the Hong Kong Consumer Council stating that the report of the Consumer Council contains biased evaluations of Nongfu Spring's bromate content, causing enormous harm to Nongfu Spring's reputation. Nongfu Spring solemnly requested that the Council issue a written clarification, apology, and eliminate all negative impacts on Nongfu Spring.

Nongfu Spring pointed out that the tested products were natural drinking water products, not mineral water, and that the bromate content of Nongfu Spring's natural drinking water products is 3 micrograms per liter, which is safe and qualifies as a high-quality product according to the European Union's drinking water safety standards, which stipulate that the safe content of bromate should not exceed 10 micrograms per liter.

"The Consumer Council forcibly applied third-party standards that should not be applicable to production, technical backgrounds, and differences in regulatory requirements, regardless of the effect of ozone treatment. The conclusion reached is unscientific and unreliable."

There is almost no bromate in natural water in nature. During the process of ozone disinfection and sterilization of drinking water, bromide existing in the water will be transformed into bromate sodium, potassium, and other bromate substances under the action of ozone. The Consumer Council stated that drinking large amounts of bromate can cause nausea, abdominal pain, vomiting, diarrhea, and in severe cases, it can also affect the kidneys and nervous system.

Recently, the Hong Kong Consumer Council's official website issued a clarification statement. After meeting with representatives from Nongfu Spring and conducting in-depth exchanges, the council learned that the products were neither natural mineral water nor purified water, but natural drinking water. The standards adopted by the company were the national standard for packaged drinking water (GB19298-2014) in mainland China where the products were produced.

Therefore, Hong Kong Consumer Council changed the sample to a separate category of 'natural drinking water' and re-evaluated it. After re-evaluation, the overall performance of the sample was adjusted from 4.5 stars to 5 stars. The Hong Kong Consumer Council apologizes for the misunderstanding caused by the discrepancy in sample classification in this test.

Market value evaporation

Looking at market share, Nongfu Spring and Yibao have long held the top two positions in China's bottled water market. According to a report by Zhishang Consulting, by 2023, Nongfu Spring's market share will be 23.6%, and Yibao will be 18.4%.

Although Nongfu Spring occupies a leading position, the pressure is also constantly increasing. Especially in recent controversies, it has had a significant impact on its sales, forcing it to stimulate sales by lowering prices.

In fact, in the past six months, Nongfu Spring seems to have been caught in the vortex of public opinion, and has been attacked by various rumors on the Internet, such as foreign capital control, pollution of water source, and public welfare donations. It has undergone months of online criticism and questioning. In April of this year, Nongfu Spring filed a lawsuit against the online rumor maker; on May 20, Nongfu Spring published 'Rumors and Truth about Nongfu Spring and the founder, Zhong Shanshan' on its WeChat public account since February 25. The article listed 20 rumors about Nongfu Spring and Zhong Shanshan and responded to them one by one.

However, these online rumors still had a negative impact on the company. In the secondary market, on July 16, Nongfu Spring's stock price hit a new low in nearly two years, at HKD 32.55 per share, and the stock price has been hovering around HKD 33 per share since then; compared with the highest price of HKD 66.42 per share, the stock has fallen by 50%, and its market value has evaporated more than HKD 370 billion.

The fluctuation of the stock price is due to the market competition pressure faced by Nongfu Spring.

At the end of April this year, China Resources Beverage (Holdings) Co., Ltd., the parent company of the Yibao brand, submitted a listing application to the main board of the Hong Kong Stock Exchange; Wahaha also increased its investment in urban channels to compete for market shares; and other brands such as Jimaier are also competing for market shares through low-price strategies.

Nongfu Spring started a price war by lowering prices across the board. During the '6.18' period this year, Nongfu Spring's official flagship store lowered the price of a 12-bottle pack of green bottled purified water to CNY 9.9, with an average price of CNY 0.825 per bottle, which is lower than the retail prices of bottled water in the same price range, such as Yibao and Wahaha, which are both priced at CNY 2 per bottle.

Share buybacks and market stabilization.

From the recent market actions, Nongfu Spring has high expectations for the drinking pure water market.

According to a report by CIC Consulting, the scale of China's ready-to-drink soft drink market in 2023 is expected to reach CNY 909.2 billion based on retail sales. Among them, according to retail sales, packaged drinking water is the largest category. In 2023, the market share of drinking purified water in the packaged drinking water category is 56.09%, and the market size is CNY 215 billion. The compound annual growth rate from 2023 to 2028 is expected to be 7.9%, which is the fastest growing category among all ready-to-drink soft drinks, and the growth rate will be higher than that of natural mineral water.

However, in addition to traditional brands, the drinking water market has also welcomed many new brands. Public data shows that there are currently 187,000 companies involved in the production of drinking water. Among them, 1686 new companies were registered in the whole year of 2023, and 639 new companies have been registered so far this year. Many of these new brands include well-known companies.

In terms of performance, Nongfu Spring's 2023 annual report shows revenue of CNY 42.667 billion, a year-on-year increase of 28.4%; the net profit attributable to the parent company was CNY 12.079 billion, a year-on-year increase of 42.2% for the same period. In 2023, the packaged drinking water products on which Nongfu Spring relies for its growth had an operating income of CNY 20.262 billion, accounting for less than 50% of total revenue, a proportion of 47.5%.

The tea drink sector, which includes two main products 'Dongfengshuye' and 'Techa,' saw strong growth last year, boosting the overall performance of the group. Sugar-free tea is one of the hotspots in the past year's water beverage market, as it has seen rapid growth in response to consumers' demand to reduce sugar. Nielsen data shows that in 2023, Dongfengshuye's revenue increased by more than 100% year-on-year, with a three-year compound growth rate of more than 90%.

For Nongfu Spring, to continue to maintain its current industry position in the bottled water track, it not only needs to continue to find new growth points, but also needs to respond to the continuous questioning from the outside world.

In the 2023 financial report, Nongfu Spring responded to the recent public opinion storm, stating that it will strengthen brand building, adapt to market changes flexibly, always adhere to the concept of healthy and natural products, continuously improve products and services, and better meet consumer needs.

At the same time, major shareholders are also actively stabilizing the market. On July 9, Nongfu Spring announced that the controlling shareholder, Yangshengtang, plans to use its own funds to acquire and increase the company's H shareholding within about six months, with a total amount not exceeding HKD 2 billion.

As of the date of this announcement, Yangshengtang directly holds approximately 66.82% of Nongfu Spring's issued shares; as the actual controller of Nongfu Spring, Zhong Shanshan directly and indirectly holds approximately 83.98% of Nongfu Spring's issued shares.

Standing behind Nongfu Spring, from 2021 to 2023, Zhong Shanshan has been China's richest person for three consecutive years. On March 25, 2024, the 70-year-old Zhong Shanshan topped the Hurun Global Rich List with a net worth of CNY 450 billion for the fourth time, but his wealth shrank by 9% from the previous year.

However, Nongfu Spring's current situation is different from previous years. (Produced by Caijing)