The company's 24H1 revenue/profit increased by 8.4%/8.0% respectively. Public opinion waves may affect short-term sales of packaged water, but the company has long insisted on product development and terminal customer maintenance, and its core competitive advantage remained unchanged. The share of packaged water is expected to gradually recover in the future, and Oriental leaves will remain the core driver of growth over the next 1-2 years. Considering the impact of this year's price war on profits, we lowered our 24-25 EPS forecast to 1.09 and 1.29 yuan. The current stock price corresponds to 25 times PE in 24 years. The valuation has gradually been absorbed into a reasonable range, giving a target price of HK$36, corresponding to 30 times PE in 24 years, and maintaining a “highly recommended” rating.

24H1 revenue increased 8.4%, and net profit to mother increased 8.0%. The company disclosed the 2024 semi-annual report. In 2024, H1 achieved revenue of 22.173 billion yuan, a year-on-year increase of 8.4%, and realized net profit to mother of 6.24 billion yuan, an increase of 8.0% over the previous year. Revenue and profit were in line with expectations. Other accounts payable and accrued expenses increased from 9.3 billion in the same period last year to 18.9 billion, mainly due to dividends payable to be included in this account.

Packaged water has been affected by public opinion incidents in the short term, and the growth trend of tea drinks is still strong. 24H1 packaged water/tea drinks/energy drinks/juice drinks/other products achieved revenue of 85.31/84.30/2.55/2.114/0.548 billion yuan, compared to -18.3%/+59.5%/+3.8%/+25.4%/-7.3%. Packaged water sales increased 19.0% year-on-year in January-January. Subsequent impact of public opinion events, but the company actively clarified the response through various methods, and launched pure aquatic products in April with the advertising slogan “All Nongfu Mountain Springs come from natural water sources” It strengthens the advantages of natural water sources. Oriental Leaf tea drinks grew rapidly in the first half of the year, and the strong momentum did not change. The company continued to promote new flavors through large-scale packaging and black oolong flavors, and maintained a leading share in the fierce competition for sugar-free tea. Tea Pi launched a new flavor of jasmine lemon tea, telling the brand story around bottle illustrations, and the growth rate increased after the juice drink product was upgraded.

Profit margins for packaged water and juice have declined, offset by improvements in the product structure. In 2014, H1 achieved a gross profit margin of 58.8%, a year-on-year decrease of 1.4 pcts, mainly due to the impact of the launch and promotion of new pure water products, a decrease of fixed costs, and an increase in the price of raw materials for juice; the H1 sales expense ratio was 22.4%, down 0.5 pct year on year, advertising and promotion expenses increased, but logistics rates declined due to changes in product structure; and the H1 management fee ratio was 4.1%, down 0.6 pcts year on year, achieving a net profit margin of 28.1%, a year-on-year decrease of 0.1 pcts. In terms of segment performance, the operating profit margins of the H1 packaged water/tea drinks/energy drinks/juice drinks/other products division in 24 were 32.2%/44.1%/41.2%/23.6%/28.9%, respectively, compared with -4.2/+1.0/ -5.9% /+2.1pcts last year. The growth rate of high-profit tea drinks was faster to hedge against the decline in packaged water and juice profits.

Shares are expected to gradually recover, focusing on the impact of the price war on profits. The public opinion incident was only a phased impact. The company maintained a good customer relationship with the terminal for a long time. In particular, after the pure water was fully distributed, it collaborated with the original natural water to seize more display resources. It is expected that farmers' share will gradually recover in the second half of the year, and packaged water sales are expected to improve sequentially. Profit margins may be under pressure in the second half of the year, considering that the price war for packaged water was intense this year, and there were many free discounts on the market, which affected the gross margin level.

Investment advice: Short-term turbulence will not change long-term competitiveness, valuations will gradually be absorbed into a reasonable range, and the “Highly Recommended” rating will be maintained. Public opinion turbulence may affect short-term sales, but the company has long insisted on investing in product construction, terminal customer service maintenance, and consumer education, and its core competitive advantage has not changed. The share of packaged water is expected to gradually recover in the future, and the intensity of the price war will also decline as sales recover. Oriental leaves will still be the core driver of growth in the next 1-2 years. Considering the impact of this year's price war on profits, we lowered our 24-25 EPS forecast to 1.09 and 1.29 yuan. The current stock price corresponds to 25 times PE in 24 years. The valuation has gradually been absorbed into a reasonable range, giving a target price of HK$36, corresponding to 30 times PE in 24 years, and maintaining a “highly recommended” rating.

Risk warning: New product development falls short of expectations, rising raw material costs, intensifying industry competition, public opinion turmoil, etc.