Nongfu's 1H24 revenue missed company's guidance given its market share loss in the packaged water segment. We expect low single digit revenue growth for the segment since market share recovery takes time. Tea beverage revenue grew 59% YoY and delivered revenue share close to water of 38%, with a 10ppt higher in OPM than water segment. The tea beverage replaced the packaged water and became the company's top profit driver. We think that it is challenging for the company to meet the double digit growth target for 2024E revenue given unfavourable environment in 2H and softener tone of management. We cut TP by 13% to HK$ 50.38 based on 40x 2024E P/E to reflect lower earnings forecasts. Maintain BUY.

Water segment hurt by market share loss. 1H24 revenue grew 8.4% YoY, below the guidance, due to an 18% YoY decline in packaged water revenue, driven by market share loss since Feb caused by brand damage from online rumours. The company observed a recovery in market share during July and Aug, although it takes time to return to pre-Feb levels. We project low single digit growth in full-year revenue for packaged water segment, reflecting a partial offset from the growth in medium to large sized water against the decline in small-sized water segment. OPM of packaged water declined by 4.2 ppt YoY due to promotional activities for green bottle, which dragged the overall OPM down by 1 ppt. We expect continued pressure on margins.

Tea beverage became top profit contributor. Revenue from tea beverage grew 59% YoY in 1H24 on a high base, driven by increased penetration and higher per capita consumption, raising its revenue share to a record 38%, nearing packaged water's contribution. The company expects sustained growth in tea beverages through deeper penetration in lower-tier markets. With tea beverages having an OP margin 10 ppt higher than packaged water, we estimate it will contribute 46% of operating profit, surpassing that of 34% from packaged water and becoming the key profit driver. The company anticipates gradual normalization of tea segment's gross margin.

Gloomy 2H24 outlook, challenging to meet the target. The company notes significant 1H damage, with 2H priorities shifting toward recovery rather than rigid KPIs. Considering the lack of improvement signal in consumer sentiment in 2H24, we expect the company to struggle to achieve double-digit revenue growth for 2024E. We lowered our 2024/25E revenue forecasts by 7-10% and gross margin estimates by 2-3 ppt, leading to an 8- 12% reduction in net profit expectations. We maintain our BUY rating, with TP cut by 13% to HK$50.38 based on 40x 2024E P/E. Risks: food safety issues, intensifying competition, raw material price hike etc.