Event: The company announced its 2024 interim results, achieving operating income of 22.173 billion yuan, +8.4% year-on-year, and net profit to mother of 6.24 billion yuan, or +8.0% year-on-year.
Comment:
Influenced by online public opinion, packaged drinking water revenue is under pressure in the short term. From January to January 2024, the company's packaged drinking water revenue was +19%. However, due to numerous online public opinion attacks and malicious slander against the company and founder since the end of February, which had a serious negative impact on the brand and sales, 2024H1 packaged drinking water reached -18.3% year-on-year to reach 8.531 billion yuan. Since March 2024, the company has clarified the truth to the public through various means, and on May 20, 2024, the company posted the title “Rumors and Facts About Nongfu Spring and Founder Zhong Yuyi since February 25 | More important than traffic, the truth is the judgment of good and evil based on the facts themselves”. It has compiled responses and clarifications to related rumors circulating on the Internet, and has taken action to investigate the legal responsibility of the malicious creators. In response to changes in the packaged drinking water market, the company launched Nongfu Spring pure water products in April 2024, which is different from most similar products on the market. The specification of pure aquatic products is 550ml. The bottle type is the same as that of natural aquatic products, but the label is green, which contrasts strongly with the red packaging of natural aquatic products. In terms of brand promotion, the company uses the advertising slogan “All Nongfu Mountain Springs come from natural water sources” to convey to consumers the advantage that all of the company's packaged drinking water comes from natural water sources, and uses the expression “the green bottle is a bit sweet, the red bottle is healthier” to convey the differentiated positioning of the two products to consumers, and continues to educate consumers about water categories. In terms of profitability, the adjusted pre-tax profit margin of the company's packaged water business fell 4.3 pct to 32.2% year on year due to increased fixed cost sharing due to the decline in scale and promotional investment after the Green Bottle Water Market.
Tea drinks continued to increase, and juice performed brilliantly. Revenue from 2024H1 tea drinks was +59.5% to 8.43 billion yuan. We believe that the main reason is that under the trend of healthier and less sweetened consumption, unsweetened Oriental tea leaves and tea pi continued to maintain good growth; under the effect of scale, the adjusted profit margin before tax for tea drinks was +1.0pct to 44.1% year-on-year. Revenue from 2024H1 energy drinks was +3.7% to 2.55 billion yuan, and the growth rate slowed slightly. We believe this is mainly due to the inclination in the company's resource investment against the backdrop of healthy development of packaged drinking water and rapid development of tea drinks.
2024H1 juice drink revenue was +25.4% to 2.114 billion yuan, mainly benefiting from the company completing the upgrade of the classic products 100% tomato mixed fruit and vegetable juice and 100% carrot mixed fruit and vegetable juice, and launched a new water-soluble C100 flavor “blood orange flavor” in February; in terms of profitability, due to rising prices of some raw materials for juice, 2024H1's adjusted profit margin before tax was 5.9pct to 23.6% year on year.
Gross margin improved in the first half of the year, and investment in sales expenses increased. 2024H1's gross profit margin was 58.8%, or 1.4 pct year over year, mainly due to the impact of new product launches and promotions for pure aquatic products, an increase in fixed cost sharing due to a decline in sales of packaged drinking water products, and an increase in the price of juice raw materials. 2024H1 sales and distribution expenses were 4.971 billion yuan, +5.9% year-on-year, and the sales and distribution expenses ratio was 22.4%, -0.5pct year-on-year. Among them, advertising and promotion expenses increased year-on-year, but logistics rates declined due to the item structure of product sales; management expenses were 0.913 billion yuan, -4.8% year-on-year, and 4.1% year-on-year, and -0.6 pct year-on-year. In summary, the profit attributable to shareholders of the company was 6.24 billion yuan, +8.0% year-on-year, and the profit ratio attributable to shareholders was 28.1%, or 0.1 pct year-on-year.
Profit prediction and investment rating: Nongfu Spring is a target in the beverage industry that is in a leading position in terms of growth capacity, profitability, and scale. Under the water+beverage dual-engine development pattern, strong product innovation capabilities drive the brand's evergreen future. The company has always adhered to the “natural and healthy” development strategy. We believe this is also a long-term development trend in the domestic beverage industry, so we expect the packaged drinking water business to improve sequentially as online public opinion calms down and the public understands the truth. Furthermore, we are optimistic about the rapid growth of sugar-free tea drinks in Oriental Leaves and the overall growth of tea drinks. We expect Nongfu Spring's EPS to be 1.10 yuan, 1.24 yuan, and 1.38 yuan respectively in 2024-2026, corresponding to the closing price of HK$28.4 per share and RMB 25.84 per share PE of 24, 21, and 19 times the closing price on August 30, 2024.
Risk factors: Sales growth falls short of expectations after the improvement of old products or the launch of new products, fluctuations in raw material prices