Source: Yaya Hong Kong Stock Circle Author: Kyle In the first half of this year, statistics show that at least 180 Hong Kong stock companies have implemented share buybacks, with a total amount of HKD 121 billion, setting a new high in the same period of history. Especially in the Internet companies, almost every shareholder return program has been significantly improved, which can be said to have opened a new era of Internet shareholder returns. Among these companies, Tencent, the "North Star" of Hong Kong stocks, is undoubtedly the most prominent. In the first half of this year, it contributed more than 40% of the repurchase volume of the Hong Kong stock market, firmly occupying the seat of the "repurchase king" of the Hong Kong stock market. In the second quarter, Tencent's single-quarter repurchase amount reached HKD 37.5 billion, which doubled from the first quarter's HKD 14.8 billion. The repurchase average price increased from HKD 290.6 to HKD 361.8, an increase of nearly 25%. It is worth mentioning that Tencent's repurchase amount this year will exceed HKD 100 billion, doubling from last year's HKD 49 billion. What is the concept of a one trillion repurchase plan? This amount is the sum of Tencent's total repurchase amount in the past ten years, which proves the management's confidence in future development and attaches importance to the demands of investors. Through various means such as repurchase cancellation, dividends, and physical distribution, Tencent has truly given back to shareholders in the capital market while achieving performance growth. One, the significance of a trillion repurchases is actively emerging. Looking back at the past two years, since Tencent's major shareholder Prosus began to reduce its holdings, the stock price has been somewhat suppressed. In particular, there have been regular trading behaviors in the market when Hong Kong stocks perform poorly. For example, Hong Kong-listed companies have a "silent period for repurchase" in the month before the financial report is released, during which repurchase is not allowed. This caused great upward pressure on the stock price whenever Tencent entered the repurchase silent period before last year. As can be seen from the following data, of the five silent periods before the end of 2023, only Tencent's stock price in October-November 2022 rose, and in other times it fell. However, since the end of last year, Tencent's stock price has risen during two consecutive silent periods. Especially after the launch of the trillion-dollar repurchase plan this year, the repurchase volume has far exceeded the number of shares sold by major shareholders. Therefore, whether it is on normal trading days that can be repurchased, or during silent periods, the impact brought by the sale of major shareholders can be ignored, and this point is being formed by market consensus. For example, during the repurchase silent period from January to March this year, which happened to be the worst half-year Hong Kong stock market, the Hang Seng Index fell to 14,800 points. Tencent's performance during this period was significantly better than before. Even though the short selling ratio once reached 20%, the stock price did not fall, and the final interval increase was 6%. After the release of the better-than-expected 2023 annual report and the restart of the repurchase at the end of March, Tencent's stock price performed even better in the second quarter, with an increase of nearly 25%. During the same period, the Hang Seng Index and the Shanghai and Shenzhen Composite Indexes fell significantly, with gains of only 8% and 4%, respectively, while Tencent significantly outperformed the Hong Kong stock market with a gain of 25%. Behind this phenomenon, there is no doubt that the trillion-dollar repurchase plan, which has doubled from last year's amount, has played an important role. More importantly, after the repurchased shares are cancelled, Tencent's share capital has been declining for three consecutive years. Since 2021, Tencent's total share capital has decreased from 9.608 billion shares to 9.355 billion shares. In the first quarter of this year, Tencent issued ordinary shares decreased by 1.1% compared to the previous quarter, and the repurchased shares have also been gradually cancelled since this year. This trend will continue to increase earnings per share and further enhance shareholder value. (Caption) Starting in 2022, Tencent has increased its repurchase efforts. With the repurchase cancellation, the company's total share capital has gradually decreased.

Source: Yaya Hong Kong Stock Circle Author: Kyle The weather is good today The weather is good today.

Two weeks ago,$CR BEVERAGE (02460.HK)$it was listed on the Hong Kong stock market, raising 4.9 billion Hong Kong dollars to become the second largest IPO in Hong Kong this year, with an oversubscription rate exceeding 234 times. It introduced cornerstone investments from UBS, China Travel, Wildlife WILLOW Limited, China Post Insurance, Oaktree, and others, with cornerstone investors subscribing to 2.4 billion Hong Kong dollars, nearly half of the IPO amount.

As the second largest player in the packaged water market, China Resources Beverage has attracted considerable attention after its listing. First, its strong state-owned background related to China Resources, coupled with a luxurious lineup of cornerstone investors, demonstrates that both China Travel Group, insurance institutions, and foreign capital are optimistic about the future growth story.

Second, according to next year's profit expectations, China Resources Beverage currently has a price-to-earnings ratio of around 15 times, compared to its competitors.$NONGFU SPRING (09633.HK)$The 25 times PE ratio suggests that the valuation is relatively cheap. However, to achieve a 15 times PE ratio, the future premise, based on what institutions provide at 20 times PE, is that bottled drinks need to achieve a 40% annual growth rate.

However, based on the post-listing decline, there is significant divergence in the market regarding the growth story of china resources related beverages.

1. Net margin difference

According to the prospectus, china resources related beverages' revenue in 2023 was 13.5 billion yuan, a year-on-year growth of 7%, with net income of 1.33 billion yuan, a year-on-year growth of 34.3%. In terms of revenue structure, the bottled water revenue was 12.45 billion yuan, accounting for over 90% of the revenue, while beverage revenue was only 1.07 billion yuan.

The market currently criticizes china resources related beverages' profitability, which has a considerable gap compared to nongfu spring. In 2023, china resources related beverages had a net margin of 9.8%, while nongfu spring had a net margin of 28%.

There are two reasons for the net margin gap.

One is in the revenue structure; nongfu spring's income from tea + beverages + juice has already surpassed that of bottled water, with beverages currently being the major profit contributor for nongfu spring.

Nongfu spring 24H1: bottled water revenue was 8.53 billion yuan, a year-on-year decline of 18.3%; tea beverage revenue was 8.43 billion yuan, a year-on-year growth of 59.5%; functional beverage revenue was 2.75 billion yuan, a year-on-year growth of 12%; juice beverage revenue was 1.84 billion yuan, a year-on-year growth of 9.3%.

Even though nongfu spring faced online bullying in the first half of the year, and the sales of packaged water fell more than it ever did during the mask period, the growing beverage sector managed to hold the situation. The profit margin for nongfu spring's tea drinks is 44%, higher than the 32% margin for packaged water. In contrast, china resources related beverage's tea drink revenue accounts for less than 10%, and the tea drink profit margin is 29%, lower than the 50% of packaged water.

Nongfu and china resources are at different stages of development, with nongfu's beverage profit elasticity being higher than that of china resources, resulting in a significant difference in gross margins between the two. In 2023, nongfu's gross margin was 59.5%, while china resources' gross margin was 44.7%, a difference of 15%.

Another reason for the overall profit margin gap is that china resources related beverage has a higher selling expense ratio. In 2023, nongfu's selling expense ratio accounted for 21% of total revenue, while china resources' selling expense ratio accounted for 30% of total revenue, nearly 10% higher than nongfu. The main reason is that china resources is investing in freezers to expand channels and capture market share.

According to the statistics from 'the rivers and lakes of the rest of life,' the data may not be accurate, but it roughly shows the gap between the two. It can be seen that nongfu spring and yibao have almost the same costs, with differences in retail prices.

Nongfu spring's ex-factory price is 0.72 yuan per bottle, while yibao's ex-factory price is 0.5 yuan per bottle. In the end, after spreading the costs, nongfu spring's net income is 0.2 yuan per bottle, while yibao's net income is 0.05 yuan per bottle. (The data is not precise, just a rough reference.)

The difference in retail prices is due to nongfu spring having a larger market share. Nongfu spring holds 23.6% of the packaged water market share, while yibao holds 18.4%, making nongfu's distribution channels broader. Yibao aims to capture market share in strong areas of nongfu spring through low pricing, alongside investing in freezers to expand its channels, so it can only set a lower retail price than nongfu, giving some profit to businesses. Otherwise, at the same price point, yibao still cannot compete with nongfu, leading to a retail price that is 0.2 yuan lower than nongfu's, which is the source of the profit gap.

Considering that this year, nongfu launched green water at 9.9 yuan per box, this will pose a greater competition for yibao. Yibao will either have to maintain its current price or also lower its price to compete in the market.

Combining the aforementioned revenue structure and sales expense ratios, this explains why the market gives nongfu spring a PE of 25 times, while china resources related beverage only receives 14-15 times PE.

It is noteworthy that yibao actually has some room for price reduction. Because previously yibao mainly operated under an OEM model, china resources beverage mentioned in its prospectus that it will launch its own production capacity in 2025, and will continue to expand capacity in 2026-2027 to increase the gross margin of packaged water.

As of 2023, china resources beverage has a total production capacity of 18.8 million tons, of which its own factory capacity is 6.7 million tons, accounting for one-third, while the capacity of OEM plants is 12 million tons, accounting for two-thirds. Production will start at 18.8 million tons in 2025, and it should reach around 100% in 2026.

The increase in self-owned capacity drives the gross margin, as seen in the changes in the chart below. In 2023, the gross margin of packaged water was 45%, and it has already increased to around 50% in the first four months of this year.

It is estimated that when self-owned capacity reaches 100%, the gross margin of bottled water may be around 60%. In that case, there is also room for price reductions on purified water to defend against nongfu spring's green water.

This also represents a difference in market expectations, as institutions generally do not believe that nongfu's green water will impact yibao, and may even lead yibao to reduce prices to offset some of the gross margin increase driven by self-owned capacity.

Looking at the beverage business now, institutions compare china resources beverage to nongfu spring in 2016, when nongfu was in a single product model relying solely on selling water for profit; after 2017, nongfu spring gradually developed into a 'beverage company' with multiple product revenues, with revenue increasing from 17.5 billion yuan in 2017 to 43 billion yuan in 2023, and net margin rising from 19% to 28%.

If china resources beverage can improve profitability of packaged water and find high growth in bottled drinks, becoming a multi-product revenue company, then it is reasonable to view future growth with a 20x PE ratio.

But thinking in reverse, with bottled water facing the impact of green water, and china resources beverage increasing sales expenses to develop channels, nongfu spring is the one with greater initiative, is the beverage market really that easy to enter?

II. The Challenging Path of Tea Beverages

Currently, institutions are bullish on the development logic of beverage products for two main reasons: first, the management of china resources related is trustworthy, bottled water has advantages and can provide good channels for beverages; second, it copies the beverage development path of nongfu spring. Of course, there are reasons for retail investors to be pessimistic about the beverage development.

As for the management of china resources related beverages, they are indeed trustworthy, but this does not necessarily mean that a good management team can succeed in the beverage market; otherwise, why hasn't china resources related's beverages taken off in the past decade? Trustworthy management and the ability to create blockbuster products are not necessarily correlated.

Looking back at the beverage product development of china resources related. As early as 2011, china resources related partnered with japan's Kirin to develop a beverage line, focusing on "afternoon milk tea" and "hot coffee" products, mainly selling bottled milk tea and coffee beverages. Among the players at that time were Assam milk tea, Yulemei, Nestle coffee, etc.

These two products sold relatively mediocre. In earlier years, advertisements could frequently be seen, but with the rapid development of offline milk tea/coffee shops, bottled milk tea/coffee in freezers have lost competitive power; lacking innovation and falling short in flavor and ingredients compared to the ubiquitous milk tea/coffee shops on the streets, while prices tend to be around 9.9 yuan for Luckin or about 10 yuan for Heytea or Mixuebingcheng.$CHABAIDAO (02555.HK)$Therefore, it is relatively difficult for bottled milk tea and coffee beverages to develop in the long term.

The only bottled milk tea brand that has been doing increasingly well is Assam Milk Tea, its competitor many years ago, listed in Hong Kong.$U-PRESID CHINA (00220.HK)$In 2016, u-presid china's milk tea revenue was 3 billion yuan, with a market share of 72%; by 2023, u-presid milk tea's revenue reached 6.3 billion yuan, growing about 5-10% each year. The current market share has no specific statistics, but based on this growth momentum, Assam's market share in the bottled milk tea category may have reached over 80%.

In contrast, the total revenue of china resources related's beverage business in 2023 was only 1.068 billion yuan, indicating that historically, its performance in bottled beverages has been relatively mediocre. However, past shortcomings shouldn't be applied to the present; let's look at the recent growth in popular tea beverages and how china resources related has made its arrangements.

Against the backdrop of tea and coffee shops rapidly spreading across the country, only the growth of bottled tea beverages has been strong in recent years. This is at least a category of products that current milk tea and coffee shops find hard to replace, as they are affordably priced and have appealing flavors.

Thus, it can be seen that even as the market for milk tea types like afternoon milk tea continues to shrink, dominated by Assam, brands like Master Kong's iced black tea and Nongfu Spring's Dongfang Shuying have remained on the market for over a decade, and are thriving even more. The change here reflects a shift in consumer priorities from "sugary drinks" to "sugar-free drinks."

Specifically, when people go to convenience store freezers to buy water, they should be able to feel the rapid growth of tea beverages in recent years, continuously expanding from oolong tea to more varieties of bottled tea drinks, such as oolong tea, barley tea, jasmine tea, green tea, and so on.

In the past two years, the fastest-growing products are Nongfu Spring's Dongfang Shuying and those from japan.$Suntory Beverage & Food (2587.JP)$Currently, nongfu spring and Suntory account for approximately 80% of the sugar-free tea market, while brands like Yuanqi Forest and Kangshifu account for about 20% market share.

From the product line of china resources related beverages, they have also been active during the same period. China resources launched chrysanthemum tea and sugar-free oolong tea in 2019 and 2021, and also introduced juice products from 2018 to 2022. However, as shown in the image, these two products currently do not rank due to intense competition.

Looking at the more mature japanese market for tea beverages, the prices of tea drinks have been gradually decreasing, mainly due to low entry barriers and increasing competition, which often leads to discounts on tea beverages. This trend is the same for both japan and the domestic market.

Since 1990 in japan, the proportion of carbonated drinks has been decreasing, while the production of sugar-free tea has been increasing year by year, becoming the largest category in the soft drink sector.

Data shows that in 2022, the sugar-free rate of ready-to-drink tea in china was 7.7%, which has a significant room for improvement compared to japan's 85%. The per capita consumption of ready-to-drink tea in japan is about six times ours. The japanese market finally has 4 remaining players, with a concentration exceeding 90%, which are$ITO EN (2593.JP)$、Suntory,coca-cola (KO.US) This is Kirin (in cooperation with china resources beverage).

What is the current situation of the domestic tea beverage market? One can easily see by walking into convenience stores like 711, FamilyMart, and Lawson that the steepest discounts in the convenience store refrigerators are on sugar-free tea drinks, with almost every major brand offering buy two get one free, buy two get two free, or half price on the second bottle promotions.

In this intensely competitive trend, every time you visit a convenience store every other week, you will see more new sugar-free tea brands being stocked and discounted. This reflects the current situation of sugar-free tea, where penetration is not high and competition is fierce.

For new brands like china resources beverage that want to enter the sugar-free tea market, the cost of expanding market share is enormous. First, production costs must be sufficiently low, and channel investment must be substantial. Second, should your product be discounted? In the case where everyone is running promotions, how much should you discount to capture market share while still making a profit?

From forecasts, beverage revenue is expected to grow from 1.5 billion in 2024 to 2.7 billion in 2026, but this incremental growth is also hard to rank in the tea category.

Conclusion

Overall, the divergence between retail investors and institutions regarding china resources beverage is reasonable. The optimistic view sees packaged water improving gross margin and beverage development driving growth. However, if the development is not so optimistic and competition intensifies, could the pessimistic view suggest that the impact from nongfu spring reduces some of the gross margin improvements, and that beverage development performances are average?

Institutions took in so much stock before and after the IPO, certainly not to see china resources related drinks turn into income stocks like u-presid china and Kang Shifu, but it can be confirmed that the growth path for this beverage is not easy. If there is no optimistic narrative about beverage growth, it might, to some extent, offer even less shareholder return than u-presid china and Kang Shifu.

But that is how the capital markets work; with differences and varying narratives, significant returns can be generated. The annual reports of nongfu spring and china resources related drinks are worth looking forward to.

Editor/Rocky