Introduction to this report:

Packaged water and sugar-free tea are at the top of the race. The market continues to thrive in repair and superimposed tea; multiple barriers to channel+brand+water source+innovation; while maintaining a high level of profitability. The current stock price corresponds to the 2025 PE 26X, which was covered for the first time, and a “gain” rating was given.

Key points of investment:

Investment suggestions: The core drives the restoration of the market share of packaged water, and high growth in tea and other categories.

For the first time, the 2024/25/26 EPS was given 1.11/1.26/1.42 yuan. The current stock price corresponds to 2025 PE26X, giving it an “increase” rating.

Packaged water and sugar-free tea are the first in the race, and the market continues to thrive as a result of restoration and superposition of tea drinks. The company's core categories have an advantageous monopoly position in the segmented circuit (7-8 percent share of natural water and 5-6 percent share of sugar-free tea). Due to the first decline in the 1H24 packaged water business due to public opinion incidents and loss of market share, the company launched a new product “Green Bottle Pure Water” in April-April. We believe that this will lead to an increase and may block competition. It is expected that the packaged water market share is expected to gradually recover to pre-public opinion levels. Meanwhile, tea drinking became the company's second growth curve with a CAGR (17-23) of 30%, accounting for 38% of 1H24 revenue, leveling the proportion of packaged water for the first time. We expect the scale of the unsweetened tea industry to continue to expand. The revenue scale of the company's large single product “Oriental Leaf” is expected to reach 12/15 billion in 2024/25, or drive the company's overall revenue to achieve a 14% increase in CAGR (24-26E).

Category pricing rights guarantee long-term profitability, and growth sustainability and stability are superior to peers.

Based on factors such as first-mover advantage, monopoly position, brand premiums, and multiple barriers, the company has strong category pricing power. The retail price of red bottle water is 2 yuan (1.5 yuan for competitive products), and the gross profit margin is 55-60%, which is clearly superior to peers. While green bottled water is growing, sales of red bottled water have also picked up recently. In the tea industry price war since 3Q24, Oriental Leaf is the brand that has participated in the shortest time, and sales are currently stable. We expect the share of tea to operating profits will continue to increase (34% in 2023). Influenced by public opinion and competitive factors, we expect the net interest rate to be lowered by about 1.5 pct to 26.7% year on year in 2024. Even so, we believe that its long-term profitability will not be affected. Compared with our peers, its growth is more stable and sustainable. We predict that the profit margin for 2025-26 may remain stable within a reasonable range of 26-27%.

There are multiple barriers to channels, brands, innovation and water sources, and the competitive advantage is remarkable. The number of the company's terminal outlets reached around 2.5 million, and the market coverage rate dropped by nearly 80%. The company forwardly lays out 12 high-quality water sources, insists on water source production, and combines high-end quality with advertising and marketing to build a brand moat. Adhere to category innovation leadership and maintain product vitality.

Risk warning: Fermentation of public opinion, intensification of competition, changes in demand, pollution of water sources.