Bottled water race is excellent, packaging rate improvement and consumption upgrade drive growth: according to Euromonitor data, we estimate that the terminal retail scale of the packaging drinking water industry is about 200 billion yuan, the factory caliber scale is about 1300-150 billion yuan, and the CAGR has reached 11% in the past five years, which is a sub-race with excellent growth and pattern in the trillions of soft drinks industry. in the short term, the industry growth mainly comes from the increase of consumption. At present, the per capita consumption of packaging water in China is lower than that in developed countries such as the United States and Japan. with the increase of urbanization rate and the increase of per capita disposable income, the penetration of packaging water in the offline market will continue to rise. on the other hand, residents' health awareness is awakened. the consumption scene and population of packaged drinking water extend to families, catering, the elderly, babies and so on. In the medium and long term, the upgrading of consumption will drive the average price of the industry to rise. Although the retail price of 2 yuan is the mainstream in the short term, the consumption proportion of natural water and natural mineral water is increasing, and the improvement of water quality requirements will promote the price belt switching of packaging water.Nongfu SpringIn 2019, the income of packaged drinking water reached 14.35 billion yuan, an increase of 21.8% over the same period last year, and the market share in packaged water reached 20.9%, surpassing the second place Ipoh and the third place Jingtian. CR2 grew rapidly from less than 40% of the market share in 2014 to nearly 60% in 2019, mainly from grabbing the share of products with a price of 1 yuan.

Steady and steady, control the lifeblood of water sources to build competition barriers: NONGFU SPRING CO., LTD. has always adhered to the requirements for water quality, and all its bottled aquatic products come from natural water sources. The company has a unique strategic vision and distributes ten high-quality water sources in advance to form a long-term and stable competitive advantage. Among them, Daxing'an Mountains and Changbai Mountain are mainly mineral water, Qiandao Lake and Wanlu Lake are mainly deep lake water. Emei Mountain, Wuling Mountain, Taibai Mountain and Wuling Mountain are mainly mountain springs. The company sets up a production base around the water source, covering the national market supply, effectively shortening the transportation radius, and the amount of water in the water source is sufficient, which can guarantee the long-term supply capacity; at present, the maximum amount of water extracted by farmers is 87,000 tons, but the actual water intake is only 33,000 tons. There is plenty of room for future capacity expansion, especially in Qiandao Lake and Changbai Mountain. We believe that water enterprises have a higher threshold for entry at the production end, with a capital investment of more than hundreds of millions of yuan, and it will take time for mining licenses, water intake permits and third-party water supply agreements to be obtained. enterprises that can control the lifeline of water sources will gain a first-mover competitive advantage.

Twin-engine drive, soft drink popular style frequently: in 2008, the company began to develop its beverage business and successfully created large items such as screaming, farmer's orchard and water-soluble C100. Tea Pi and Oriental leaves have increased well in recent years, and the beverage has become the company's second growth curve. Multi-SKU business model can effectively reduce the risk of performance fluctuations and enhance market competitiveness through channel cross-penetration: 1) different products can be aimed at different markets. For example, Tea Pi, Oriental leaves and NFC are aimed at the first and second tier markets, while screams and farmers' orchards are aimed at the third and fourth tier markets. 2) Multi-brands can occupy more shelf space, and dealers and salesmen can occupy a more favorable position when negotiating with stores; 3) Multi-product matrices can help reach consumers in different consumption scenarios, enhance brand potential energy and stickiness, and reduce seasonal fluctuations, but multi-brand operation also requires companies to have strong operational capabilities. At present, the company regards tea beverage as the second most important category after packaging water, and there is still room to improve the market share of sugary tea with a scale of about 600 million yuan. Oriental leaf brands and products in the field of sugar-free tea are all good, which can support the company to go further in this subdivision track.

The channel reform reinvigorates the vitality, and the information system enables the supply chain: after the company fell into the growth bottleneck in 2013-2016, the company successfully launched the dealer reform: 1) put forward different requirements for the establishment of dealers in different regions, and determine dealers through competitive bidding, and give dealers profit space in the price system. 2) adjust the salary system of the salesman, the labor relationship of the salesman is transferred to the company after the trial of the dealer, and give the salesman different degrees of commission incentive; 3) cut the cost, divide the cost into market cost and channel cost, the channel cost mainly depends on the dealer to achieve the performance target, and the market cost is mainly used for product display by the company and dealers. After the reform, the dealer area is clearly divided, and the enthusiasm is mobilized, which helps the company to achieve rapid sales growth from 2016 to 2019. At the same time, the company relies on the farmer partner system (NCP system) to improve distribution efficiency, real-time management of 4,000 + dealer network and 12000 sales team, can strictly control operational risks, and strengthen the control of dealers and terminals.

Focus on natural health research, tell a good farmer brand story: NONGFU SPRING CO., LTD. founder Zhong Kui is the soul of the company, is still mainly responsible for the brand and market, control the final decision-making power, at the beginning of its establishment of the enterprise in line with the original intention of long-term survival to focus on health research, create long-term products, define industry standards, occupy the advantage of the industry value chain. Although highly popular advertising slogans such as "NONGFU SPRING CO., LTD. is a bit sweet" and "We don't produce water, we are just porters of nature" have been praised for their marketing ability, it is supported by good water sources and is closely related to the company's strategy. NONGFU SPRING CO., LTD. 's controlling shareholder, Yangshentang Group, aims to "serve life and health". NONGFU SPRING CO., LTD. permeates this theme into every corner of the product to create a natural and healthy product cluster. in beverage manufacturing, packaging, publicity and other aspects are closely linked to the concept of health, and integrate new elements to shape new categories, but the connotation and core are consistent.

Investment advice: cover the buy-An investment rating for the first time, with a 12-month target price of HK $48. SOTP is used to value the company, including: 1) HK $39.4 in water business (based on water business segment performance of HK $6.11 billion corresponding to 60xPE in 2021), and HK $8.50 in beverage business (based on beverage performance of HK $3.46 billion in 2021 corresponding to 23xPE). We expect the company's revenue to grow by-3%, 21.1% and 18.7% respectively, and net profit to grow by 7.6%, 21.3% and 19.5% respectively from 2020 to 2022. The current stock price corresponds to a PE of 73.8 PE 60.9max 51.0 times from 2020 to 2022, and the target price is equivalent to 69x PE in 2021.