In his book principles, Ridario concludes that all kinds of successful start-up projects are summed up in three simple words: rigid demand, high frequency, and big market.

Wang Xing also said directly that high frequency has a great advantage over low frequency.

Since ancient times, most of the big business has focused on "food, clothing, housing and transportation", because human survival needs to meet these most basic high-frequency rigid needs.

In clothing, food, housing and transportation, the highest frequency is food, and the highest frequency of food is drinking.The business related to drinking is the high-frequency rigid demand in the high-frequency rigid demand.It is not surprising that NONGFU SPRING CO., LTD. (HK:09633) has been so successful.

Even a company with a market capitalization of nearly HK $1 trillion, the founder of the sixth richest person on the Hurun Global Rich list.Only a limited part of the market has been cut off.

Competitive advantage in a large market with high-frequency rigid demand, gross profit margin close to 60% and rising year after year, ROE of more than 40%, abundant cash flow brought by upfront and post-goods sales system, brand value that cannot be defined by a specific amount. An enterprise with few shortcomings is bound to be popular in the capital market.

But no matter how bullish the capital is, a price-to-earnings ratio of more than 100 times earnings is too high for a consumer company.This is also one of the core reasons for the recent withdrawal of nearly 40 per cent of NONGFU SPRING CO., LTD. 's share price.

By 2021, NONGFU SPRING CO., LTD. 's share price had reached the point where it had to fall-- andAfter such a sharp fall, valuations of more than 70 times earnings are still not low.

Unlike the securities analysts who make quantitative analysis, this article interprets the enterprise from the perspective of qualitative analysis. For investors, you can get the truest answer by looking at it from as much perspective as possible.

Exclusive brand, high valuation

People unscrew the caps of bottles and drink packaged water and drinks in various scenes, repeatedly contributing profits to beverage companies.

In China, packaged water, protein drinks and fruit juices account for half of the soft drink market, of which packaged water alone accounts for 20.34%. Beverage-soft drink-packaging water-natural water, 2 yuan per bottle of packaging water is the mainstream price of the current market, NONGFU SPRING CO., LTD. basically monopolized this range.

The power of monopoly is strong. For consumer enterprises, it is difficult to achieve 100% monopoly in the traditional sense and narrow sense, but it can achieve the "monopoly" of natural water to a certain extent.

For enterprises, this kind of monopoly usually means the abandonment of interests and the possession of interests.

The so-called abandonment lies in that while NONGFU SPRING CO., LTD. occupies the market by virtue of the power of products, brands and channels, he gives up his dominant position in the price of packaged water and does not seek active and sustained price increases to make profits. part of the profits that could have been obtained through price increases were transferred to consumers.

By giving up this part of the potential profits, NONGFU SPRING CO., LTD. gained stronger brand power and market control:Users can completely save all choices and thinking, with 2 yuan to buy a bottle of NONGFU SPRING CO., LTD. 's natural water.This is the side of NONGFU SPRING CO., LTD. 's monopoly on the natural water market.

The role of brand power tends to be underestimated in the Internet era.What we see is the rise of many new brands through Internet channels, judging that the original brand control will be weakened.

But the actual situation is that although the industrial and product environment is becoming complex, there is no obvious change in consumers' consumer psychology and behavior patterns, and consumers will still equate strong brands with specific consumer goods. in order to reduce the time and energy needed for decision-making and judgment.

To sum up with a common saying, NONGFU SPRING CO., LTD. occupies the "consumer mind".

This means that the certainty of product sales for enterprises, and the most pursuit of secondary market investment is certainty. So since listing, NONGFU SPRING CO., LTD. 's valuation has always been at a high level. NONGFU SPRING CO., LTD. 's TTM has never been lower than 60 times earnings since IPO, rising as high as 138.70 times at one point in early January 2021.

How high is this number? We can compare it with the following extreme cases:

In 2015, at the height of the gem bubble, the price-to-earnings ratio was 144 times earnings.

On November 5, 2007, Petrochina's first day on the market, the share price was 48.6 yuan, with a price-to-earnings ratio of 64 times.

During the global dotcom bubble in 2000, the overall price-to-earnings ratio of companies in the Nasdaq index was as high as 200x. Cisco Systems, one of the leaders, had a price-to-earnings ratio of more than 200x.

It is not impossible for a listed company to have an ultra-high price-to-earnings ratio, but it needs reasonable support. Listed companies that can maintain a high price-to-earnings ratio without being killed need to meet two conditions at the same time:Net profit is growing at a high speed, and this growth is sustained.

Many securities firms have made a detailed and comprehensive analysis of the packaging water industry and come to a definite conclusion:NONGFU SPRING CO., LTD. 's net profit growth can be sustained for a long time. This also gives capital the confidence and confidence to buy at a high price-to-earnings ratio.

But in terms of the growth rate of net profit, no brokerage dares to give an ultra-high figure.

High certainty and high expectation

No matter how successful the operation is, the average annual net profit growth of consumer listed companies is relatively limited.

There are few companies with high net profit growth and sustainable growth in the A-share market, and most of them are valued at a very high level by the market, of which SZ:300015 is a typical representative.

Due to the unique way of "industrial fund + in vitro incubation + listed companies to buy back hospital assets", under the background of the sustained high growth of the domestic ophthalmology marketEarl Ophthalmology can ensure that the annual net profit growth rate is more than 30%.This has been the case every year since 2014, with net profit growing at a compound rate of 32% over the past decade.

As a result, Capital has given it a high price-to-earnings ratio, which has averaged nearly 100 times over the past five years and was fired to an all-time peak of 234.56 times in early 2021. After a substantial withdrawal, it is still as high as 120 times.

The charm of certainty of earnings growth can be seen from this.

But it is not easy for consumer companies to achieve net profit growth of more than 30 per cent a year, just like Ayre ophthalmology.

On the one hand,Although consumer goods have a brand moat, most of the similar products are highly substitutable, and there are not many enterprises that can achieve monopoly + continuous price increases at the same time.

On the other hand, most of the consumer segments have been "cultivated" for a long timeThere are few segments of industries with low penetrationThis means that it is difficult for enterprises to achieve ultra-rapid growth, and the growth rate of net profit is naturally limited to a reasonable level.

For example, Haitian flavor industry, known as "soy sauce", is one of the representative consumer stocks with growth certainty in the capital market except Maotai, with a compound growth rate of 20% of its net profit in the past five years.

With a perennial 20 per cent net profit growth, Haitian Flavor has achieved an average price-to-earnings ratio of more than 55 times over the past five years, with a maximum of 114.4 times.

Buffett's investment in Coca-Cola Company in history is a very typical case of high-growth consumer stocks. The largest beverage company in the United States carried out an international expansion of "going global" in the late 1980s.The compound growth rate of net profit reached 14.7% in the 10 years from 1988 to 1998.The enterprise's net profit and valuation rose synchronously, resulting in the "Davis double-click". Buffett held it for 10 years, and his net investment increased by 12.64 times.

However, after its price-to-earnings ratio reached 46.47 times in 1998, it did not continue to break through, but fell to 12.7 times in more than a decade. During this period, Coca-Cola Company's net profit can still grow by 10% a year, but the stock price has been standing still.

It can be seen that, for the reasons previously mentioned, no matter how successful the operation is, the average annual net profit growth of consumer listed companies is relatively limited, unable to reach the 30% or higher level of Ayre ophthalmology.

The annual growth rate of 15% or 20% of net profit is enough to enable listed companies to achieve high valuations and bring excess returns to investors. However, if investors intervene in the stage of excessive price-to-earnings ratio, they are likely to fall into stagnant earnings or even losses.

Specific to NONGFU SPRING CO., LTD., according to some brokerage researchersAccording to the best estimate, the compound growth rate of net profit will basically be 20% in the next five years.The actual situation can only be less than this number, not more than this number.

According to the 2020 annual report, due to the impact of the epidemic, its annual operating income fell 4.8% compared with 2019, with a net profit of 5.277 billion yuan, an increase of 6.6% over the same period last year. At the 17 per cent annual revenue growth rate from 2017 to 2019, coupled with the highest gross profit margin in 2020, net profit growth should be 20 per cent.

If it is optimistically estimated that NONGFU SPRING CO., LTD. can maintain such a good result for many years to come, then it will have the same certainty as the sea and sky flavor industry.And the corresponding price-to-earnings ratio of about 55 times.

According to the Frost Sullivan report, in terms of retail sales, China's soft drinks market is 991.4 billion yuan in 2019. China's soft drinks market is expected to maintain a compound growth rate of 5.94 percent from 2019 to 2024, and the growth rate of NONGFU SPRING CO., LTD. will greatly exceed the growth rate of the soft drinks market.

The 20% growth rate and the average price-to-earnings ratio of 55 times earnings are already quite optimistic figures.But it is obvious that the average price-to-earnings ratio of NONGFU SPRING CO., LTD. since its listing has been close to 90 times, which has long exceeded the level of the sea and Tianwei industry.

Valuation benchmark, high risk

NONGFU SPRING CO., LTD. played a subtle role in the unprecedented rise in consumer stock valuations.

Of course, the stock price is never determined only by the performance of listed companies, but by people's risk preference and the financial situation of the enterprise. Judging from the situation in recent years, with the increase of global political and economic uncertainty, enterprises with profit certainty are generally given a high premium.

Consumer companies are favored by investors for their certainty of demand and better cash flow.

One of the most typical is Guizhou Moutai, whose share price has risen fivefold in the past three years, known as "everything is good".

However, after a continuous rise since 2018, the share prices of excellent consumer companies have generally increased by more than twice as much, and even some companies that do not have the certainty of high-speed growth in their performance have enjoyed the pursuit of capital.

The more extreme case is SH:300999, a grain and oil company with a perennial net profit rate of about 3%, a gross profit margin of just over 10%, and a risk of substantial fluctuations in raw material prices. It is also listed as "Youmao" and was once given a price-to-earnings ratio of more than 100 times by the market.

During this unprecedented rise in consumer stock valuationsNONGFU SPRING CO., LTD. played a subtle role.Due to the much higher proportion of institutional investors in the Hong Kong stock market than A shares and the participation of a large number of overseas mature investment institutions, NONGFU SPRING CO., LTD. 's high valuationTo a certain extent, it can "corroborate" the high valuation of A-share consumer enterprises and strengthen the overall overvaluation situation.

To put it simply, NONGFU SPRING CO., LTD. is providing a valuation benchmark for domestic consumer stocks: "what are we worried about when big international investment banks can give such high valuations?" "

Of course, the Hong Kong stock market has not only the high valuation of NONGFU SPRING CO., LTD., but also the higher valuation of Pop Mart International (HK:09992), since the listing of the average price-to-earnings ratio of as high as 135 times, the market capitalization once exceeded HK $100 billion.

Giving higher valuations to consumer stocks is not an overnight thing, but a rule summed up in the development of capital markets over the past few decades or even hundreds of years.

From 1957 to 2003, 11 of the 20 largest cattle stocks with the highest annualized returns in the United States came from consumer stocks.

Among the "beautiful 50" quotations in the US capital market, the highest proportion is consumption (including essential and optional consumption), including PepsiCo, Anheuser-Busch Inbev SA, Gillette, Walmart Inc, Chunguo Le and McDonald's Corp.

According to the observation and statistics of economist Ren Zeping, the beautiful 50 has significantly surpassed the S & P 500 since 1969, with an overall increase of 49.2%, while the S & P 500 rose 28.2% over the same period, peaking in 1972, but during the market volatility of 1973-1974, gave up almost all the gains.

It is true that most of these excellent consumer companies have become "friends of time" since then, expanding and growing with the development of the US economy, leading the S & P after the 2008 financial crisis.

But back to the peak of the beautiful 50 market, if investors buy these excellent consumer stocks during the period of the highest price-to-earnings ratio, they will basically fall into a period of stock price stagnation or even decline for more than a decade, just like buying Coca-Cola Company in 1998.

Unlike many companies,If it is only for operational considerations, NONGFU SPRING CO., LTD. can not be listed at all.As an independent unlisted company, it can complete the operation, expansion and future transformation of the enterprise by virtue of its own funds.

If Zhong Jiuyi chooses to embrace the capital market and expand the enterprise value to the public value, he will inevitably accept the public pricing.Pricing is hard to make sense most of the time.This has been the case since the listing, and it will be the same in the future. It is only a matter of time before underestimates appear.

However, no matter how the stock price changes, there is no serious risk problem at the operational level. Regardless of the rise or fall of stock prices and valuations, investors should pay more attention to the latter-in a huge high-frequency rigid demand market, with an unbreakable brand and ten production bases and capacity reserves. For competitors, NONGFU SPRING CO., LTD. 's face is terrible.