We expect the company's revenue to increase by 31% year-on-year in the second half of the year, better than the growth rate in the first half of the year, market expectations and previous management guidance. We expect the company's average unit price to remain stable without price increases, and product upgrades and even the launch of new products will bring about a low increase in unit prices. By category, bottled water has maintained a steady growth rate of around 9% (about 10% for the whole year). The growth rate of tea drinks exploded, doubling in the second half of the year (about 80% for the whole year); juice drinks and energy drinks are each expected to record growth of more than 20% (around 20% + for the whole year). In terms of gross margin, due to the decline in PET purchase prices in the second half of last year, we believe that gross margin will stabilize at around 59% in the second half of the year, driving the annual gross margin to increase by 2 percentage points to 59.4% year-on-year. The company increased its promotional investment in the second half of the year according to seasonal demand, but the three-fee ratio remained stable throughout the year, and the rate growth rate was in sync with the revenue growth rate (about 27%). Overall, we expect net profit to reach 5.5 billion yuan in the second half of the year, an increase of 39% over the previous year. Net profit for the full year was exceeded by 26.5%, slightly higher than management and market expectations. Considering the possibility that Nongfu Spring's performance may exceed expectations, we maintained our purchase rating and added the company to our short-term recommendation list (Maotai, Yili, Samsonite).

Differentiation of product ingredients is the key to long-term growth. The main driving force for growth depends on consumption trends such as more natural, healthier, and more attention to raw material sources and ingredients. For example, in the case of water, consumers who pay more attention to the source of water, will also pay more attention to the ingredients in the drink, and gradually switch from high-sugar drinks to low-sugar and sugar-free drinks. In terms of water sources, the company has an absolute advantage in the field of natural water (compared to pure water), and last year it also strengthened this kind of publicity about various water sources. For example, the company launched an advertisement for 4 water sources last year, and invited a large number of consumers to visit the factory, so that consumers have a better understanding of the company's natural water sources.

Steadily promote consumption appreciation through product transformation. Nongfu Spring's consumption upgrade was from high sugar to low sugar to no sugar, and then from pure water to natural water. Oriental foliage is a very clear example. There are actually many sugar-free teas that cost 3-4 yuan on the market, but Oriental leaves have always been anchored in the 5 yuan price range. Even if it sells for 6 yuan on some platforms, it is still very sought after by consumers.

Revision of profit expectations. In summary, we raised the average revenue of tea drinks by about 10% in 2023-25E, resulting in a 3-9% increase in total revenue during the same period. We assume that the company will continue to benefit from the cost advantage brought about by falling PET prices in the second half of 2023 and next year, and then increase gross profit by 4-9%. Overall net profit increased by 8-10%.

valuation. The updated target price is based on 42.0 times P/E (from 50.0 times) at the end of 2024 (from mid-2024), and the multiples are compared to the average estimate for the past 3 years (one standard deviation above the average).