Revenue and profit both achieved high single-digit growth in the first half of 2024. In the first half of 2024, Nongfu Spring's sales increased 8.44% year over year to 22.17 billion yuan (RMB, same below). Gross margin fell 1.4 percentage points to 58.8% year-on-year, mainly due to 1) the impact of new product launches and promotions for pure aquatic products, 2) the decline in sales of packaged drinking water products in the first half of the year led to an increase in fixed cost sharing, and 3) the increase in the price of raw juice ingredients. The impact of all factors was quite balanced. Net profit increased 8.0% year over year to 6.24 billion yuan, corresponding to a net profit margin of 28.1%, which is still high (28.2%/28.4% for the first half of 2023 and 28.4%, respectively).

The packaged drinking water business declined significantly due to public opinion; the tea and juice business performed well. Although drinking water sales were good in January-January of this year and achieved double-digit year-on-year growth, the company began to be influenced by online public opinion at the end of February, and drinking water sales gradually declined, causing the company's packaged drinking water business to decline by more than 18% to 8.5 billion yuan year-on-year in the first half of the year. The increase in consumer acceptance of ready-to-drink tea (especially sugar-free tea) led to an increase in per capita consumption. Coupled with the steady increase in the company's sales rate and the continuous introduction of new products (such as the new flavor “jasmine lemon tea” introduced in the first half of the year), Nongfu Spring's tea business achieved a year-on-year increase of 59.5% to 8.4 billion yuan in the first half of the year. Through continuous brand building for various juice sub-brands (such as Farmer's Orchard and Water-Soluble C100) (such as Water-Soluble C100's “blood orange flavor,” which further emphasizes the brand's high vitamin C content characteristics), the company has achieved growth far exceeding the industry's performance in the face of weak overall juice market performance. The company's juice business grew 25.4% year over year to 2.1 billion yuan in the first half of the year.

How do you view the pattern of green bottle water and red bottle water? The company launched pure aquatic products (i.e. green bottled water) in April of this year, and is still in the process of consumer promotion and terminal promotion. Due to the short time to market and the product has only one specification (550ml), the impact on the company's overall performance is limited. At the same time, natural water and purified water have different uses and scenarios, so there is room for growth in the corresponding consumer demand fields. The company plans to ensure the healthy growth of the two products through differentiated promotion of categories and channel construction and promotion.

Maintain the purchase, with a target price of HK$33.74. The influence of public opinion is gradually declining. Drinking water sales this summer (July and August) are in line with the company's expectations, and overall business is expected to recover steadily. The rapid growth in the tea and juice business reflects the company's ability to build brands and promote new products. Our latest target price of HK$33.74 is based on the 2024-25 average price-earnings ratio of 23 times (the average price-earnings ratio for the past three years was reduced by 2.5 standard deviations). We are still optimistic about Nongfu Spring for a long time and maintain our purchases.