Summary of Nongfu Spring's Conference Call Company Overview - **Company**: Nongfu Spring - **Date**: August 27, 2025 Key Points Financial Performance - In the first half of 2025, Nongfu Spring achieved total revenue of RMB 25.622 billion, a year-on-year increase of 15.6% [4] - Net profit reached RMB 7.622 billion, up 22.1% year-on-year [4] - Gross margin improved by 1.5 percentage points to 60.3%, while net margin increased by 1.6 percentage points to 29.7% [4][2] - Sales and distribution expenses decreased by 2.8 percentage points to 19.6% of total revenue [4] Product Category Performance - All product categories experienced double-digit revenue growth: - Packaged drinking water: +10.7% [5] - Tea beverages: +19.7% [5] - Functional beverages: +13.6% [5] - Juice beverages: +21.3% [5][6] Cost Control and Efficiency - The increase in gross margin was attributed to lower procurement costs for PET, packaging materials, and sugar [7] - Reduced advertising and promotional expenses, along with lower logistics costs, contributed to the decrease in sales and distribution expenses [7] Water Source Development and Brand Promotion - Three new water sources were added: Hunan Badagong Mountain, Sichuan Longmenshan, and Tibet Nyainqentanglha, bringing the total to 15 nationwide [8] - Enhanced brand promotion through social media and sourcing activities, emphasizing the natural health concept [8] New Product Launches and Marketing Strategies - Introduced several new products, including a zodiac-themed bottle and new tea flavors, supported by online and offline marketing campaigns [9][10] - The company plans to continue exploring overseas markets, with core products launched in Hong Kong covering over 3,500 retail terminals [11] Future Outlook - Full-year revenue is expected to achieve mid-double-digit growth, with stable performance anticipated in the second half of 2025 [3] - Gross and net margins are projected to be slightly higher than in 2024 [3] Innovations and Market Trends - The company is focusing on product innovation, particularly in the functional beverage and juice segments, to meet consumer demand [18][25] - Nongfu Spring is also exploring new retail channels and customized products to cater to high-end consumers [13][14] Capital Expenditure and Growth Strategy - Capital expenditures are expected to be higher than in 2024, particularly for water source development and advanced equipment [19] - The company aims to balance the growth of pure water and natural water products while educating consumers on their differences [26] Dividend Policy - Nongfu Spring does not have a fixed dividend payout ratio, with a 70% payout ratio for 2024, and future dividends will be announced based on investment needs and cash flow [22] International Expansion Plans - The company is considering building a factory in the U.S. and will continue to expand its international presence, focusing on market demand [24] Conclusion - Nongfu Spring's strong financial performance, innovative product launches, and strategic market expansion position the company well for future growth in the competitive beverage industry. The focus on cost control, brand promotion, and consumer education will further enhance its market presence and profitability.

Investment Rating - The report maintains an "Outperform" rating for Nongfu Spring [2][5]. Core Insights - Nongfu Spring has returned to double-digit growth, with H1 2025 revenue reaching RMB 25.622 billion, a year-on-year increase of 15.6%, and a net profit of RMB 7.622 billion, up 22.1% [3][10]. - The packaged water business has rebounded, generating RMB 9.443 billion in revenue, a 10.7% increase year-on-year, as the impact of previous public opinion issues fades [11][3]. - The tea beverage segment has shown remarkable performance, achieving RMB 10.089 billion in revenue, a 19.7% increase, making it the largest revenue segment [12][4]. - Efficient expense management has led to improved profit quality, with a gross profit margin of 60.3% in H1 2025, up 1.5 percentage points year-on-year [13][4]. Financial Forecast - Revenue projections for 2025-2027 are RMB 49.95 billion, RMB 56.64 billion, and RMB 63.72 billion, with year-on-year growth rates of 16.4%, 13.4%, and 12.5% respectively [14][5]. - Expected net profits for the same period are RMB 14.44 billion, RMB 16.19 billion, and RMB 18.20 billion, corresponding to EPS of RMB 1.28, RMB 1.44, and RMB 1.62 [14][5]. - The company's ROE is among the top tier in the industry, justifying a valuation premium with a target price set at HKD 55.9 for 2025 [14][5].

Core Viewpoint - Nongfu Spring is gradually overcoming the negative impact of a public relations crisis, with a reported total revenue of 25.622 billion yuan and a net profit of 7.622 billion yuan for the first half of 2025, reflecting year-on-year growth of 15.6% and 22.1% respectively [2] Revenue and Profit Performance - In the first half of 2025, Nongfu Spring's total revenue reached 25.622 billion yuan, marking a 15.6% increase year-on-year, while net profit was 7.622 billion yuan, up 22.1% [2] - The company's core product, packaged drinking water, saw a revenue of 9.443 billion yuan in the first half of 2025, representing a year-on-year growth of 10.7% [3][4] - Despite the recovery, packaged water revenue has not yet returned to the 10.442 billion yuan level of the same period in 2023 [4] Impact of Public Relations Crisis - In early 2024, Nongfu Spring faced its largest public relations crisis, which led to a 21.3% decline in packaged water revenue, dropping from 20.262 billion yuan in 2023 to 15.952 billion yuan [3][4] - The company has since shifted focus away from its green bottle pure water product, which was introduced as a competitive strategy during the crisis [3][4] Product Category Performance - Packaged water's revenue share has decreased from 54.9% in 2022 to 37.2% in 2024, overtaken by tea beverages, which accounted for 39% of revenue in 2024 [5][6] - In the first half of 2025, the revenue share of packaged water and tea beverages was 36.9% and 39.4% respectively, indicating a widening gap [4][6] Challenges in Tea Beverage Segment - Tea beverage revenue reached 10.089 billion yuan in the first half of 2025, with a year-on-year growth of 19.7%, showing a significant slowdown compared to previous years [7] - The competitive landscape for sugar-free tea has intensified, prompting Nongfu Spring to expand its large packaging offerings to maintain market share [7][8] Strategic Developments - Nongfu Spring has expanded its water source locations to ensure quality and create competitive barriers, with three new water sources operational in the first half of 2025 [8]

Core Insights - Nongfu Spring reported a revenue of 25.62 billion yuan for the first half of the year, a year-on-year increase of 15.6%, and a net profit of 7.62 billion yuan, up 22.1% [1] - Following the positive earnings report, Nongfu Spring's stock price surged by 7.11% to 50.3 HKD per share, with a total market capitalization of 565.7 billion HKD [1] - The company's bottled water business showed signs of recovery, achieving a revenue of approximately 9.44 billion yuan, a 10.7% increase, after two consecutive quarters of decline [1] Financial Performance - In 2024, Nongfu Spring's total revenue increased by 0.5% to 42.896 billion yuan, but revenue from bottled water products decreased by 21.3% compared to the same period in 2023 [1] - The gross profit margin for the group increased from 58.8% to 60.3%, attributed to lower procurement costs for PET materials and packaging [2] Market Strategy - The company has shifted its focus from the green bottle pure water to the red bottle natural water, with the latter's share in bottled water revenue increasing from approximately 75% in the second half of 2024 to over 78% in the first half of 2025 [2] - Nongfu Spring has reduced subsidies for green bottle water significantly, with subsidies dropping to 1 yuan per case in the first half of 2025, down from 2 yuan [2] - The company is promoting larger packaging sizes of red bottle water (1.5L, 2L, 4L) to cater to household and restaurant needs, which aligns with consumer preferences for health-conscious products [6] Product Development - Nongfu Spring has expanded its product offerings, launching core products like natural drinking water and sugar-free tea drinks in the Hong Kong market, covering over 3,500 retail terminals [4] - The tea beverage segment generated 10.09 billion yuan in revenue, a 19.7% increase, although growth has slowed compared to previous years [7] - The company introduced a new carbonated tea drink, "Ice Tea," and plans to invest 2 billion yuan in its research and promotion [7] Supply Chain and Cost Management - Nongfu Spring has added new water sources in Hunan, Sichuan, and Tibet, bringing the total to 15 major water sources nationwide, which helps in reducing production costs and enhancing supply efficiency [5] - The company has achieved a significant reduction in sales expense ratio to 19.6%, the lowest in recent years, due to an expansion of its distribution network to 3 million terminals [6]

Core Viewpoint - The financial performance of Nongfu Spring in the first half of the year shows significant growth, with revenue reaching 25.62 billion yuan, a year-on-year increase of 15.6%, and net profit attributable to shareholders at 7.62 billion yuan, up 22.1% [1][3]. Financial Performance - In the first half of the year, Nongfu Spring's revenue was 25.62 billion yuan, marking a 15.6% increase year-on-year [1]. - The net profit attributable to shareholders was 7.62 billion yuan, reflecting a 22.1% growth compared to the previous year [1]. - The packaging drinking water segment generated approximately 9.44 billion yuan in revenue, with a year-on-year growth of 10.7%, indicating a recovery after two consecutive quarters of decline [3]. Market Strategy - To regain market share, Nongfu Spring reintroduced the green bottle pure water product in April 2024, employing a low-price promotion strategy [3]. - The green bottle pure water was priced as low as 1 yuan per bottle or 9.9 yuan for a pack of 12 during intense price competition [3]. - The company has shifted focus to promoting the red bottle natural water while reducing subsidies for the green bottle pure water, with subsidies dropping to 1 yuan per pack in the first half of 2025 [4][5]. Product Positioning - The red bottle water has gained consumer preference due to its health label, leading to higher repurchase rates compared to the green bottle [5]. - The gross profit margin for Nongfu Spring increased from 58.8% to 60.3% year-on-year, attributed to lower raw material costs [5]. - The company is optimizing its product structure by reducing reliance on the lower-margin green bottle water and enhancing the red bottle's market presence [5]. Market Expansion - Nongfu Spring is expanding its product offerings, including launching core products like natural drinking water and sugar-free tea in the Hong Kong market, covering over 3,500 retail outlets [6]. - The company has added new water sources in Hunan, Sichuan, and Tibet, increasing its total to 15 major water sources nationwide [7]. - The company is also promoting larger packaging sizes of red bottle water to cater to household and restaurant needs, which aligns with consumer health concerns [8]. Tea Beverage Segment - The tea beverage segment achieved revenue of 10.09 billion yuan, growing 19.7% year-on-year, although growth rates are slowing compared to previous years [9]. - The company launched a promotional campaign for its sugar-free tea product, "Oriental Leaf," increasing its market share from 70% to 75% [9]. - Despite the strong distribution network, the new carbonated tea product "Ice Tea" has faced challenges in consumer retention and sales performance [10].

Core Viewpoint - The company faced a significant crisis in 2024 due to a sudden wave of public criticism, leading to a sharp decline in sales and revenue, particularly in its core bottled water business, which saw a 21.3% year-on-year revenue drop. However, the company rebounded in the first half of 2025, reporting a 15.6% increase in total revenue and a 22.1% increase in net profit, surpassing market expectations [1][3][21]. Group 1: Bottled Water Business - The bottled water segment was severely impacted by both public opinion and aggressive price competition from rivals, prompting the company to launch a low-priced green bottle water product as a tactical response [4][5]. - The introduction of the green bottle water product aimed to disrupt competitors and penetrate previously inaccessible market segments, leading to a significant price war that forced competitors to react defensively [5][8]. - By mid-2025, the company shifted focus back to its core red bottle natural water, reducing subsidies for the green bottle and increasing the revenue share of red bottle water to over 80% [9][21]. Group 2: Tea Beverage Business - The tea beverage segment, particularly the "Oriental Leaf" brand, demonstrated strong growth, achieving a revenue of 10.1 billion RMB in the first half of 2025, a 19.7% increase year-on-year, and becoming the company's largest business segment [10][11]. - The tea business maintained a high operating profit margin of 48.4%, attributed to effective supply chain management and early investments in the tea production process [12][14]. - The company's proactive marketing strategies, such as the "One Yuan Enjoyment" campaign, helped maintain a market share of 70% in key regions for its tea products [12][14]. Group 3: Other Beverage Segments - The functional beverage segment reported a revenue of 2.9 billion RMB, a 13.6% increase, showcasing the company's strong channel capabilities despite facing tough competition [17][20]. - The juice beverage segment achieved a remarkable growth rate of 21.3%, with revenue reaching 2.6 billion RMB, indicating successful penetration into both high-end and mass-market segments [18][19]. - The company's dual strategy of targeting both premium and value markets in the juice category highlights its operational flexibility and platform capabilities [19][20]. Group 4: Financial Performance and Market Position - The company's financial results for the first half of 2025 indicated a successful recovery from the previous year's crisis, with a gross margin exceeding 60% and a net profit margin close to 30%, positioning it competitively against both domestic and international peers [23][24]. - The rapid recovery and strong financial metrics suggest that the company's true competitive advantage lies in its internal operational structure rather than just its access to natural resources [23][24]. - Following the release of the financial report, the company's stock price surged by 6%, reflecting positive market sentiment and confidence in its recovery strategy [21].

Core Viewpoint - Nongfu Spring has shown signs of recovery from its previous challenges, with significant revenue growth and stock price increase, but faces new challenges as its tea beverage segment experiences a slowdown in growth [1][3]. Financial Performance - For the first half of 2025, Nongfu Spring reported revenue of 25.622 billion RMB, a year-on-year increase of 15.6%, and a net profit attributable to shareholders of 7.622 billion RMB, up 22.1% [1][2]. - The gross profit margin improved by 1.5 percentage points to 60.3%, while the net profit margin rose to 29.75%, marking a record high for the company [1]. Business Segments - The company operates five main business segments: packaged drinking water, tea beverages, functional drinks, juices, and others [1]. - Packaged drinking water revenue for the first half of 2025 was 9.443 billion RMB, accounting for 36.9% of total revenue, with a year-on-year growth of 10.7% [2][3]. - The tea beverage segment, led by "Oriental Leaf," generated revenue of 10.089 billion RMB, representing 39.4% of total revenue, but its growth rate has slowed compared to previous years [2][7]. Market Dynamics - The bottled water market in China is projected to reach a scale of 247 billion RMB by 2024, with Nongfu Spring holding a market share of 14.4% [4]. - The tea beverage market is experiencing a shift, with many manufacturers reallocating resources towards functional drinks and juices, leading to a slowdown in the growth of sugar-free tea products [9]. Product Innovations - To maintain its market position, "Oriental Leaf" has introduced new products, including a 1.5L large package and a new flavor "Chenpi White Tea," along with promotional activities to stimulate sales [7]. - The juice beverage segment achieved revenue of 2.564 billion RMB, growing by 21.3%, while functional drinks generated 2.898 billion RMB, up 13.6% [9].

Group 1: Market Overview - The Shanghai Composite Index experienced a pullback after reaching a high, with a total trading volume of 3.2 trillion yuan in A-shares, and the Consumer ETF (159928) fell by 2.38% with a trading volume exceeding 1.3 billion yuan [1] - The Hong Kong Stock Connect Consumer 50 ETF (159268) also declined by nearly 2%, with a trading volume of over 73 million yuan, and has seen net inflows on 6 out of the last 8 days, accumulating over 150 million yuan [3] Group 2: Consumer Sector Insights - Despite a decline in overall consumption, measures such as promoting service consumption and subsidies for replacing old consumer goods are expected to help normalize consumption growth by the second half of 2024 [5] - The younger demographic continues to support current consumption levels, but their growth has significantly slowed, reflecting economic pressures and employment uncertainties [6] - Future consumption growth is anticipated to rely on two main paths: real economy re-inflation (PPI recovery leading to increased corporate profits and household income) and financial re-inflation (stock market gains boosting household financial asset returns) [6] Group 3: Asset Revaluation Outlook - Over the next 1-2 years, a comprehensive revaluation of Chinese assets is expected, with a potential new core asset market driven by consumption upgrades, similar to the period from 2016 to 2021 [7] - Factors contributing to this outlook include rapid urbanization, wealth effects from stock market gains, and policy measures that positively impacted PPI [7] Group 4: Alcohol Industry Analysis - The liquor industry is showing signs of bottoming out, with expectations for valuation recovery as market concerns about short-term performance have been acknowledged [8] - The industry is currently in a phase of intensive mid-year report disclosures, with improving channel confidence and inventory reduction indicating a potential turning point [8] Group 5: Consumer ETF Composition - The Consumer ETF (159928) has a significant allocation to major consumer stocks, with the top ten holdings accounting for over 68% of the index, including leading liquor companies and other consumer staples [9][10]

Market Overview - The Hong Kong stock market experienced a decline for the second consecutive day, with all three major indices falling over 1%. The Hang Seng Index closed down 1.27% at 25,201.76 points, with a total turnover of HKD 371.376 billion [1] - The Hang Seng China Enterprises Index dropped 1.4% to 9,020.26 points, while the Hang Seng Tech Index fell 1.47% to 5,697.53 points [1] Blue Chip Performance - Nongfu Spring (09633) led the blue-chip stocks, rising 7.11% to HKD 50.3, contributing 10.53 points to the Hang Seng Index. The company reported a revenue of RMB 25.622 billion for the first half of 2025, a year-on-year increase of 15.56% [2] - Other notable blue-chip movements included Zhongsheng Holdings (00881) up 1.96%, China Hongqiao (01378) up 1.12%, while China Resources Mixc Lifestyle (01209) fell 9.08% and CSPC Pharmaceutical Group (01093) dropped 6.36% [2] Sector Highlights - Large tech stocks generally declined, with Tencent down 1.72% and Xiaomi down 0.56%. However, AI concept stocks surged following the State Council's release of the "Artificial Intelligence+" action plan, with SenseTime rising over 14% [3] - The AI action plan aims for over 70% application penetration of new intelligent terminals and intelligent entities by 2027, marking a shift towards deep integration with the real economy [3] Brokerage Stocks - Chinese brokerage stocks faced significant declines, with Shenwan Hongyuan (06806) down 6.02%, Dongfang Securities (03958) down 5.78%, and CITIC Securities (06030) down 4.11% [4] - The recent surge in the Shanghai Composite Index and trading volume indicates strong market sentiment, but there are signals of potential adjustments if volatility increases [4] Pharmaceutical Sector - The sentiment in the pharmaceutical sector remained low, with notable declines in stocks such as Connaught (02162) down 8.59% and King’s Flair International (01548) down 7.42% [4] Innovation Drug Sector - Guotou Securities reported that the current market capitalization of the innovative drug sector reflects a neutral expectation, with improvements in the domestic market expected to lead to profitability by 2026 [5] - The sector is anticipated to benefit from several catalysts in the second half of the year, including medical insurance negotiations and academic conferences [5] Notable Stock Movements - Lianyi Technology (09959) surged 23.21% to HKD 2.76 after announcing a share buyback plan [7] - Lens Technology (06613) reached a new high, rising 7.78% to HKD 27.98, driven by strong growth prospects and expected benefits from Apple's new products [8] - COSCO Shipping International (00517) reported a revenue of HKD 1.934 billion for the first half of 2025, a 10.3% year-on-year increase, with a profit attributable to shareholders of HKD 488 million, up 25.6% [9] - NIO (09866) rose 4.26% to HKD 51.65, supported by strong orders for new vehicle models [10] - Country Garden Services (06098) fell 11.11% after reporting a 30.8% decline in profit attributable to shareholders [11]

Market Overview - The Hong Kong stock market experienced a decline for the second consecutive day, with all three major indices falling over 1%. The Hang Seng Index closed down 1.27% at 25,201.76 points, with a total turnover of HKD 371.38 billion [1] - The short-term liquidity in the Hong Kong market is lagging, but it has structural advantages in the long term. Key characteristics of the market this year include stronger structure compared to indices and continuous rotation of leading sectors [1] Blue Chip Performance - Nongfu Spring (09633) led the blue-chip stocks, rising 7.11% to HKD 50.3, contributing 10.53 points to the Hang Seng Index. The company reported a revenue of RMB 25.622 billion for the first half of 2025, a year-on-year increase of 15.56% [2] - Other notable blue-chip movements included Zhongsheng Holdings (00881) up 1.96%, China Hongqiao (01378) up 1.12%, while China Resources Mixc Lifestyle (01209) fell 9.08%, and CSPC Pharmaceutical Group (01093) dropped 6.36% [2] Sector Highlights - Large technology stocks generally declined, with Tencent down 1.72% and Xiaomi down 0.56%. However, AI concept stocks surged following the State Council's release of the "Artificial Intelligence+" action plan, with SenseTime rising over 14% [3] - The AI action plan aims for over 70% application penetration of new intelligent terminals and entities by 2027, marking a shift towards deep integration with the real economy [3] - Chinese brokerage stocks faced significant declines, with Shenwan Hongyuan down 6.02% and Dongfang Securities down 5.78% [4] - The pharmaceutical sector showed low sentiment, with notable declines in stocks like Kangnuo Ya-B (02162) down 8.59% and King’s Flair International (01548) down 7.42% [4] Notable Stock Movements - Lianyi Technology-W (09959) saw a strong increase of 23.21% after announcing a share buyback plan of at least USD 80 million [7] - Lens Technology (06613) reached a new high, rising 7.78% due to strong growth prospects and expected benefits from Apple's upcoming foldable phone [7] - COSCO Shipping International (00517) reported a revenue of HKD 1.934 billion for the first half of 2025, a 10.3% year-on-year increase, with a profit attributable to shareholders of HKD 488 million, up 25.6% [8] - NIO-SW (09866) rose 4.26% as strong orders for new models are expected to drive stock price increases [9] - Country Garden Services (06098) fell 11.11% after reporting a 30.8% decline in profit attributable to shareholders despite a 10.2% increase in revenue [10]