Summary of China Beverages Conference Call Industry Overview - The report focuses on the **China Beverages** industry, particularly the **ready-to-drink (RTD)** segment and competition from **freshly-made drinks (FMD)**. - The covered China Beverages names have outperformed the MSCI China Staples Index, with an average increase of approximately **20% YTD** compared to **17% YTD** for the index [1][4]. Key Insights and Arguments - **Cautious Outlook**: The company adopts a more selective stance in the beverage sector due to rising competition and cautious pricing trends expected into **2026**. Increased promotions and a shift towards larger pack sizes are anticipated by the end of **2025** [1][4]. - **Top Picks**: **Eastroc** is highlighted as a top pick due to its potential for market share gain and portfolio expansion, supported by strong channel execution and resilience against FMD competition [1][4]. - **Nongfu's Performance**: Nongfu is expected to recover market share in packaged water, with an estimated **80%+** market share in the sugar-free tea segment by the end of this year, up from **65%-70%** in **2024** [1][4]. - **Earnings Adjustments**: Earnings for **UPC** and **Tingyi** have been adjusted down by **3%-8%** and **1%-3%** respectively for **2025E-27E** due to slower sales growth trends. Conversely, Nongfu's earnings have been revised up by **0.2%-1.7%** for the same period [1][4]. Competitive Landscape - **FMD Competition**: The competition from FMD brands is intensifying, particularly in **3Q**. The impact on RTD beverages is more pronounced than previously expected, with a projected **3%** volume hit to bottled beverages for the full year **2025** [1][6]. - **Promotional Pressure**: Increased promotions have led to weakened pricing for RTD drinks, with a narrowing price gap between RTD and mass-market FMD [1][8]. - **Market Dynamics**: Historical brand disputes in the beverage industry have shown long-lasting negative impacts on sales and market share dynamics, providing opportunities for competitors to gain market share [1][7][13]. Financial Projections - **Earnings Growth Expectations**: Expected year-over-year earnings growth for **Nongfu/Eastroc/Tingyi/UPC** in **2H25** is **29%/35%/7%/17%** respectively, while **CR Beverage** is projected to see a **49%** earnings decline [1][4]. - **Cost Trends**: Anticipated **3%-6%** unit cost deflation in **2025** is expected to lead to **2.0-3.3ppt** gross profit margin (GPM) expansion. However, cost benefits are moderating, particularly in **PET/sugar** [1][24][25]. Additional Insights - **Wahaha Brand Dynamics**: The potential launch of a new brand "Wa Xiao Zong" by Hongsheng Group in **2026** could shift market dynamics in the bottled water segment, particularly affecting Wahaha's market share [1][16][17]. - **Scenario Analysis**: The report includes scenario analyses predicting potential market share movements for **Nongfu** and **CR Beverage** based on the dynamics surrounding the Wahaha brand dispute [1][20][21]. Conclusion - The China Beverages industry is facing heightened competition and changing market dynamics, particularly from FMD brands. Companies like Eastroc and Nongfu are positioned to capitalize on these changes, while others like UPC and Tingyi may face challenges. The financial outlook remains cautiously optimistic, with adjustments made to earnings forecasts reflecting the competitive landscape.

Nongfu Spring (9633.HK) Earnings Review Summary Company Overview - **Company**: Nongfu Spring - **Ticker**: 9633.HK - **Market Cap**: HK$565.7 billion / $72.6 billion - **Industry**: China Consumer Staples Key Financial Highlights - **1H25 Results**: Sales and Net Profit (NP) increased by 16% and 22% year-over-year (yoy) respectively [1][21] - **2025 Guidance**: Management expects mid-teens percentage sales growth for 2025, with Gross Profit Margin (GPM) and Net Profit Margin (NPM) expansion due to cost benefits and improved capacity utilization [1][21] - **Capex**: Anticipated higher capital expenditures in 2025 and 2H25 for capacity additions and establishment of three natural water sources [1][21] Segment Performance Water Segment - **Stabilization**: The water segment has stabilized from previous social media issues and is expanding production capacity [1][21] - **Sales Growth**: Expected further sales and margin expansion in 2H25, approaching 2023 levels [1][21] Beverage Segment - **Product Innovation**: Focus on launching new products that cater to health trends and changing consumer preferences [1][21] - **Vertical Supply Chain**: Continued investment in upstream agricultural supply chains, enhancing competitiveness in healthy drinks like fresh juice [1][21] Competition Impact - **Food Delivery Competition**: Management believes that the development of the Food Delivery (FMD) industry will drive innovation in the Ready-to-Drink (RTD) beverage sector [1][21] - **Defensive Positioning**: Nongfu's portfolio, including sugar-free tea and packaged fresh juice, is competitively priced and well-penetrated in channels, providing a defensive edge against competitors [1][21] Market Dynamics - **Consumer Migration Opportunity**: Potential market share gain from competitor Wahaha, which is facing publicity issues, could yield significant revenue and profit increases for Nongfu [1][19] - **Sales Estimates**: Each 1 percentage point market share gain from Wahaha could equate to approximately Rmb2.3 billion in retail value or Rmb1 billion in revenue for Nongfu [1][19] Earnings Estimates and Valuation - **Revised EPS Estimates**: EPS estimates for 2025-2027 have been raised by approximately 4% due to stronger sales trends and profit improvements [1][20] - **Sales Growth Projections**: Expected sales growth of 21% in 2H25 and 18% in 2025, driven by water and juice segments [1][20] - **Target Price Update**: Updated 12-month target price to HK$53.2 from HK$48.0, reflecting changes in EPS estimates and valuation base year adjustments [1][20] Additional Insights - **Cost Management**: Management attributes long-term margin sustainability to strong execution and cost management capabilities, with raw material prices being a key factor [1][21] - **Consumer Awareness**: Focus on increasing consumer awareness of product quality in the water segment [1][22] - **Juice Segment Growth**: The C100 Fruit Drink has driven strong growth in the juice segment, with stable long-term growth expected [1][23] Conclusion Nongfu Spring demonstrates solid financial performance with a focus on innovation and market share expansion. The company is well-positioned to capitalize on growth opportunities in the beverage sector while maintaining strong margins through effective cost management.