Citibank: The drinking water business recovery trend clearly reaffirms Nongfu Spring's (09633) “buy” rating

The Zhitong Finance App learned that Wall Street financial giant Citigroup recently released a research report saying that the agency is more convinced of Nongfu Spring (09633)'s drinking water business recovery trend in 2025. Citi said that Nongfu Springs management is expected to resume the double-digit sales growth rate of the group in 2025 (especially after a year of slowdown), which should restore investors' confidence in Nongfu Spring's long-term performance growth prospects (especially in the drinking water business). Citi reiterated its “buy” rating for Nongfu Spring stock in the research report.

Citi said that the future re-rating or downgrading of Nongfu Spring depends largely on investors' expectations and confidence in the recovery trajectory of the group's drinking water business from 2025 to 2026. Citi said that in view of the continuous recovery in Nongfu Spring's market share since June last year, sales performance from January to February this year, the return of healthy distribution channel inventory since the end of the third quarter of 2024, and the shift in advertising and promotion (A&P) investment mean that the recovery path for Nongfu Spring drinking water products (from pure water to natural water) is more clear.

Citi said in the research report that the agency believes that Nongfu Springs is currently in a phase of business recovery similar to that of “Tingyi” after experiencing a one-time shock in 2024, but unlike “Tingyi” (which experienced a structural valuation reduction in 2014-2016 after three consecutive years of decline in revenue), Nongfu Spring's return to a double-digit (DD) level of the Group's overall sales growth trajectory (after only about a year of slowdown) should restore investors' confidence in its long-term performance growth prospects (especially the drinking water business) ). As a result, although the market generally expects that investors and analysts may slightly lower the 2025 net profit consensus forecast after the announcement of the 2024 results (reflecting lower than expected revenue for the second half of 2024), Citi will continue to maintain a “buy” rating for Nongfu Springs.

In terms of the 2025 performance outlook, Citi said that the company's management will guide the Group's overall revenue to achieve double-digit growth in 2025. Although the company's management did not provide moderate guidance on whether the net profit margin increased year over year (net interest rate reached 28.3% in 2024, which is at the leading level in the industry), Citi does not expect a significant year-on-year decline in net interest rate in 2025. Furthermore, Citi said it is seeing a number of positive factors that can ease the pressure on net interest rates in 2025: an increase in capacity utilization in the drinking water business, a year-on-year decrease in rebates for pure aquatic products (i.e. “green bottle” water), and a favorable trend in PET costs.

Citi said that according to the latest statement from Nongfu Spring management, after drinking water sales slowed in March-May, the company took the initiative to increase rebates to dealers during the peak beverage season in the third quarter to reduce channel inventory of drinking water products. Since the end of the third quarter of 2024, the company's drinking water product channel inventory has remained at a healthy level, which has laid an important foundation for a sharp recovery in the drinking water business in 2025. Nongfu Spring management also expects the tea business to continue to grow rapidly in 2025.

Citi emphasized in the research report that the agency is more confident about the recovery of the drinking water business in 2025. Citi said that according to Nongfu Spring's management, the company's drinking water business experienced a three-month decline in market share from March to May last year, mainly due to “cyber attacks and malicious slander against the company and its founders” at the end of February 2024. However, Citi said that since June of last year, the market share of Nongfu Spring's drinking water business has gradually recovered month by month. Although the current market share has not returned to the level before the public opinion incident in February last year, Nongfu Spring's market share in the water category still ranks first in the industry. In January-February of this year, the company's drinking water business sales continued to show a “good recovery”, which also gave the company's management more confidence in achieving double-digit growth in the Group's performance in 2025. Management also stressed that in the future, the company will only keep one pure aquatic product SKU (550 ml size) (according to this, Citi believes that management is not doing much to expand the pure water business production line); in contrast, the company introduced a new packaging design for 380 ml and 550 ml of natural water in December 2024, and added two new natural water sources in 2024. According to management, the company will cut expenses related to pure aquatic products in 2025 (which may include rebates and sales-related expenses invested during the launch of new products in 2024).