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Nongfu Spring, which has always been known for its high-quality water source, was hurt by a description by the Consumer Council of Hong Kong (hereinafter referred to as the Consumer Council) that "the preface and the postscript were mismatched".

On July 15, the Consumer Council disclosed that after testing 30 common bottled water samples purchased from the local market, it was found that bottled water samples from Baishuishan and Nongfu Spring from mainland China were both found to contain 3 micrograms of bromate per litre, reaching the EU maximum limit of bromate applicable to natural mineral water and spring water treated with ozone, but far below the drinking water quality standard of 10 micrograms of bromate per litre set by the United States, Japan, the United Kingdom and the World Health Organization.

Public information shows that the Consumer Council was established in 1974 and is a statutory body of the Hong Kong Special Administrative Region of China, dedicated to researching and advocating work to safeguard consumer rights.

On July 16, Nongfu Spring issued a lawyer's letter to the Consumer Council, pointing out three major errors: incorrect application of standards, incorrect standard judgment, and obvious subjective misleading, and requested that it immediately clarify, apologize and eliminate the impact.

As of press time on July 16, Nongfu Spring was quoted at HK$32.50 per share, down 2.99%.

War Smoke Price

It is midsummer and Nongfu Spring is particularly "irritable". In addition to dealing with the "nonsensical" war of words, it also has to win the fierce price war to maintain its throne as the "boss of bottled water".

Since defeating its rival C'estbon in 2016, Nongfu Spring has dominated the Chinese bottled water market for six consecutive years. Industry research reports show that in 2023, Nongfu Spring will top the list of China's packaged drinking water market with a market share of 23.6%, followed by C'estbon, Jingtian, Wahaha, and Master Kong with 18.4%, 6.1%, 5.6%, and 4.9%, respectively.

Even though the industry is already full of stars, new forces are still constantly breaking in. Recently, Yu Donglai, chairman of Pang Donglai, disclosed on a social platform that Pang Donglai may launch its own brand of mineral water, which is packaged from the water source of Changbai Mountain and has a net content of 360ml.

In order to seize market share, Nongfu Spring launched green-bottled purified water in April to distinguish it from red-bottled natural drinking water, but the two are sold at the same price, basically 2 yuan.

However, with the arrival of the peak drinking water consumption season in summer, Nongfu Spring has launched a large-scale promotional campaign in both online and offline channels. It is reported that Nongfu Spring's authorized channels or supermarkets have begun selling Nongfu Spring green bottled water at 8.8 yuan per piece, which is only 74 cents per bottle.

So far, "The price war for bottled drinking water has begun" has become a hot search on many lists.

In the view of industry experts, this price war in the bottled water market not only reflects the fierce competition in the industry, but also highlights the deep-seated challenges facing the entire industry.

On the one hand, as the market saturation increases, brands have become increasingly homogenized, resulting in price becoming the main means of competition; on the other hand, consumers' understanding of bottled water has gradually matured, and they no longer blindly pursue high-priced products, which has forced brand owners to re-examine their positioning and value propositions.

Shen Meng, director of Xiangsong Capital, believes that "although this is a means to prevent competitors from challenging the core business of natural water of listed companies, the cost may be high, and it may lower the gross profit margin level in the long term and change investors' views."

Market value evaporated by hundreds of billions

Looking back at 2020, Nongfu Spring successfully landed on the Hong Kong Stock Exchange amid cheers, with a market value of HK$370.3 billion on the first day. Since then, Nongfu Spring's stock price has been rising all the way, with its market value exceeding HK$600 billion at its highest.

However, the good times did not last long. In the past three years, Nongfu Spring's stock price has fallen by more than 20%. Since the beginning of May this year, the company's stock price has fallen sharply, with a cumulative decline of more than 30% during the period, and the total market value has evaporated by nearly HK$170 billion.

Contrary to the stock price trend, as the leader of China's beverage market, Nongfu Spring has always performed well in terms of performance. From 2021 to 2023, Nongfu Spring achieved revenues of 42.7 billion yuan, 33.2 billion yuan, and 29.7 billion yuan, with growth rates of 28%, 12%, and 30%, respectively. The corresponding gross profit margins were as high as 59.55%, 57.45%, and 59.46%, respectively. The profit from "selling water" is quite lucrative.

It is worth noting that Nongfu Spring also has its own anxieties. While its tea beverage business is rising strongly, the revenue share of the packaged drinking water business segment has continued to decline, reaching 57.4%, 54.9% and 47.5% in 2021-2023.

Recently, Macquarie, a well-known institution, published a report that Nongfu Spring's sales growth in the first half of 2024 is expected to slow down to 7.6% year-on-year, and its net profit will fall by 4.6%. The bank expects Nongfu Spring's gross profit margin to narrow by 2.2 percentage points to 58% in the first half of the year, and the increase in discounts offsets the positive factors of cost reduction. The target price was lowered by 29% to HK$26, and the rating was downgraded from "neutral" to "underperform".

After the market closed on July 9, Nongfu Spring issued an announcement stating that the controlling shareholder Yangshengtang plans to use its own funds to acquire and increase its holdings of the company's H shares within approximately six months from the date of this announcement, and the total amount of increase is expected to be no more than HK$2 billion.

There is also a view that this share purchase plan means that Nongfu Spring founder Zhong Shanshan has launched a crazy "rescue market" plan.

Public data shows that Yangshengtang directly holds 66.82% of Nongfu Spring's total share capital, while Zhong Shanshan directly and indirectly holds 83.98% of the company's total share capital through Yangshengtang. It can be said that Nongfu Spring's equity structure is highly concentrated in the hands of Zhong Shanshan and his holding company Yangshengtang.

An investor did some calculations and found that if Zhong Shanshan's current shareholding remains unchanged, he has received RMB 19.36 billion in dividends from Nongfu Spring in the past four years. The increase in Nongfu Spring shares for HKD 2 billion accounts for less than 10% of the nearly RMB 20 billion in dividends that Zhong Shanshan has received in four years.

The "2024 New Fortune 500 Wealth Creation List" shows that Zhong Shanshan once again topped the throne of China's richest man with a net worth of 456.27 billion yuan. This is the fourth consecutive year that Zhong Shanshan has topped the list.

The stock price is getting greener and greener, and China’s richest man is getting richer. Can Nongfu Spring still be sweet?