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Recently, whether it is the offline price war or the large-scale increase in holdings in the online capital market, Nongfu Spring’s series of measures are aimed at consolidating its position as the leader and recovering from the impact of previous public opinion shocks.

Text/Daily Financial Report Huishui

Recently, Nongfu Spring has had a lot of troubles!

On July 15, the Hong Kong Consumer Council released the report "Flavor, Mineral and Safety Testing of 30 Bottled Waters", which showed that samples from Nongfu Spring and Baishuishan were found to contain bromate at 3 micrograms per liter, or 0.003 mg/L, which reaches the EU's maximum limit for bromate used in natural mineral water and spring water treated with ozone.

This move triggered a strong reaction from Nongfu Spring. On July 16, a lawyer's letter was sent, demanding that the Hong Kong Consumer Council apologize to Nongfu Spring and its consumers.

▲Nongfu Spring official account

You know, this is the critical time when Nongfu Spring pure water is being widely distributed and it is busy with its old rivals Yibibao and Wahaha in a price war. The three giants are fighting fiercely, and it seems that it will be difficult to determine the winner in a short time.

Another thing that worries Nongfu Spring is the falling share price. Although Nongfu Spring announced on July 9 that it would invest HK$2 billion to increase its stake in the company, unfortunately, the good news failed to stabilize the share price. As of the close of July 16, Nongfu Spring's share price fell 2.84% to HK$32.55.

▲Nongfu Spring stock price trend chart source: Tonghuashun

Nongfu Spring has experienced many ups and downs. After some moves, can it still hold the top spot?

The stock price plummeted by 30%, and even the richest man couldn't sit still

On July 9, Nongfu Spring issued an announcement that Yangshengtang, owned by Zhong Shanshan, plans to increase its holdings of the company's H shares by no more than HK$2 billion within approximately six months.

▲Source: Company announcement

As of the date of this announcement, Yangshengtang directly holds approximately 66.82% of the issued shares of Nongfu Spring; as the actual controller of Nongfu Spring, Zhong Shanshan directly and indirectly holds approximately 83.98% of the issued shares of Nongfu Spring through Yangshengtang.

▲Source: IFinD

Two months ago, Nongfu Spring's stock price reached a high of HK$47.98 on May 3, with a market value of HK$535.8 billion. The stock price then continued to fall. As of the close of July 9, the stock price was HK$33.75, a range of decline of more than 30%. The company's market value was about HK$379.6 billion, which means that nearly HK$160 billion of market value evaporated in two months.

It is no wonder that Mr. Zhong is getting impatient. The announcement of increasing holdings with real money at this time not only sends a signal to the market that the company's value is underestimated, but also demonstrates his confidence in the company's future development.

The company's announcement also expressed this meaning. The board of directors believes that Yangshengtang's plan to increase its holdings reflects the controlling shareholder's long-term commitment to the company and its firm confidence in the company's prospects.

The bosses' entry into the market to "buy at the bottom" can naturally boost market sentiment. For companies like Nongfu Spring, where the number of shares outstanding is limited, the effect of increasing holdings will be more obvious. According to the latest stock price, the proportion of shares outstanding will be reduced by more than 10% after the increase in holdings is completed.

Considering that the transaction amounts of Nongfu Spring in the previous two months were HK$3.7 billion and HK$3.6 billion respectively, this time the share purchase plan exceeded the company's transaction volume in half a month.

Sure enough, stimulated by this good news, Nongfu Spring's stock price jumped up significantly on July 10. The intraday increase once exceeded 8%, and closed up 4.44%. However, the effect of this increase in holdings only lasted for two or three trading days. On July 16, Nongfu Spring's stock price fell significantly. It closed at HK$32.55, with a total market value of HK$366.1 billion.

This trend means that the market has received the signal the company wants to send to it; but the situation is obviously more complicated and may be related to the ongoing pure water price war.

The Hurun Rich List shows that from 2021 to 2023, Zhong Shanshan will remain the richest man in China, followed by well-known entrepreneurs such as Ma Huateng of Tencent, Huang Zheng of Pinduoduo, Zeng Yuqun of CATL and Zhang Yiming of ByteDance.

▲Source: "Hurun Rich List 2023"

Competitors within the track are coming in full force

In recent years, Nongfu Spring's performance has continued to be outstanding. In 2022, its revenue successfully exceeded 30 billion, and in 2023 it successfully crossed the 40 billion mark. The financial report shows that in 2023, Nongfu Spring's total revenue was 42.667 billion yuan, a year-on-year increase of 28.4%; net profit was 12.079 billion yuan, a year-on-year increase of 42.2%.

▲Source: Company financial report

Among them, the revenue of packaged drinking water in 2023 was 20.262 billion yuan, accounting for 47.5% of the company's total revenue.

According to a report by CSI Consulting, the size of China's packaged drinking water market will be RMB 215 billion in 2023 and is expected to reach RMB 314.3 billion by 2028, with broad market prospects. In terms of retail sales, Nongfu Spring ranks first with a market share of 23.6%, followed by China Resources Beverage with a share of 18.4%.

▲Source: China Resources IPO prospectus

However, Nongfu Spring hides a trace of anxiety deep inside, as the growth momentum of its packaged drinking water business seems somewhat weak.The company's packaged drinking water revenue grew by only 7.1% in 2022. Although the revenue growth rate in 2023 has increased to 10.9%, it is still not comparable to 2021.

▲ Changes in Nongfu Spring packaged drinking water revenue Source: Company financial report

Moreover, the market is volatile and the leading position is not always stable. The leading position is also facing challenges.

The Internet storm in March caused Nongfu Spring to suffer a lot. Many distributors experienced the problem of slow sales of Nongfu Spring products during that period.

As an old rival, Wahaha accelerated its terminal distribution with the help of public opinion, and its product sales soared. Many markets in first- and second-tier cities that were originally occupied by Nongfu Spring were seized. In addition, Wanhaha intends to further retain consumers by recruiting a large number of salesmen and strengthening the assessment of distributors.

Nongfu Spring's biggest competitor, China Resources C'estbon, has also been actively seeking breakthroughs. The latter has reshaped its brand image through initiatives such as cooperation with national teams, continued to increase investment in packaged drinking water and diversified products, actively strengthened interaction with consumers, and sought to expand its market share.

In late April, China Resources Beverage, the parent company of Yibao, submitted an application for listing to the Hong Kong Stock Exchange, intending to raise funds to build factories in multiple locations to expand production capacity and market share. There is no doubt that a successful listing will reserve more food and grass for it.

▲Source: China Resources Beverages IPO prospectus

In addition, beverage giants such as Jingtian and Master Kong are also competing in the market. Kunlun Mountain Snow Mountain Mineral Water under the Jiaduobao Group, Yingjia Mountain Spring under Yingjia Gongjiu, and some second- and third-tier brands such as Longwangquan in Shaanxi and Beite in Sichuan are also accelerating their rise. Competition in the packaged water market is intensifying.

Strong competitors continue to enter the sugar-free tea field of Nongfu Spring's new "ace" Oriental Leaves. In addition to Suntory, Uni-President, Coca-Cola and other old rivals, "new force" brands represented by Yuanqi Forest, Heytea, Dayao Beverages, etc. are becoming new competitors, vying for a share of the market pie.

The basic "position" for launching a price war cannot be lost

The gross profit margin of the drinking water business is as high as 60%, which is the basic foundation that Nongfu Spring cannot let go easily.In order to ease the pressure of industry competition, they finally resorted to the killer move of "price war", which is usually effective.

With this mission, Nongfu Spring's new purified water began to appear in supermarkets on a large scale, with continuous online and offline promotions. When this purified water was launched at the end of April, the retail price was 2 yuan per bottle. During the "618" period, the price of 12 bottles of green bottle purified water in Nongfu Spring's official flagship store dropped to 9.9 yuan per box, an average of 0.825 yuan per bottle. On July 15, we also saw this product on the JD Mall APP.

▲Source: JD Mall APP

Facing the attack from Nongfu Spring, Yilibao and Wahaha began to take action. In many supermarkets, Nongfu Spring green-packaged purified water is sold at 9.9 yuan for 12 bottles; while red-packaged natural water is sold at 12.9 yuan or 11.9 yuan for 12 bottles, which is a bit more expensive than green-packaged water; Yilibao 12 bottles are sold at 10.9 yuan or even higher; Wahaha purified water is sold at 13.9 yuan or 14.9 yuan.

Nongfu Spring's choice of pure water to break through this time was also a well-thought-out decision. China Resources Beverage, the second largest company in the packaged water market, had revenue of 13.5 billion yuan in 2023, but more than 90% of its revenue came from the pure water Yilibao brand, which was overly dependent.

In the past, Nongfu Spring disrupted the natural drinking water market with its newly launched purified water products, which had less adverse impact on the company and also had a significant publicity effect, with the product gaining popularity quickly. No matter how you look at it, it's not a loss.

Some industry insiders believe that although the low-price strategy can quickly attract a large number of consumers and achieve impressive sales results, this strategy is likely to trigger vicious competition in the industry, leading to market chaos and damaging the brand image. Moreover, competitors can also use the low-price strategy. Many consumers consider the cost-effectiveness and will switch to Nongfu Spring once a substitute appears.

Nongfu Spring’s brand image needs to be improved. The previous “daffodil experiment” and “acidic and alkaline water incidents” have left many consumers with the impression that Nongfu Spring is not down-to-earth.

In addition, many of Nongfu Spring's water sources are now advertised in promotional videos that suggest they are located in remote areas with few people, so the water quality is naturally purer. In fact, three of the sources that account for 80% of its total production are giant reservoirs.

▲Source: Screenshot of video from Nongfu Spring’s official website

A great company must be able to stand the test of time. How will Nongfu Spring's future story unfold? Will the final result be what it wants? We will continue to pay attention.

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