Nongfu Spring Earnings: Stellar Growth Driven by Ready-to-Drink Tea

Narrow-moat Nongfu Spring reported solid 2023 earnings with key highlights in the tea category, which doubled in sales and drove margin expansion for the company. Revenue was slightly higher than our forecast, whereas net profit beat our estimate due to a lower selling expenses ratio. Net margin reached a record high of 28.3%, thanks to operating leverage. We slightly lift our five-year revenue and net profit projections by 3% on average, taking into account the higher base in 2023. We project revenue growth from 2024 onward to revert to a more normalized level of below 20%. This marginally raised our fair value estimate to HKD 42.50 per share from HKD 42.00, which implies 33 times 2024 P/E, 20 times EV/EBITDA, and a 2.5% dividend yield. We think shares are currently fairly valued.