Nongfu Spring Earnings: Water Segment to Pose Near-Term Profit Headwinds; Reduce Valuation by 7%

Narrow-moat Nongfu Spring’s 2024 interim results were mixed, with revenue missing our expectation, but net profit exceeded our forecast due to successful cost control. Water segment sales were still dragged by the consumer backlash that has been continuing since March, which more than offset strong momentum in the tea and juice categories. The company-level gross margin was also adversely affected by the declining volume of packaged water and contracted 1.4 percentage points year on year to 58.8%. Positively, the company still delivered over 28% net margin for the period, thanks to higher-margin tea products. We reduce our 2024-28 net income forecasts by 5%-6% to account for lower revenue and gross margin assumptions. Consequently, we cut our fair value estimate to HKD 39.50 per share from HKD 42.50.