Financial Report 2024 | Sugar-free Tea "Ignites" Nongfu Spring, Net Profit Margin Hits Historic High Amid Expansion of Water Sources and Cost Reductions

Amidst the unsettled situation, Nongfu Spring (9633.HK) delivered an explosive full-year performance.

On March 26, Nongfu Spring disclosed its 2023 financial report, achieving a full-year revenue of 42.667 billion RMB, a year-on-year increase of 28.4%; achieving a net profit of 12.079 billion RMB, a year-on-year increase of 42.2%, with a net profit margin increasing by 2.79 percentage points to 28.3%.

Benefiting from the decrease in raw material prices such as packaging materials, Nongfu Spring's gross profit margin for 2023 reached 59.5%, an increase of 2.1 percentage points year-on-year.

Both gross profit margin and net profit margin reached historical highs for Nongfu Spring.

The board of directors of Nongfu Spring proposed to distribute an annual cash dividend of 0.75 RMB per share, totaling 8.435 billion RMB, with a dividend payout ratio of approximately 70%, the same level as in 2022 but lower than last year's 91%.

In terms of product breakdown, packaged drinking water remains the revenue pillar, contributing a total revenue of 20.262 billion RMB, a year-on-year increase of 10.9%, accounting for 54.9% of the revenue.

According to information obtained by TradeWind01 from relevant sources at Nongfu Spring, due to the absolute scale of the packaged drinking water business model, the business growth rate may further decline.

However, the source also indicated that there is "steady growth" potential for the packaged water business in on-the-go consumption scenarios and in consumer scenarios such as homes and offices.

In 2023, Nongfu Spring invested 600 million RMB and 1.25 billion RMB respectively to open new water sources in Damingshan, Guangxi, and Huangshan, Anhui, further consolidating its leading position in the bottled water sector.

As of now, excluding the unfinished Huangshan water source in Anhui, Nongfu Spring has a total of 12 water sources nationwide, which is also its core competitiveness—transporting mineral water at lower costs nationwide, thereby having a price advantage at the terminal.

This is directly reflected in Nongfu Spring's sales expenses.

In 2023, its sales expenses reached 9.284 billion RMB, an 18.7% year-on-year increase, but the sales expense ratio decreased by 1.7 percentage points to 21.8%, attributed in the financial report to the optimization of the supply chain costs.

According to TradeWind01 from the aforementioned sources at Nongfu Spring, the optimization of Nongfu Spring's supply chain costs is mainly due to its production capacity being closer to the target market, resulting in a significant decrease in logistics costs.

The performance surge of Nongfu Spring in 2023 can be attributed to the sugar-free tea product "Eastern Tea Leaves", with tea beverage products becoming the main driver of Nongfu Spring's rapid growth last year. It contributed a total revenue of 12.659 billion RMB, an 83.3% year-on-year increase, with the revenue share increasing by 5.4 percentage points to 20.8%.

According to TradeWind01 from the aforementioned sources at Nongfu Spring, they believe that as consumers pay more attention to health and ingredient composition, the market share of sugar-free tea in the tea beverage market will continue to rise.

However, the source also mentioned that in the past year or two, an increasing number of sugar-free tea products have entered the market, and competition in the sugar-free tea market will become increasingly fierce in the future Regarding the recent public opinion impact, the individual stated that despite some short-term negative impact, the current public opinion heat has decreased, and whether it will end remains to be observed. In 2024, Nongfu Spring will still set "double-digit" as the growth target for each category.

The day after the performance announcement, Nongfu Spring's stock price opened high and then fell, closing down 1.08% at HKD 41.25 per share