The ready-to-drink tea market is making waves again, as Dongfang Shuye drives up the performance of Nongfu Spring.

Just as it once dominated the packaged water market with "Natural Water," Nongfu Spring (9633.HK) is now making its mark in the ready-to-drink tea market with its sugar-free Oriental Leaves.

Recently, Nongfu Spring released its performance report for the first half of 2023. During the reporting period, it achieved a revenue of 20.462 billion yuan, a year-on-year increase of 23.3%, and a net profit of 5.775 billion yuan, a year-on-year increase of 25.3%.

During the reporting period, although the price of Nongfu Spring's largest raw material, PET, increased, the price of the second largest raw material, packaging materials, decreased, offsetting each other. As a result, its gross profit margin increased by 0.9 percentage points to 60.2% compared to the same period last year.

In the soft drink industry with strong cash flow, Nongfu Spring is like a "money-printing machine."

During the reporting period, its current assets increased by 32% to 28.4 billion yuan, mainly due to a 32% increase in monetary funds to 24.7 billion yuan compared to the same period last year.

However, current liabilities also increased significantly, rising by 48% to 26.3 billion yuan, including a 38% increase in interest-bearing borrowings to 3.9 billion yuan, and a 51% increase in other payables and accrued expenses to 16.2 billion yuan.

According to Nongfu Spring's 2022 annual report, the top three expenses in other payables and accrued expenses are deposits, payable for the purchase of factory equipment, and payable for sales discounts and rebates.

Regarding this change, TradeWind01 asked Nongfu Spring for the reasons, but they have not yet responded.

In terms of product breakdown, packaged drinking water remains the absolute core, contributing 10.442 billion yuan in revenue during the reporting period, a year-on-year increase of 11.7%. However, its proportion decreased by 5.3 percentage points to 51%.

The tea beverage sector, including Oriental Leaves and Teaπ products, has become the most important "growth engine" for Nongfu Spring. It contributed 5.286 billion yuan in revenue, a year-on-year increase of 59.8%, and the revenue proportion increased by 5.9 percentage points to 25.8%.

Nongfu Spring officials told TradeWind01 that in the first half of the year, tea beverages "may have contributed 30% of the profit, becoming Nongfu Spring's second growth curve and a new source of profit."

According to Nielsen data, Oriental Leaves grew by 114% in the past 12 months, with a growth rate more than 9 times higher than the overall growth rate of the ready-to-drink tea industry. Oriental Leaves, along with Teaπ, contributed more than 60% of the incremental growth in the entire ready-to-drink tea market. It is estimated that the retail scale of Oriental Leaves for the whole year may reach 10 billion yuan.

From 2000 to 2009, Nongfu Spring launched marketing wars with other purified water companies such as Wahaha, C'estbon, and Master Kong. Through differentiated marketing methods, Nongfu Spring gradually occupied consumers' minds with the idea that "natural water is healthier."

According to Cinda Securities research report data, in 2012, Nongfu Spring's market share in the natural drinking water market soared to first place in China, surpassing China Resources C'estbon.

This storyline is being replicated by Nongfu Spring in the ready-to-drink tea sector, which has a market capacity second only to the packaged water market. In 2011, when Oriental Leaves went public, the tea beverage market was dominated by sugar-containing teas from companies such as Master Kong and Uni-President. Oriental Leaves was once rated as the "worst-tasting beverage." Farmers' Spring has caught up with the trend of "sugar-free" beverages in recent years. According to a research report by Ping An Securities, in 2019, despite Kangshifu and Tongyi still ranking first and second in the ready-to-drink tea market with market shares of 26% and 23% respectively, Nongfu Spring, with its sugar-free tea brand Dongfang Shuye, achieved a market share of 10%, ranking third.