HSBC: Intensified competition may limit NONGFU SPRING's profit margins, rating downgraded to "Hold" with a target price raised to 47.4 yuan

AASTOCKS
2025.07.28 03:01

HSBC Global Research report indicates that NONGFU SPRING (09633.HK) is expected to perform steadily in the first half of 2025, but intensified competition may limit the upside potential for profits. HSBC has downgraded the stock rating from "Buy" to "Hold," reduced the weighted average cost of capital to 8%, and rolled forward the discounted cash flow method by one year, raising the target price by 21.2% from HKD 39.1 to HKD 47.4, which corresponds to price-to-earnings ratios of 34.8 times and 30.8 times for 2025 and 2026, respectively, implying about a 2% upside from last Friday's closing price. The current price corresponds to an estimated price-to-earnings ratio of 33.2 times for 2025. HSBC believes that if there are no further upward revisions in market consensus forecasts, the re-rating phase for NONGFU SPRING may have ended.

HSBC expects NONGFU SPRING to achieve steady performance in the first half of this year, with its bottled water business continuing to recover from a low base in 2024. It is anticipated that revenue will grow by 14% year-on-year in the first half (bottled water: 11%; beverages: 16%), and net profit is expected to increase by 15% to RMB 7.177 billion. This expected performance aligns with HSBC's current profit forecast for 2025 and is consistent with market consensus.

However, HSBC points out that the cost of PET used for producing beverage bottles has decreased this year, leading to intensified industry competition due to greater promotional efforts and increased market supply. On the other hand, demand for ready-to-drink (RTD) products remains weak, potentially being eroded by a heavily subsidized delivery market starting in the second quarter of 2025.

HSBC believes that under the current market conditions, the aforementioned factors inevitably limit the upside potential for profits, prompting a slight adjustment to NONGFU SPRING's profit forecast. The company is expected to achieve a net profit growth of 15% year-on-year to RMB 13.943 billion in 2025, with sales growth of 15.4%. The compound annual growth rates for net profit and revenue from 2025 to 2027 are expected to be 12.6% and 12.2%, respectively, in line with market consensus

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