China's richest man is gearing up for a tough battle

Author | Liu Baodan

Editor | Zhou Zhiyu

From public opinion crisis to continuous decline in stock price, NONGFU SPRING, known as the "Maotai in water," urgently needs to regain investors' confidence. This time, Zhong Shantang stepped forward.

On July 9th, NONGFU SPRING announced that its controlling shareholder, Yangshengtang, plans to use its own funds to acquire and increase its holdings of the company's H shares, with a total amount not exceeding HKD 2 billion. This is the first time NONGFU SPRING has increased its holdings since its listing in 2020.

This is a crucial move. Since May, NONGFU SPRING's stock price has been declining, coupled with a public opinion incident in March, the company's position in the minds of investors has deteriorated and needs improvement.

As a leader in the Chinese beverage market, NONGFU SPRING has taken the water business to the extreme, with a gross profit margin of over 50%, making the company not only the most profitable but also sending Chairman Zhong Shantang to the top of China's richest list for three consecutive years.

However, this capital myth is being shattered. After 28 years of development, Zhong Shantang and NONGFU SPRING are facing a difficult challenge.

Urgent Increase in Holdings

Whether in the capital market or facing the public, Zhong Shantang is known as China's most low-key richest man, but this time, he chose to personally take action.

According to the announcement, Yangshengtang directly holds 7.515 billion shares of NONGFU SPRING, accounting for approximately 66.82% of the company's issued shares. Zhong Shantang directly and indirectly through Yangshengtang holds 9.444 billion shares of NONGFU SPRING, accounting for approximately 83.98% of the company's issued shares.

NONGFU SPRING is a listed company with highly concentrated equity, and Zhong Shantang is the biggest decision-maker. According to his plan, this increase in holdings by NONGFU SPRING will be completed in the public market over the next six months.

Increasing holdings to boost buying power in the market and drive up stock prices is usually seen as positive news. NONGFU SPRING also stated that this is based on recognition of the company's value and confidence in future overall business development and growth potential.

Jiang Han, a senior researcher at Pangu Think Tank, believes that this reflects the strong confidence and positive attitude of major shareholders in the company's future development. Moreover, due to the high concentration of NONGFU SPRING's equity in the hands of major shareholders, the market impact of the increase in holdings may be more significant. However, the specific effects still need to consider the comprehensive impact of factors such as market environment.

In recent times, NONGFU SPRING has been cold-shouldered in the capital market, which is a direct driving factor for Zhong Shantang's action.

On May 3rd, NONGFU SPRING's stock price reached HKD 48.8 during trading hours, hitting a high for the year. Subsequently, the company's stock price continued to decline, reaching HKD 32.4 on July 8th, breaking the annual low record, with the stock price rapidly plummeting by 33.6% in a short period, evaporating a market value of over HKD 160 billion.

Behind the stock price decline, NONGFU SPRING encountered an unprecedented brand crisis, and the new product strategy did not receive much positive feedback.

In March, NONGFU SPRING was involved in an unexpected public opinion crisis, affecting the sales volume of its core product, NONGFU SPRING Natural Water. A supermarket owner operating around Beijing said that they usually sell 7 to 8 cases of NONGFU SPRING water in a month, but at that time, it was difficult to sell even one bottle A well-known institution, Morgan Stanley, released a report stating that NONGFU SPRING's sales growth in the first half of 2024 is expected to slow to 7.6% year-on-year, with a 4.6% drop in net profit. The institution also predicts that NONGFU SPRING's gross profit margin in the first half of the year will narrow by 2.2 percentage points to 58%.

In this scenario, NONGFU SPRING quickly launched a new product in May, the green bottled purified water sourced from natural springs, in an attempt to regain lost sales from competitors who also focus on purified water.

To achieve this, NONGFU SPRING also initiated a price war. The owners of the above-mentioned stores indicated that the cost price of NONGFU SPRING's green bottled water is 0.8 yuan per bottle, which is 0.2 yuan cheaper than the red bottled water. During the 618 period, the selling price at NONGFU SPRING's official store dropped to 0.825 yuan per bottle, significantly lower than the retail prices of bottled water from brands like Nongfu Spring, Wahaha, etc.

Currently, the capital market still has concerns about NONGFU SPRING's new product. Shen Meng, a director at Harvest Capital, believes that NONGFU SPRING's entry into the purified water market will lower the listed company's gross profit margin and impact its performance.

Shen Meng further emphasized, "Although this is a way to prevent competitors from challenging the listed company's core business of natural spring water, the cost may be significant, potentially leading to a long-term depression of gross profit margin levels and changing investors' perceptions."

Increasing holdings is an important measure for NONGFU SPRING to boost the market, and the capital market has also given positive feedback. As of the announcement, NONGFU SPRING's stock price has shown a slight rebound for two consecutive trading days.

The increase in holdings will be gradually realized, which is a good start for investors.

Will the Richest Title be Hard to Maintain?

Among the group of entrepreneurs in China, Zhong Shanshan is a special figure. He is one of the few who have emerged from the beverage and healthcare sectors, surpassing internet giants like Jack Ma and Pony Ma in wealth.

28 years ago, he entered the potential track of drinking water, which aligns with the characteristics of long slopes and thick snow. From water sources to production lines, from logistics to nationwide distributors, he gradually developed NONGFU SPRING into a leading beverage brand.

In 2020, NONGFU SPRING successfully went public in Hong Kong with a market value of up to 370 billion Hong Kong dollars, making Zhong Shanshan a regular on the rich list.

In October last year, the 69-year-old Zhong Shanshan once again became China's richest man with a wealth of 450 billion yuan, representing the post-50s generation dedicated to modernizing traditional industries and successfully breaking through among a group of young entrepreneurs.

In line with this is the development of NONGFU SPRING. In the past three years, NONGFU SPRING achieved revenues of 42.7 billion yuan, 33.2 billion yuan, and 29.7 billion yuan, with growth rates of 28%, 12%, and 30% respectively. The corresponding gross profit margins were as high as 59.55%, 57.45%, and 59.46%, demonstrating its strong profitability.

Of course, this is also attributed to NONGFU SPRING's generous dividends. According to data from Tonghuashun, NONGFU SPRING has distributed a total of 25.47 billion Hong Kong dollars in dividends since 2020, which is a key factor attracting investors.

However, this trend took a turn this year. NONGFU SPRING, known for building brands, unexpectedly faced a public relations crisis. Zhong Shanshan had to personally clarify his relationship with Zong Qinghou, and NONGFU SPRING responded to twenty rumors in one go Currently, NONGFU SPRING's business focus is twofold. Firstly, it continues to enhance the market performance of bottled water, which accounts for a significant portion of the company's business. Secondly, it is making continuous efforts in tea beverages, functional beverages, fruit juice drinks, and other new products, exploring new growth opportunities.

The immediate priority for NONGFU SPRING is to quickly stabilize the market performance of bottled water and address the ongoing repercussions of the public opinion crisis. However, this is not an easy task.

Competition in the bottled water market is becoming increasingly fierce. In April, China Resources Beverage, the parent company of C'estbon, officially submitted its prospectus to the Hong Kong Stock Exchange, intending to raise funds for strategic expansion and sales network development. Furthermore, Jinmailang Blue Label Water has already entered terminals such as Wumart supermarkets, focusing on first-tier cities.

Whether NONGFU SPRING can maintain its leading position is crucial, and the next moves will significantly impact the company's future development trajectory.

Increasing holdings to boost confidence is a very positive gesture. It also indicates that Zhong Shanshan and NONGFU SPRING are making more changes and breakthroughs.

Whether the over seventy-year-old Zhong Shanshan can continue to climb the rich list depends on investors' confidence in NONGFU SPRING and consumers' attitudes towards the brand. This will be a tough battle