Zhong Shanshan made a high-profile appearance on CCTV, investment banks: boosting NONGFU SPRING distributors' confidence, half-year report expected to exceed expectations

Recently, NONGFU SPRING founder Zhong Shanshan made a rare appearance on CCTV for an interview, commenting on NONGFU SPRING's business strategy, social responsibility, succession plan, and addressing the negative public opinion in the first quarter. Citigroup believes that this will inject a strong boost into NONGFU SPRING, further consolidating the confidence of distributors in its future development.

On August 12, Citigroup analysts Xiaopo Wei and Vincent Young released a report stating that it is expected that NONGFU SPRING's semi-annual report to be announced at the end of August will far exceed market expectations. Citigroup also predicts that Zhong Shanshan will accelerate the pace of repurchasing NONGFU SPRING shares after the announcement of the company's first-half performance.

Last month, NONGFU SPRING announced that its major shareholder Zhong Shanshan (through his controlled company Yangshengtang, the controlling shareholder of the company) plans to repurchase up to HKD 2 billion of shares within the next 6 months and intends to increase his stake in the company (currently at 83.9%) to demonstrate his confidence in the company's growth prospects and recognition of its intrinsic value.

Expected Net Profit to Increase by High Single Digits YoY

According to Citigroup's research forecast, NONGFU SPRING's net profit in the first half of 2024 is expected to increase by high single digits year-on-year, far better than the market's expected net profit decline in the mid to high single digits.

Citigroup predicts:

Packaged water sales softness is expected, with a year-on-year decline of over 10% in the first half;

Tea beverage sales (which accounted for 30% of the group's sales in 2023) are expected to increase significantly by about 50% year-on-year;

Juice sales (which accounted for 8% of the group's sales in 2023) are expected to increase by over 10% year-on-year.

It is worth noting that compared to other businesses, NONGFU SPRING's packaged water business has relatively high gross profit margin and operating expenses/sales ratio.

Citigroup predicts that the changes in NONGFU SPRING's group sales structure in the first half of the year will lead to changes in the gross profit margin and operating expenses/sales ratio year-on-year. The year-on-year decrease in transportation/logistics costs for the packaged water business will lead to a year-on-year decrease in the operating expenses/sales ratio, thereby alleviating the negative impact on the year-on-year gross profit margin.

Maintaining "Buy" Rating

Citigroup expects that free cash flow will continue until 2033 and will be discounted back to the end of 2024.

Maintaining a "Buy" rating on NONGFU SPRING, with a target price of HKD 60.15, expecting a stock price return rate of 107.8%, a dividend yield of 4.2%, and an expected total return rate of 112.0%.

However, Citigroup also points out that unexpected fluctuations in raw material costs, business seasonality, and other downside risks may hinder the stock price from reaching the target price