Nongfu Spring (Trans): GP at a record high, but driven by cheaper raw materials

Below is Dolphin Research’s transcript from Nongfu Spring’s FY25 H1 earnings call:

I. Key financial takeaways

1. Shareholder returns: no fixed payout ratio, FY25 to follow past practice.Management reiterated that there is no fixed dividend payout ratio. The payout was 70% for 2024, and FY25 will follow prior practice, with a formal announcement in due course after weighing investment needs for 2026–2027, cash flow and rates.

2. Guidance: full-year revenue to sustain double-digit growth; GPM and NPM slightly above last year.Management expects a relatively balanced H1/H2. Prices of PET, cartons and sugar should be broadly in line with H1, with minor fluctuations at most.The H1/H2 sales mix and margin pattern should resemble the past 3–4 years (Mar last year was an anomaly). Over the mid-to-long term, management tempered expectations, noting that at ~RMB 100 bn scale, retaining today’s high margins will be challenging.

3. H1 metrics and management attributionsa) Scale: revenue of RMB 25.622 bn (+15.6% YoY); net profit attributable to shareholders of RMB 7.622 bn (+22.1% YoY). GPM 60.3% (+150 bps), NPM 29.7% (+160 bps).b) GPM drivers: uplift mainly from lower procurement costs for PET, cartons and sugar. By category, revenue growth was: packaged water +10.7% YoY; tea +19.7%; functional drinks +13.6%; juice +21.3%.c) Opex drivers: selling and distribution expenses RMB 5.011 bn, at 19.6% of revenue (-280 bps), driven by lower ad & promo spending and reduced logistics costs from mix/volume changes. Admin expenses RMB 1.068 bn, at 4.2%, largely flat.d) Other gains/losses: other income and gains RMB 808 mn (-22.3% YoY) on lower deposit interest income due to rate declines. Other expenses RMB 127 mn, up sharply, mainly from RMB 50 mn donations and RMB 66 mn FX losses.

4. Balance sheet and CAPEX: net current liabilities RMB 5.611 bn; full-year CAPEX to step up.Net current liabilities were RMB 5.611 bn, mainly due to time deposits with maturities over one year. Inventory days rose from 82.3 days as of Dec 31 last year to 90.8 days, driven by production pre-stocking and higher raw material inventories.CAPEX was already higher YoY in H1 and should be higher for the full year, focusing on plants near water sources and advanced high-speed equipment.

II. Call details

2.1 Management remarks

1. Packaged watera) The negative online sentiment from last year has faded. Packaged water sales recovered through H1, with revenue up 10.7% YoY.b) Three new water sources were added in H1: Hunan Badagongshan, Sichuan Longmenshan, and Tibet Nyainqentanglha, bringing the nationwide network to 15 key sources.c) The nationwide ‘natural water source transparent factory’ traceability program continued, inviting world swimming champions, artists, industry KOLs and employees with families to visit 10+ premium sources and modern plants.d) A cross-social-media matrix was deployed using images, short videos, and outdoor ads in buildings, airports and large screens to amplify key messages. Most plants are open to the public daily, with visits bookable via the WeChat mini-app ‘Nongfu Spring invites you to see the source and the factory’.

2. Teaa) Revenue rose 19.7% YoY. Tea surpassed water last year to become the group’s largest category, and its share further expanded in H1.b) In Apr, Oriental Leaf launched its first ‘open-the-cap to win’ campaign, supported by new advertising in subways and bus shelters. In May, a new Chenpi White Tea debuted, filling a flavor gap among the six major tea types.c) In Jun, a carbonated tea ‘Iced Tea’ was launched, using 100% real tea extract without tea powder. It features delicate bubbles and was promoted alongside the cap-opening campaign.d) Since Dec last year, five modern tea processing plants have been donated and built in Jingdong, Simao and Jinggu in Pu’er, and Linxiang and Yun County in Lincang, extending upstream into tea raw materials.

3. Juice and functional drinksa) Juice revenue grew 21.3% YoY, while functional drinks were up 13.6%.b) On Dec 31, 2024, the 17.5° Honeyberry blended juice launched. Sourced from Northeast China mountain areas with higher nutritional value, it uses fresh fruit pressing to preserve flavor.

4. Brand marketinga) For CNY, the Snake Year commemorative glass-bottle mineral water returned. Brand ambassador and world swimming champion Pan Zhanle and his grandfather co-starred in the ad, reinforcing the reunion theme, with synchronized offline ads in subways, buses, shelters and elevators in major cities.

5. Intla) In Jun 2025, core products including natural drinking water, Oriental Leaf unsweetened tea and Tea π fruit tea officially entered Hong Kong, with more than 3,500 retail endpoints covered across all channels.b) Through source traceability and celebrity endorsements, a ‘three-in-one’ strategy spanning channels, products and culture validated premiumization and internationalization. The company will continue to expand to other overseas markets.

2.2 Q&A

Q: Competition is intense, yet all categories posted double-digit growth in H1. How do you see H2, and what are the strategies for water and tea?

A: Full-year revenue to stay double-digit; H1/H2 relatively balanced; strategy remains long-termism with no new moves. Management said operating playbooks are unchanged from prior years, focusing on brand-building, product rotation and channel infrastructure.Execution in H2 will continue under long-term principles. No differentiated H2 tactics or separate growth targets were disclosed for water vs. tea.

Q: Margins hit new highs and selling expense ratio fell visibly. How do you see H2 expenses and overall margins?

A: Full-year GPM and NPM slightly above last year, but at ~RMB 100 bn scale high margins are hard to sustain. GPM expanded by 150 bps YoY in H1, mainly on lower PET, cartons and sugar prices. Commodity prices in H2 are expected to be broadly flat vs. H1, with small swings.Management noted that in recent years, oil and macro factors drove commodities lower or range-bound, which will continue to move with the broader market over time. Margin is a composite of management and operating excellence, not just raw material prices.As the business scales up, it becomes difficult for traditional companies to maintain high margins, and further improvement is even harder. Management asked investors to keep expectations objective and reasonable.

Q: How do you view membership and discount retail formats like Sam’s and Aldi? Any collaboration opportunities?

A: Customized 17.5° orange juice, pure transparent edible ice and birch sap drinks for Sam’s; channel mix not disclosed. Customization needs, informed by consumer and market feedback, can reverse-inspire product innovation on the manufacturing side.Consumer feedback from these collaborations has been strong, showing premium products meet the needs of high-end customers in emerging channels. The company will keep expanding such partnerships and developing more innovative products.

Q: What were the H1 priorities in water? How do you see the investments and recovery in H2 and next year?

A: Inviting consumers to visit sources and plants is the core lever; three new sources added in H1, totaling 15. After experiencing the source ecology and plant safety firsthand, most consumers become loyal long-term customers, so this will continue.Source expansion was promised on IPO day and will keep going. While more companies are entering natural source development, matching Nongfu Spring’s scale, number of sources and national layout requires very long time and substantial manpower, a moat management said ‘cannot be broken’.Another executive added that beyond repairing last year’s sentiment, both water and tea are focused on educating consumers on quality. Source layout and tea supply chain investment are long term, expected to drive steady incremental returns.On category extension, after last year’s ice cup, pure transparent edible ice was launched with Sam’s this year. Ice-making demands high standards in process, quality and cold-chain logistics, and the company has extended from bottled water to tea water, baby water and edible ice, with capability to enter harder niches.

Q: What drives future growth in unsweetened tea? Why did tea channel margins improve?

A: After four years of explosive growth, unsweetened tea will normalize; tea has overtaken water as the largest category. Management clarified that tea includes unsweetened and sweetened formats. The new carbonated tea ‘Iced Tea’ is sweetened, and consumer preferences diverge: some want 0 sugar/0 fat/0 calories/0 additives and natural flavor, others want taste and refreshment, and both tracks have room to grow.Confidence stems from habits and per-capita consumption. Versus neighboring East Asia markets, China still has ample space. Oriental Leaf’s Chenpi White Tea launched in H1, and management sees China as world-leading in biodiversity, tea varieties and roasting, with this flavor filling a gap among six major tea types.Growth drivers included an H1 ‘RMB 1 add-on’ promo, with red-envelope rewards up to RMB 666, which boosted new-user acquisition and repeat purchases, supporting strong category growth. Management still sees room to grow off the current base, but expects the pace to moderate and normalize.

Q: Will the strategy remain focused on water and tea, or are there new ideas for juice and functional drinks?

A: Water and tea remain core given their volume share, but juice and functional drinks will be pursued when resources and opportunities arise. Both functional and juice delivered strong growth this year.For functional drinks, the company stepped up positive engagement with younger consumers, focused product design on their needs, and diversified promotion, exploring cross-platform and cross-dimension approaches to keep the brand energized.For juice, management believes both awareness and demand are high, yet few products truly win on taste. With long-term raw material layouts, the company can deliver high-quality juice, and once consumers find near-fresh-pressed taste, they keep repurchasing. The juice market has ample room, and more functional juices will be introduced.

Q: For water, will mid-to-long-term growth be more about per-outlet productivity or channel penetration? What about CAPEX?

A: Both matter; upgrading rural markets to the RMB 2 price band is key, and full-year CAPEX will be higher. For the 550ml red bottle, mainstream pricing is around RMB 2. Distribution is mature overall, but remote and rural markets are still growing, constrained by purchasing power and ‘water knowledge’.Hence the company keeps educating on sources and water knowledge, explaining differences among purified, natural and mineral water, and the health impact of mineral vs. non-mineral products, nudging consumers into the RMB 2 band.Per-outlet productivity relates to sales execution, capture, cold display and water education, and RMB 2 water is not unique to Nongfu Spring. Household, office and restaurant indoor scenes can add volume, but the bulk still comes from modern trade, c-stores and mom-and-pop shops.Water is a high-frequency necessity, unlikely to spike, but steady growth is expected over the long term. CAPEX is not tied to a specific category, as lines and plants are shared by water and beverages.Fixed asset investment will steadily increase over the next few years, focusing on source-adjacent plants and high-speed equipment, with amounts dynamically adjusted to capacity and sales needs.

Q: How did ASP and margins for unsweetened tea change YoY? Is there still room to lift margins at scale?

A: No disclosure of item-level margins; tea margins are already very high with quite limited upside. No quantified change for unsweetened tea ASP was provided.Management is doing two things: deeper, more comprehensive upstream investment in tea raw materials, exemplified by the Yunnan tea plants reported by media over the past 12 months, which is a long-term strategic investment; and continuous brand-building and brand awareness around health and quality, including raw material control, formula refinement and new flavors.Another executive noted that concerns surfaced when green-bottle water launched and when this year’s tea cap-opening promo rolled out, but consumer goods need to respond to market changes and feedback with new promotions each year. Ultimately, margins by category and overall reflect composite strength and fine-grained management.

Q: With rates still trending down and ample cash on hand, will you raise the payout ratio? Will it stay around 70%?

A: No fixed payout ratio; 70% for 2024, FY25 to follow past practice with timing to be announced. Decisions will balance 2026–2027 investment needs, cash flow and rates, with no range or floor provided for FY25.Management added that while there is no fixed annual commitment, the company has historically delivered stable, predictable and relatively reasonable returns through balanced consideration.

Q: How do medium/large pack sizes affect margins and cost structure overall? How to balance small vs. medium/large formats?

A: Medium/large packs are priced lower but have lower per-unit packaging costs, so margin impact is limited. Logistics and shelf-space factors further dilute the impact. Medium/large packs first respond to demand scenarios, as unsweetened tea consumers drink more than one bottle a day, with office and in-car settings calling for larger formats, and consumers also flagged wastefulness in discarding multiple small bottles.Historically, medium/large-pack water share surged during COVID, which was understandable, but over the years, the share change has not materially affected margins for water as a single item.Repeat purchases from larger packs help lift consumption, build habits and loyalty, and can backflow to small-pack demand. Small-pack portability remains strong, and format choice is driven by consumption scenes and individual needs, with mutual reinforcement.Another executive added the company will not tweak product mix to chase a specific OP margin or margin uplift target. The goal is to scale the entire water category and build a complete matrix, letting consumers choose among purified, natural and mineral water.

Q: Juice posted standout growth in H1 revenue and operating margin, but 17.5° products have higher costs. Is growth and margin sustainability achievable?

A: Juice remains the smallest of the four core categories; Water-soluble C100 grew strongly in H1, while the other two brands met expectations. Management did not directly quantify 17.5° cost structure or margin sustainability, and sees steady growth over the long term with cultivation needed.On demand, per-capita fruit consumption is rising annually, especially as younger consumers better understand nutrition. Demand and awareness for pure juice, blends, fruit-vegetable and mixed juices are growing, with many sharing DIY mixes on Xiaohongshu and Douyin, fueling trial and community spread.On supply, juice and unsweetened tea share a core trait: heavy reliance on raw materials, as quality directly drives taste and nutrition, with brand and craft only part of the equation. The company has invested for over a decade in Xinjiang apple and Ganzhou navel orange bases and will keep investing, viewing them as long-term sources of competitive advantage.

Q: How will overseas expansion be planned over the next 2–3 years? With land in the U.S., will you build a plant?

A: No answer was provided; overseas expansion and U.S. plant were not addressed. The moderator directed the question to finance, but the response only covered packaging structure and juice, and the overseas section was skipped and not revisited.Beyond the opening remarks that core products entered Hong Kong in Jun 2025 with 3,500+ endpoints, no overseas timeline, regional priorities or capacity plans were disclosed.

Q: How will the future mix of green-bottle water be planned? How to balance purified vs. natural water?

A: No deliberate control or market-share targets will be set for this product; consumers decide. The purpose of launching purified water was to help consumers understand the difference between natural and purified by contrasting two products, as awareness and choices differ today.The company will keep promoting source-related activities to reinforce the importance of natural water quality and its health value. As drinking volume and water knowledge rise, long-term growth should follow.Management stressed this is a long journey and they will not give up. They will persist, but no target range was provided for the green-bottle share.

Q: What impact did the Jul–Aug food-delivery price war have on bottled beverages? How do you view the long-term relationship between made-to-order and RTD?

A: Management clearly opposes platform-subsidy food-delivery wars and said the impact on the company was relatively limited. Such practices force small merchants to shoulder subsidies and face operating stress, running counter to market economics, and have visibly harmed the current environment and market order.Given consumer recognition of product quality, service and channel management, distributors prefer to join the company’s own promotions, limiting the impact. No quantified impact on sales was provided.Long term, made-to-order and RTD serve different goals: the former stresses freshness and customization with social experiences, while bottled emphasizes convenience and storability. If one only drinks once a day, made-to-order can substitute bottled.In the short run, competition will intensify and divert some consumers. Over time, it should spur innovation and ecosystem convergence, as street drinks now also stress fresh fruit and leaf tea instead of powder, which helps educate consumers about bottled beverages.Management noted street drinks are mostly sweetened tea, reflecting diverse demand, while Nongfu Spring holds advantages in health, convenience and innovation.

Q: How to break down the 150 bps GPM expansion (raw materials, utilization, RMB 1 add-on promo)? Can H2 improve sequentially?

A: Most of the 150 bps came from raw materials, with PET the biggest driver, followed by packaging and sugar. PET prices fell further in H1 from already low levels last year, as shown in industry monitoring data.Utilization also contributed but to a much smaller extent. Water-category depreciation rates fell YoY, reflecting a recovery in water volume that lifted utilization and provided fixed-cost dilution benefits, with depreciation disclosed in both segment and overall reports.No explicit guide was given on sequential H2 improvement. Management said H1/H2 sales mix and GPM/NPM distribution have been consistent over the past 3–4 years and can be a reliable reference, with last Mar abnormal and this year relatively steady.

Q: What are the plans for H2 ad and marketing spend?

A: No fixed spending targets; ad & promo will be dynamically adjusted. H1/H2 investment will be flexed based on market conditions, consumer trends and the competitive landscape. The company does not set fixed targets for these expenses or directions.As H2 is not over yet, spending will be adjusted accordingly in response to market developments.

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