Nongfu Spring (Trans): Tea drinks lead; full-year double-digit growth target unchanged

Below is Dolphin Research's Trans of Nongfu Spring's FY26 mid-year earnings call:

I. Key takeaways

1) Full-year guidance: revenue framework unchanged; no specific margin guidance. a. On revenue, management sticks to the initial playbook, targeting double-digit full-year sales growth. b. On profit, they reiterated confidence in double-digit growth for both sales and profit, yet, consistent with past practice, declined to guide margins. c. Rationale: cost pressure and volatility expected in H2.

2) GPM: 60.9% in H1, up 60bps YoY; puts and takes likely net out in H2. a. Positives: mix shift (tea outgrowing the market) and YoY declines in fruit juice concentrate and sugar procurement costs. b. Negatives: PET prices higher YoY; after a Q2 spike, PET has eased but remains above pre-conflict levels. c. New headwind: jasmine flowers. Supply is recovering post-flood, but prices are above pre-flood levels. d. Management expects structural positives to persist in H2, offset by the above headwinds, and views any precise forecast as premature.

3) Capex and shareholder returns. a. Capex for the year to be similar to, or slightly above, last year’s elevated level, primarily for source-based plants; two new water-source plants were added in H1, and new aseptic and water lines were installed at legacy plants. b. Management said recent years’ investments have earned healthy returns, without disclosing specific IRRs. c. Dividends: a new plan is set each year, with no commitment to a payout ratio or policy, balancing future growth cash needs with shareholder returns.

4) Opex and other financial items. a. S&D expenses were RMB 5.843 bn (+16.6% YoY), at 19.7% of revenue vs. 19.6% a year ago; the increase was driven by higher ad and promo spending, while logistics rate declined on mix. b. Other income and gains were RMB 857 mn (+6.1% YoY), mainly higher investment income from wealth management; other expenses were RMB 222 mn (+74.8% YoY, 0.7% of revenue), primarily FX losses of RMB 180 mn. c. Higher leverage reflects increased use of notes receivable financing.

II. Detail from the call

2.1 Management remarks

1) Packaged water and sources. a. H1 revenue was RMB 9.641 bn (+2.1% YoY), achieving growth against an overall decline in the packaged water market. b. Two new sources were added in H1: Jiaozi Snow Mountain (Yunnan) and Leiqiong Haikou Volcanic Cluster (Hainan), bringing the nationwide footprint to 17 premium natural sources. c. The company adheres to the principle of building plants at sources and on-site bottling, expanding into use-case-specific SKUs for infants, tea brewing, conferences, dining, and outdoor sports.

2) Tea beverages. a. H1 revenue was RMB 13.122 bn (+30.1% YoY). 'Oriental Leaf' white tea added 335 ml and 900 ml sizes. b. The spring limited Longjing continued its fifth annual on-time launch, using 100% first-grade pre-Qingming Longjing. c. The first low-temp tea, Cold Brew Longjing, launched at Sam’s Club on Apr 25 with cold-brew processing and full cold-chain sales; it ranked among Sam’s top water/beverage sellers for months and now leads its sugar-free beverage chart.

3) Functional drinks and juice. a. Functional drinks delivered RMB 3.348 bn in H1 (+15.5% YoY); juice reached RMB 2.922 bn (+14% YoY). b. The company launched Nongfu Spring electrolyte drinks with lemon and grapefruit flavors in 550 ml and 950 ml, with electrolytes over 350 mg and 600 mg per bottle, plus niacin and vitamin B6. c. Positioned as 'low-sugar, light burden', the new line is supported by ads around the 2026 World Cup on CCTV and other media, and by offline engagement at sports venues and campuses.

4) 30th anniversary and branding. a. This year marks the company’s 30th anniversary (since 1996). A 15-day online vote drew over 3 mn votes and 20k+ comments, bringing back four classic products. b. Source storytelling: free water handouts on National Highway G318 began in Mar; a source-themed ad with brand ambassador Pan Zhanle launched in Apr; the Year of the Horse commemorative glass-bottled mineral water went live with a New Year animation, with offline placements across subways, high-speed rail, and office buildings in key cities.

5) Supply chain and social responsibility. a. The company deepens standardized, contract farming across bases in Jiangxi, Guangxi, and Yunnan for 17.5° oranges, jasmine, and tea. b. From 2024, it is investing in the tea supply chain, donating five tea plants in Yunnan, with a jasmine plant in Guangxi to come online this year. c. In Jul 2026, heavy rains and a dam failure threat in Hengzhou, Guangxi prompted the company to release all Nanning-area water inventory without allocation limits, use the newly built Hengzhou jasmine plant area as a temporary shelter, and donate RMB 10 mn for post-disaster rebuilding and agricultural recovery.

2.2 Q&A

Q: After the interim results, do you have better visibility for full-year revenue and profit, and can you update guidance?

A: Revenue guidance remains double-digit growth, with no specific margin guidance. Management is confident in double-digit growth for both sales and profit. Yet they maintained their practice of not providing margin figures, citing cost pressure and volatility in H2, including elevated PET prices and post-flood jasmine supply constraints. They emphasized long-standing supplier relationships and a resilient supply chain across agriculture and bulk inputs, which should help absorb cost volatility.

Q: Sugar-free tea posted strong growth. How effective were consumer promotions such as cap-opening rewards, and what worked and what is next?

A: Last year’s cap-opening rewards were limited to 'Oriental Leaf', and this year expanded across categories for the 30th anniversary. The initiative proved effective in acquiring new users, prompting trial from consumers unfamiliar with the brand. The broader rollout aims to introduce more products to consumers and elevate awareness of the multi-brand and diversified portfolio. Winners can redeem across categories, turning redemption into a cross-selling entry point, and management credits steady, long-term execution for the growth.

Q: Electrolyte water is performing well. Will there be new formats like energy drinks by year-end, and what is the pipeline strategy?

A: No specific new products or timelines were pre-announced; launches will come when ready. Management never pre-hypes products to the market to avoid signaling dependence on unreleased SKUs. R&D pipelines and mature formulas are ample, but launches depend on market suitability and timing. For electrolyte drinks, the focus is on superiority vs. peers: higher electrolytes than comparable products, added vitamins, and lower sugar vs. sugared peers, supporting future growth potential.

Q: How were sales in the Jul–Aug peak season, and any category breakdown for H2?

A: Jul–Aug sales were in line with expectations; no category breakdown was provided. Management cited steady, healthy growth into the nationwide peak season with hotter weather, while refraining from disclosing category-level growth rates or H2 expectations.

Q: How are key raw material procurement, mix, and H2 pricing trends, and what are the implications for GPM?

A: Puts and takes likely offset; too early for precise estimates. Tea growth above the market and savings on juice and sugar should continue to be positives. Headwinds include PET, which spiked in Q2, then eased but remains above pre-conflict levels, and jasmine, where production is normalizing but prices are still above pre-flood. Management noted PET already pressured H1 costs, and expects H2 positives and negatives to offset, making precise guidance premature.

Q: How many months of PET are locked, and at what cost vs. H1?

A: PET lock volumes are not disclosed; procurement follows a rolling strategy. Management reiterated that PET is a bulk commodity with daily or weekly price changes, and they have been rolling purchases since the annual report, adjusting volumes and prices dynamically. They will stick to rolling coverage, prioritizing company interests and supply assurance, adding that the IPO-era PET prices were even higher and were managed through strategic supplier partnerships and coordination.

Q: How is the phasing of 30th anniversary-related expenses between H1 and H2?

A: Cap-opening rewards ran Mar through end-Sep, adding marketing opex to both halves. Exact rates depend on purchase timing and redemption efficiency, making precise quantification difficult, but both H1 and H2 are impacted. They highlighted that ad and marketing spend as a share of revenue has been relatively low vs. peers, focusing on content quality and ROI, with pacing set by campaign nodes and platforms.

Q: Packaged water has shown resilience but has not returned to its historical peak. Is the full-year recovery target intact?

A: The correct baseline is 2023 pre-controversy, not 2019. After a 20%+ drop in 2024, packaged water recovered well in 2025, and H1 2026 grew 2.1% against a declining market, regaining share. There remains a gap vs. the 2023 pre-controversy peak, and the focus is on continued channel and consumer mindshare building, without restating any numeric full-year target.

Q: Based on digital systems, any new insights on 'Oriental Leaf' user profiles or drinking frequency, and how much runway remains?

A: No quantified profiles or frequency data were provided; management still sees no ceiling for sugar-free tea. Both data and frontline feedback indicate a broadening consumer base, without a specific profile to target, so no tags or frequency metrics were disclosed. They expect sugar-free tea and 'Oriental Leaf' to retain a long runway, growing faster than other categories for a long time.

Q: Tea segment margin rose 50bps in H1. What drove that, and can it expand further with scale?

A: Scale benefits were the main driver, with no commitment on future expansion. High growth on a large base improved utilization of plants, equipment, and other fixed costs, diluting marketing and fixed asset costs, which lifted segment margins. Management did not quantify the potential for further expansion.

Q: Functional drink segment margin fell by over 200bps YoY in H1. Why?

A: The cap-opening rewards extended to functional drinks, lifting promo spend. Last year, the initiative covered tea only, namely 'Oriental Leaf' and the newly launched 'Ice Tea'. This year, under the 30th anniversary theme, it covered vitamin water and the new electrolyte drinks, pressuring the segment.

Q: What were the industry growth rates for water, sugar-free tea, sugared tea, and functional drinks in H1? Is sugar-free still taking share from sugared tea?

A: Water volume declined overall; ready-to-drink tea rose, with ongoing conversion from sugared to sugar-free. Packaged water volumes fell nationwide in H1, while the company still grew 2.1%, regaining share. Sugar-free tea, led by 'Oriental Leaf', holds over 80% share, driven by both new users and conversion from sugared tea, a trend that should continue. Sugared tea still has demand and consumers make diverse choices, so the company continues to invest, including lowering sugar in 'Teaπ' and launching the carbonated lemon 'Ice Tea'.

Q: With a potential warm winter, could Q4 become a beverage peak season, and how are marketing and supply prepared?

A: No weather-driven promos; rely on channel fundamentals and fully self-owned capacity. Weather shocks the entire industry and is uncontrollable, and potential El Niño conditions could also affect agri prices, supply, and global chains. The company focuses on channel basics rather than short-term promos. With nationwide self-built capacity, they do not rely on OEMs, enabling tighter demand sensing and production control.

Q: Water has not returned to peak. Is that due to industry headwinds or company-specific issues?

A: Clearly industry-driven, as national packaged water volumes declined in H1. The company delivered growth against a down market and did not attribute the shortfall vs. peak to internal execution. Opportunities remain in both share gains as health awareness rises and in per-capita consumption, with China at about one-third of the U.S./Europe.

Q: With extensions into cold chain and short shelf-life, what is the strategy for sugar-free tea?

A: Extensions such as cold chain are a natural path, but niche teas with very small audiences will not be pursued. China’s biodiversity and tea culture offer rich opportunities, and as a category leader the company intends to move the industry forward where there is consumer demand. Cold-chain products require higher enterprise capabilities, which the company believes it has, citing positive feedback for Cold Brew Longjing and 'Ice Cup', and further quality upgrades such as high-purity bottled ice.

Q: Will sugar-free tea and electrolyte water cannibalize water, and will channel private labels pressure share?

A: More beverage options can reduce water intake, but water’s rigidity is irreplaceable; no comment on channel brands. While richer choices can shift daily beverage mixes, water remains a daily necessity, and consumer quality focus will continue to rise. Management did not address the question on low-priced private-label water.

Q: What are the returns on the heavy capex in water-source development in recent years?

A: Investments have delivered healthy returns, with capex still focused on source-based plants and lines. Two source plants were added in H1, with new aseptic and water lines at legacy plants, and full-year capex similar to or slightly above last year’s high level. Return assessments consider local demand fulfillment, new product potential, and logistics cost savings in this heavy-load category, without disclosing project IRRs or payback periods.

Q: What is the trend and mix of large-pack family-use water?

A: No response; management did not address large-pack family-use trends or mix. The answer, paired with the capex question, covered source capex and dividend planning only.

Q: Any new plans for capex and shareholder returns for this year, next year, and the next 2–3 years?

A: Dividends are set dynamically each year, with no fixed payout ratio or policy. This consistent approach balances cash needs for growth with healthy shareholder returns. Capex planning follows the framework noted above.

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