Citi raises NONGFU SPRING's target price to 53.3 yuan, expects a 22% increase in net profit for the first half of the year

Citi published a research report, estimating that NONGFU SPRING (09633.HK) will see a year-on-year net profit growth of 22% in the first half of the year, exceeding market expectations by 8%. It is expected that sales will grow by 20% year-on-year (also higher than market expectations by 8%), benefiting from growth in direct sales across all major categories. Citi predicts that sales of bottled water, tea, functional beverages, and juice will grow year-on-year by 16%, 25%, 16%, and 15% respectively in the first half of 2025.

Citi stated that in light of the recent negative news about its main competitors (since early July), it expects the recovery of NONGFU SPRING's bottled water business to accelerate in the second half of 2025, and the strong sales growth of tea and functional beverages will continue in the second half of this year. Citi raised the target price for NONGFU SPRING from HKD 38.6 to HKD 53.3 and initiated a 30-day positive catalyst observation, maintaining a "Buy" rating.

Citi also expects the group's gross profit margin to expand by 50 basis points year-on-year in the first half of 2025, as positive operating leverage (through strong revenue growth) and a decrease in input costs will be sufficient to offset the negative impact of its "Add 1 RMB for an extra bottle" promotional campaign (which, according to Citi's understanding, will be accounted for in the cost of goods sold).

Additionally, in light of its year-on-year reduction in sales expenses for purified water products, Citi predicts that the sales expense ratio will decrease by 30 basis points year-on-year in the first half of 2025. Therefore, Citi expects its EBITDA margin to expand by 100 basis points year-on-year, with the group's EBITDA growing by 23% year-on-year in the first half of this year. Given the year-on-year decrease in net financial income, Citi forecasts that its net profit will grow by 22% year-on-year in the first half of this year, with the net profit margin improving by 50 basis points (to 28.6%).

Citi has raised its net profit forecasts for NONGFU SPRING for the years 2025 to 2027 by 6%, 6%, and 7% respectively, while sales forecasts have been raised by 3%, 5%, and 6% respectively