China Consumer

The new Moutai?

Massive oversubscription for bottled water IPO

Nongfu-w

Nongfu Spring: a sparkling IPO

Evian has long claimed that its water, sourced from a small town in the French Alps, is a geological miracle: rainfall and snow is sluiced through glacial rocks, resulting in water full of electrolytes.

Nongfu Spring, China’s bestselling bottled water brand, makes similar claims about its own water sources, which include springwater from the Changbai Mountains and Thousand Islands Lake. The bottler boasts that water from these areas is so fresh that it contains far more minerals than regular water, and is thus much better for health.

Proving those benefits is difficult but Nongfu is the clear leader in the bottled water market, accounting for more than a fifth of the industry’s China’s sales for eight consecutive years, according to research firm Frost & Sullivan.

It is now raising as much as $1 billion in an initial public offering in Hong Kong – and having set the share price at the top end of its prospective range, the company is already valued at around $33 billion. The shares start trading on September 8. Despite a lofty valuation, the IPO was oversubscribed 285 times in the retail tranche, with investors hoping to plough some HK$167.6 billion ($21.6 billion) into the offering. To help put that demand in perspective, Alibaba’s Hong Kong listing was 42 times oversubscribed.

Nongfu also attracted $320 million in investment from five cornerstone investors including Fidelity International and the state-backed China Structural Reform Fund. These cornerstones have agreed to subscribe to about 30% of its international placement tranche.

Investor interest is understandable. Nongfu’s market share in tea drinks, functional drinks and juice drinks ranked in the top three in China in terms of retail sales in 2019. Gross margins for its bottled water business, by far the biggest revenue contributor, exceed 60%. In 2019, it recorded a profit of Rmb4.95 billion ($723.54 million), a fifth more than the previous year. “The only company that comes close to Nongfu Spring’s margin is probably Kweichow Moutai (which enjoys a gross margin of over 90%),” noted Guimi Caijing, a widely followed financial analyst who is published by Phoenix News (the name is a pseudonym).

Founded in 1996 by the tycoon Zhong Shanshan, who owns 87% of the Hangzhou-based water bottler, Nongfu has won over consumers with its savvy marketing. Over the years it has talked up various benefits, such as how the water’s low alkalinity renders it better for the body. In addition to its much-touted health effects, the company claims that its water has a hint of natural sweetness that is different from others on the market.

Some of this is treated with a healthy scepticism by market commentators. “Even the worst lie told 10,000 times will become truth, not to mention that the debate about different waters on health is a discussion with no real conclusions,” Guimi Caijing surmised.

Nongfu Spring has other detractors, with 21CN Business Herald reporting that one of the water’s sources is Danjiangkou in Hubei, where the levels of pollution can be high. The newspaper even compared the area to a “garbage dump”.

In the past Nongfu has tried to diversify into skincare, launching facial masks and toner based on its springwater (see WiC391). Last year, the company released a plant-based yogurt and a drip-bag coffee (see WiC487). Few of these efforts have shown much success so far.

Nongfu saw profits fall 18% on a 12% drop in sales in the first five months of this year – performance that it blamed on disruption from Covid-19.

It also paid dividends of Rmb9.6 billion to shareholders last year, primarily its founder Zhong. That wassubstantially more than its net profit for the year and a larger sum than the amount it is raising through its IPO. The scale of the distributions led some to question whether the company really needed to go public. But Nongfu says the proceeds of the IPO will be dedicated to expansion of production capacity and further investment in its various beverage brands. It is currently trying to complete the purchase of its first overseas water source and production plant, Otakiri Springs, in New Zealand.

In other IPO news Yum China, China’s largest restaurant chain, is pricing a $2.4 billion share sale in Hong Kong this month, joining the queue of high-profile listings.


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