---
title: "Nongfu Spring: Sweet, Salty, Offensive, and Defensive"
description: "Nongfu Spring, a beverage company with profitability and return on investment surpassing peers like Master Kong and Uni-President, and outperforming Yili and Mengniu, is arguably China's most promising candidate to become a soft drink giant akin to Coca-Cola. Since its listing, its stock price has soared without correction, pushing its market value toward 500 billion yuan, with its founder becoming the new richest person in China."
author: "LaughingDu"
publisher: "New Distribution"
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published: "2020-11-23"
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# Nongfu Spring: Sweet, Salty, Offensive, and Defensive

> Nongfu Spring, a beverage company with profitability and return on investment surpassing peers like Master Kong and Uni-President, and outperforming Yili and Mengniu, is arguably China's most promising candidate to become a soft drink giant akin to Coca-Cola. Since its listing, its stock price has soared without correction, pushing its market value toward 500 billion yuan, with its founder becoming the new richest person in China.

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In the beverage industry, there is a company whose profitability and return on investment crush its peers Master Kong and Uni-President, and completely outperform Yili and Mengniu. It is arguably the company with the greatest potential in China to become a soft drink giant like Coca-Cola.
That company is Nongfu Spring!
Since its listing, its stock price has been rising without any pullback. After watching it for several months, it simply gave no opportunity, leaving us only to drool over its financial reports.
As the stock price climbed, news emerged repeatedly that its founder surpassed the two Ma dads to become the new richest person. Now its market value is about to reach 500 billion yuan! It's not a pharmaceutical company, nor a tech company, but a beverage company with a price-to-earnings ratio of nearly 100 times!!
Even so, brokers' target prices have been rising, but they are about to fall behind the stock price again. This scene reminds you of Kweichow Moutai in recent years.
Without debating whether the valuation is reasonable, even if there is no comfortable buying opportunity now, we can start researching and be prepared at all times. Who knows, when the prince falls into trouble, we can decisively strike.
This is the first article, mainly discussing the industry space and competitive landscape of the soft drink market. In the future, I plan to discuss Nongfu Spring's competitiveness and financial situation.
**-01-****Industry Space**
China's beverage market is a trillion-yuan market. In 2019, the market size was 991 billion yuan, with an expected compound annual growth rate (CAGR) of about 6% over the next five years (2019-2024, same below). The specific categories are as follows, including those Nongfu Spring is involved in:
**Packaged drinking water:** In 2019, the scale exceeded 200 billion yuan, with a growth rate of 10.8% over the next five years, reaching 337 billion yuan by 2024. It is the largest category in the soft drink market. Among them, natural water and natural mineral water are the fastest-growing categories, with expected growth rates of 15.4% and 14.2% over the next five years.
**Fruit juice beverages:** In 2019, the scale was 144 billion yuan, with a growth rate of 2.2% over the next five years. Among them, medium- and high-concentration fruit juice grows much faster than low-concentration fruit juice.
**Functional beverages:** In 2019, the scale exceeded 110 billion yuan, with energy drinks accounting for 70%. Over the next five years, the growth rate is 9.4%, with little difference among sub-segments.
**Tea beverages:** In 2019, the scale was about 79 billion yuan, with a growth rate of 3.5% over the next five years. The future trend is sugar-free tea beverages, with a growth rate of 22.9%.
Coffee and others account for too little of Nongfu's revenue to discuss in detail.
Data source: Frost & Sullivan
From Nongfu's product matrix, it can be seen that its positioning is very precise. In packaged drinking water, it mainly promotes natural water and natural mineral water. In tea beverages, Oriental Leaf and Chabi are either sugar-free or low-sugar. In functional beverages, it has energy drinks. In fruit juice, it has NFC, etc. All are sub-segments with faster future growth. It even includes small-scale products like Tanbing coffee, plant-based yogurt, and soda water.
Overall, soft drinks are a large market, and the overall growth rate has slowed, but growth rates vary among sub-segments. Even though Nongfu Spring's product matrix is good, we should have reasonable expectations for its growth rate and not be blindly optimistic.
Moreover, beverages are impulse purchases, with high trend risk. Consumer preferences are constantly changing, with demands for health, appearance, and taste. It is not easy for leaders to maintain their performance. Full-category beverage companies are better able to resist risks.
**-02-****Competitive Landscape**
Overview: The soft drink market is large. After rapid growth, the industry has entered a period of moderate growth. As mentioned earlier, the CAGR over the next five years is about 6%, but competition is fierce and the landscape is fragmented.
Overall market share:
**First is Coca-Cola, mainly selling carbonated beverages, with a market share of 8.6%;**
**Second is Ting Hsin, whose main beverage business is selling tea beverages. This name may be unfamiliar, but its subsidiaries Master Kong, Wei Chuan, FamilyMart, and Dicos are well-known. Its market share is 6.7%;**
**Third is Yangshengtang, which is Nongfu Spring, mainly selling packaged drinking water, with a market share of 5.7%;**
**Fourth is Thai Tiansi, which is Red Bull, mainly selling energy drinks, with a market share of 5.2%;**
**Fifth is Uni-President, which, like Master Kong, mainly sells tea beverages, with a market share of 4%.**
Data source: Euromonitor, CITIC Securities
Specifically for the sub-industries Nongfu Spring is involved in:
**1) Packaged drinking water (accounting for 60% of Nongfu's revenue)**
In 2019, the CR3 was only 27.4%, with the leader Nongfu Spring holding a 10.5% market share. In Japan, the CR3 is 48.3%, with the top player Suntory holding 25.8%. In the US, the CR3 is 43.4%, with the top player Nestlé holding 18.4%.
Data source: Euromonitor, CITIC Securities
Compared with overseas markets, the domestic landscape is more fragmented, and the leader has significant room for improvement. Even though the industry seems more fragmented recently, I believe the packaged drinking water industry will eventually consolidate.
The most important point is differentiation!
Although packaged drinking water is an industry with little differentiation, China is large, and high-quality water sources are relatively scarce, giving companies the opportunity to create differentiation. Through branding and product shaping, categories such as purified water, mineral water, and natural water create differentiated images in consumers' minds.
Many companies have done well in this regard, such as "aristocrat in water," "a little sweet," and "nature's porter." Their brand positioning has successfully entered consumers' minds.
Nongfu Spring's positioning of "natural, healthy" continuously occupies consumers' minds, forming the concept that "Nongfu Spring = natural, healthy." Differentiation creates brand loyalty, enables pricing power, and keeps latecomers out.
In addition, Chinese people are very sensitive to food safety. The unit price of drinking water is low, and people are very willing to pay a premium for quality, even for the appearance of the bottle. For example, I myself, when scanning the shelf, prioritize good-looking bottles, and I am not very price-sensitive. An extra one or two yuan doesn't matter at all.
**2) Tea beverages (accounting for 13% of revenue)**
The tea beverage market is already relatively concentrated, with the CR5 reaching 75.7% in 2019. The leader Master Kong's market share began to decline significantly in 2011, and the two major herbal tea giants began to rise. Now it is stabilizing, with JDB and Guangzhou Pharmaceutical Group (Wanglaoji) together accounting for 34.3% in 2019.
Although Nongfu's Oriental Leaf was launched in 2011, its market share has always been small. It was not until the launch of Chabi in 2016 that it gradually gained a place in the tea beverage industry, with a market share of 7.9% in 2019.
Data source: Euromonitor, CITIC Securities
Compared with packaged drinking water, the tea beverage landscape is more mature. Overall, volume has basically stopped growing, and growth is mainly driven by product upgrades and price increases. Frost & Sullivan expects a growth rate of about 3.5% over the next five years. Structurally, sugary tea currently accounts for a high proportion but is not growing, while sugar-free tea accounts for a small proportion but is growing rapidly.
Therefore, in this sub-segment, the future growth point for companies lies in mid-to-high-end sugar-free tea beverages, such as Oriental Leaf, which I personally like very much.
**3) Functional beverages (accounting for 16% of revenue)**
Functional beverages are a relatively fast-growing sub-segment in the soft drink industry. Frost & Sullivan expects a growth rate of about 9.4% over the next five years. In 2019, the CR5 was 56.7%, and the industry is relatively concentrated. The leader Red Bull holds a 28.1% market share, while Nongfu holds 7.3%, ranking third.
Data source: Frost & Sullivan, prospectus
Overall, the functional beverage market will reach about 175.6 billion yuan by 2024, with a CAGR of 9.4%. The market is relatively concentrated, with Red Bull holding an absolute advantage. Nongfu's Scream and Lidl are quite good, at least in terms of product experience and packaging.
**4) Fruit juice (accounting for 10% of revenue):**
First, let's look at the classification of fruit juice. According to Euromonitor's classification, there are several categories. Currently, low-concentration fruit juice is the most common, but it has basically stopped growing. The fast-growing ones are NFC and plant-based waters like coconut water, which align with a healthy lifestyle. Their CAGRs from 2014 to 2019 were 38.9% and 27.9%, respectively.
Data source: Euromonitor, CITIC Securities
Overall, the fruit juice market will reach about 160 billion yuan by 2024, with a CAGR of 2.2% over the next five years, entering a stable phase. The competitive landscape is relatively fragmented, with the CR5 at 35.1% in 2019. The leader is Coca-Cola with about 10% market share. Master Kong, Uni-President, and Wahaha have seen their market shares decline since 2010. Nongfu Spring now holds a 3.8% market share, ranking third.
In fruit juice, besides the previous mixed fruit and vegetable juices and Aquarius C100, Nongfu now mainly focuses on NFC, which has been a hit in recent years. Its positioning is also health-oriented, and it is very popular. Its positioning is also very precise, as it is the fastest-growing sub-segment in fruit juice.
**-03-****Summary**
**Overall, beverages are a super industry with a large market size. The overall growth rate has become mediocre, but category differentiation is severe, showing diversification. Product life cycles are clearly shorter, testing companies' product iteration capabilities.**
On a larger scale, the development trend of beverages is health, sugar-free, and low-fat. Healthier categories grow significantly faster than the overall market. According to Mintel data, from 2012 to 2018, the global CAGR for sugar-free/low-sugar beverages reached 28%.
The soft drink industry has the soil to produce large-cap companies, such as Coca-Cola, Monster, and Ito En. Currently, the domestic industry landscape is fragmented. Leaders with strategic vision, the ability to choose the right sub-tracks, and strong comprehensive capabilities (product, brand, channel, supply chain) have great opportunities to continuously expand categories, build moats, and become soft drink giants.
Nongfu Spring uses packaged drinking water for defense and other categories for offense, with an excellent product matrix. Moreover, after listing and raising funds, it can fully engage in strategic acquisitions to extend categories and channels, shorten internal R&D time, and, like Nestlé and Coca-Cola, continuously merge and acquire to enter new tracks in a timely manner, consolidating its moat in the overall consumer market.
Source: Laughing说 (ID: lingyun_investalk)


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