Source: Finance World Weekly (ID: cjtxzk), Author: Shao Lanjie, Editor: Sun Jing After a decade of IPO rumors, Nongfu Spring has finally officially embarked on its IPO journey. On the early morning of April 30, Nongfu Spring Co., Ltd. disclosed its prospectus on the HKEX website, revealing the true face of this beverage empire with annual revenue exceeding 24 billion yuan.
-01-
Gross margin on water sales exceeds 60% According to the disclosed prospectus, Nongfu Spring, established in 1996, primarily covers categories such as packaged drinking water, tea beverages, functional beverages, and fruit juice drinks. In terms of brands, Nongfu Spring encompasses the packaged water brand Nongfu Spring, tea beverage products Oriental Leaf and Chapi, functional beverage Scream, Vitamin Water, and fruit juice products including medium-concentration juice Nongfu Orchard, low-concentration juice Shui Rong C100, and non-concentrated pure juice NFC and 17.5°, totaling nine regular traditional brands. In recent years, Nongfu Spring has also launched different categories such as Tanbing coffee, soda water drinks, and plant-based yogurt, which are classified as "other products" in financial reports due to their smaller scale. Additionally, based on demand for fruit juice products, Nongfu Spring has extended into upstream fruit cultivation, processing, and fresh fruit retail. As of the end of 2018, Nongfu Spring had 12,000 mu of navel orange planting bases and over 400,000 orange trees. By 2019, Nongfu Spring had planted 4,000 mu of apples in the core production area of Aksu, Xinjiang. Nongfu Spring has also crossed over into agricultural products. Since 2016, Nongfu Spring has established a dedicated rice technology research institute to cultivate rice, and its "Northeast Fragrant Rice" uses small packaging design, priced at over 10 yuan per jin. Although Nongfu Spring's product line is very extensive, in terms of revenue share, packaged drinking water has contributed over 50% of revenue in the past three years, and the proportion is still increasing. From 2017 to 2019, packaged drinking water revenue accounted for 57.9%, 57.5%, and 59.7% respectively. From 2019 data, packaged drinking water revenue exceeded 14.3 billion yuan, with a 59.7% share leading far ahead; followed by functional beverage products, tea beverage products, fruit juice products, and other products, with revenue shares of 15.7%, 13.1%, 9.6%, and 1.9% respectively. In terms of gross margin, packaged drinking water still leads, with a gross margin as high as 60.2% in 2019, which means that for every bottle of Nongfu Spring sold at 2 yuan, the gross profit is 1.2 yuan. The gross margins for functional beverage products, tea beverage products, fruit juice products, and other products are 50.9%, 59.7%, 34.7%, and 18.1% respectively. In terms of total revenue, Nongfu Spring's revenue from 2017 to 2019 was 17.491 billion yuan, 20.475 billion yuan, and 24.021 billion yuan, with a compound annual growth rate of 17.2%, higher than the 5.8% growth rate of China's soft drink industry and 3.1% of the global soft drink industry during the same period; net profit from 2017 to 2019 was 3.386 billion yuan, 3.612 billion yuan, and 4.954 billion yuan, with net profit margins of 19.4%, 17.6%, and 20.6% respectively. In comparison, the average profitability level of domestic and foreign soft drink industries is less than 10%. On the surface, net profit continues to rise, so why has Nongfu Spring chosen to go public now? After all, its founder Zhong Shanshan responded to IPO rumors in 2017 by saying: "The capital market emphasizes demand and being demanded. Nongfu Spring currently has no demand, so there is no need to go public." Some industry insiders analyzing the media mentioned that bottled water competition is increasingly fierce, and the new fields Nongfu Spring has entered, such as coffee and plant-based milk, are also areas with strong competitors and require increased investment. Nongfu Spring's choice to IPO at this time should be due to funding pressure. -02- Water sources: partly from third-party water supply companies In this prospectus, Nongfu Spring rarely mentioned that some water intake comes from third-party state-owned water supply companies. In the risk factors section, the prospectus states: "We have entered into water supply agreements with each relevant third-party state-owned water supply company. These agreements mainly stipulate the water supply price and annual water supply volume determined through mutual negotiation to ensure stable water supply for our relevant subsidiaries and plants." Zhu Danpeng, a food industry analyst in China, analyzed to Finance World Weekly: Currently, Nongfu Spring has built a pyramid system in packaged drinking water, with high-end products priced at dozens of yuan per bottle and natural water at a few yuan. High-end products focus on mineral water, while affordable natural water comes from surface water. Water sources with relatively large production volumes are basically cooperated with local state-owned water supply companies because local water supply itself comes from these sources, such as Qiandao Lake. However, regarding the proportion of state-owned water supply companies in water sources, Nongfu Spring only told Finance World Weekly: "For relevant information, please check the official website of the Hong Kong Stock Exchange," without providing a detailed explanation. Water sources are one of the core elements of competition for drinking water companies. After launching the slogan "We don't produce water; we are just nature's porters," Nongfu Spring has always regarded water sources as a "long-term stable competitive advantage" and heavily promotes its water sources in marketing. In 2000, Nongfu Spring announced the cessation of purified water production and fully shifted to bottled natural water production. Currently, it has 10 major water sources in China, distributed in Qiandao Lake in Zhejiang, Wanlv Lake in Guangdong, Danjiangkou in Hubei, Tianshan Manas in Xinjiang, Emei Mountain in Sichuan, Taibai Mountain in Shaanxi, Changbai Mountain in Jilin, Wuling Mountain in Guizhou, Daxing'anling in Heilongjiang, and Wuling Mountain in Hebei. Nongfu Spring has established packaged drinking water production bases around each water source and stated that it will focus on expanding production capacity at bases located in Qiandao Lake, Zhejiang; Wanlv Lake, Guangdong; and Changbai Mountain, Jilin. Nongfu Spring has been looking for more water sources, but this has also led to some controversies, such as the deforestation incident in January 2020 when it was reported that Nongfu Spring was illegally constructing and taking water in Wuyi Mountain. In subsequent public statements, Nongfu Spring emphasized that the water intake point was not within the Wuyi Mountain National Forest Park, and the project procedures were legal and compliant, and stated that Nongfu Spring began searching for water sources in Wuyishan City in 2010, signed an investment agreement with the municipal government on August 1, 2017, was listed as a key provincial project, and received approvals from various departments. However, "Wuyi Mountain National Park" disclosed on the evening of January 15 via its WeChat public account that on the 13th, it had persuaded excavators working at the water intake to withdraw from the national park area and dispatched law enforcement officers and ecological patrol guards to work in shifts to prevent construction machinery from returning to the operation point. Wuyi Mountain National Park also mentioned that after verification, two of the three construction plots were compliant, while the other had violations due to historical reasons, but the deforestation occurred before it was included in the park's scope. However, from this prospectus, Wuyi Mountain is not listed as one of Nongfu Spring's water sources.
-03-
The capital map of the mysterious founder With the disclosure of the prospectus, the capital map of the mysterious founder behind Nongfu Spring and his family has surfaced. On the early morning of April 30, Nongfu Spring Co., Ltd. disclosed its prospectus on the HKEX website. The day before, on April 29, Wantai Biological listed on the main board of the Shanghai Stock Exchange. Coincidentally, Wantai Biological and Nongfu Spring share the same origin, with the actual controller being Zhong Shanshan. Zhong Shanshan holds 98.38% of Yangshengtang, and through Yangshengtang indirectly holds high proportions of shares in both Wantai Biological and Nongfu Spring. On September 26, 1996, Xin'anjiang Yangshengtang Drinking Water Company was established, renamed "Zhejiang Qiandao Lake Yangshengtang Drinking Water Co., Ltd." the following year, and restructured into a joint-stock company in 2001, with the name changed to "Nongfu Spring Co., Ltd." Wantai Biological's prospectus shows that Zhong Shanshan holds a total of 83.56% of the company's shares. Zhong Shanshan holds 87.4472% of Nongfu Spring Co., Ltd., while Lu Xiaowei, Lu Cheng, Lu Xiaofu, Zhong Xiaoxiao, and Zhong Xuanxuan hold 6.4426% of the shares. These five shareholders are all relatives of Zhong Shanshan: among them, Lu Xiaowei and Lu Xiaofu are both sisters of Lu Xiaoping (Zhong Shanshan's wife), with Lu Xiaowei serving as a director and general manager of Yangshengtang; Lu Cheng is Lu Xiaoping's brother; and Zhong Xuanxuan and Zhong Xiaoxiao are Zhong Shanshan's sisters. In addition, some management members of Nongfu Spring collectively hold 0.5507% of shares, and 57 other individual shareholders hold 5.5595% of equity. Zhong Shanshan, now 66 years old, was born in Zhuji, Zhejiang, into an intellectual family. Due to historical reasons, his educational journey was bumpy; he worked as a bricklayer and later worked at Jiangnan Magazine and Zhejiang Daily. Later, he went south to seek fortune and founded Yangshengtang in Hainan, with his signature product being the health product "Turtle Turtle Pill," but before that, he had been the general agent for Wahaha in Guangxi and Hainan. Compared to other founders in the FMCG industry, Zhong Shanshan is very low-key. He is skilled in marketing and does not hesitate to be "outspoken" in expressing his views—for example, in his eyes, except for Nongfu Spring, any other bottled water is not good enough, "Nongfu Spring is the only legitimate representative of healthy water"; his attitude towards suppliers is also condescending, and industry insiders call him a "loner," "without even a business friend." But this does not hinder Zhong Shanshan's commercial success. The prospectus shows that from 2017 to 2019, Nongfu Spring's revenue was 17.491 billion yuan, 20.475 billion yuan, and 24.021 billion yuan, respectively. The year-on-year growth rates in 2018 and 2019 were 17.1% and 17.3%. The adjusted net profit for the past three years was 3.386 billion yuan, 3.612 billion yuan, and 4.957 billion yuan. Although Nongfu Spring expects that due to the impact of the epidemic, sales volume in the first quarter of this year will decline compared to the same period in 2019, and revenue and net profit will also decrease accordingly, it has not lowered its full-year expectations, stating that "the epidemic will not have a material adverse impact on the performance of the 2020 fiscal year." Once the tip is adopted, a payment of 400-2000 yuan will be made.