New Stock Analysis | CR Beverage: Annual Revenue of 13.5 Billion Yuan from Bottled Water, Unable to Remove the "Yibao" Label.

Following NONGFU SPRING, the leading company in pure water, CR Beverage is about to enter the capital market. According to the Hong Kong Stock Exchange disclosure on September 25th, CR Beverage has passed the hearing at the Hong Kong Stock Exchange, with bofa securities, BOCI, CITIC SEC, and UBS Group as its joint sponsors. The company expects to raise up to $1 billion and plans to build new factories in Zhejiang, Hubei, Chongqing, and Shanghai as well as expand existing factories, with the clear intention of surpassing NONGFU SPRING. However, despite being just one step away from going public, as the market for pure water becomes increasingly saturated and the on-the-go sector has not yet shown a clear "second curve", CR Beverage faces substantial challenges in the future. Annual revenue of 13.5 billion RMB "Yibao" revenue growth slowing down According to a research report, CR Beverage is one of the earliest companies in China to specialize in producing packaged drinking water. It has grown to become the second-largest packaged drinking water company in China and the largest drinking pure water company in China (by retail sales in 2023). According to the research report, the retail sales of the company's "Yibao" brand of drinking pure water reached 39.5 billion RMB in 2023, making it the number one brand in the Chinese drinking pure water market. With the single brand "Yibao", CR Beverage ranks second in the Chinese packaged drinking water market with a market share of 18.4%, second only to NONGFU SPRING, and also becomes the largest drinking pure water company in China with a market share of approximately 32.7%. With "Yibao" as its core brand, CR Beverage has developed into a leading on-the-go soft drink enterprise covering a variety of consumption scenarios such as outdoor, home, business, dining, and sports, by continuously enriching its product matrix and expanding product specifications. According to the prospectus, CR Beverage currently has a product portfolio of 13 brands including Yibao, Zhibenqingrun, Misui series, Holiday series, and Zuweicha Shi, with a total of 56 SKUs. In 2023, by retail sales, the company ranked fifth in China's on-the-go soft drink industry, with a market share of approximately 4.7%. In terms of performance, in the first four months from 2021 to 2024 (hereinafter referred to as the reporting period), CR Beverage achieved revenues of approximately 11.34 billion RMB, 12.623 billion RMB, 13.515 billion RMB, and 4.15 billion RMB respectively; with profits reaching approximately 0.858 billion RMB, 0.989 billion RMB, 1.331 billion RMB, and 0.447 billion RMB respectively. Both revenue and net profit show a growth trend. In terms of products, CR Beverage focuses on the production and sales of packaged drinking water products with Yibao as the core brand. During the reporting period, revenues generated from Yibao packaged drinking water products were 10.797 billion RMB, 11.887 billion RMB, 12.405 billion RMB, and 3.692 billion RMB respectively, accounting for 99.8%, 99.8%, 99.7%, and 99.2% of total revenues from packaged drinking water products during the same period. Despite being an industry leader, CR Beverage still faces pressure. Firstly, the entire pure water market has reached its ceiling, making it difficult to tell new stories. An HAITONG INT'L research report suggests that the pure water industry has low barriers to entry, high competition, thin profit margins per bottle, requiring high turnover, and competing based on overall capabilities. After several changes, the leading packaged water companies have entered a stage of slow growth, with the industry's future growth maintaining around 3%-4%. This makes bottled "water wars" always fierce. The prospectus shows a declining revenue growth trend for Yibao in the past two years, with the growth rate for packaged drinking water products going from 10.06% in 2022 to 4.54% in 2023. Additionally, Yibao's pure water has chosen a "self-owned factory + contract processing" model, leading to lower profit margins compared to NONGFU SPRING. From 2021 to 2023, CR Beverage's gross profit margins were 43.8%, 41.7%, and 44.7% respectively. NONGFU SPRING, on the other hand, produces in its own factories without having to pay contract processing fees, allowing better control of profit margins. According to NONGFU SPRING's 2023 performance, its total revenue and net profit were 42.67 billion RMB and 12.08 billion RMB respectively. In comparison, the revenue was three times that of CR Beverage, the profit was nine times greater, and the gross profit margin remained stable at around 60%. Apart from "Yibao", how will CR Beverage grow? As mentioned earlier, the packaged drinking water industry is still in a growth phase, but the competition is fierce. According to a research report, by retail sales, the size of China's packaged drinking water market in 2023 was 215 billion RMB, with a compound annual growth rate of 7.1% from 2018 to 2023. It is expected to reach 314.3 billion RMB by 2028, with a compound annual growth rate of 7.9% from 2023 to 2028. Just as the law of "big fish in a big pond" suggests, this billion-dollar race is also filled with significant competitive pressure. In the risk disclosure, CR Beverage also admitted, "The company is in China's on-the-go soft drink industry, which is highly competitive and will continue to be so. The company faces fierce competition from existing competitors and new entrants into the industry. Some competitors have established market positions in multiple categories and have more financial, research and development, marketing, and other resources. The company also competes with some smaller brands, which may be more innovative and better at bringing new products to market and entering and serving niche markets more effectively and quickly." However, at present, the main revenue pillar for CR Beverage is still its pure water business, with beverage products accounting for less than ten percent. In fact, the beverage market is highly competitive, with consumers being picky about their tastes. Not only do traditional giants like Coca-Cola, Master Kang, and Uni-President compete, but also rising stars like Genki Forest, He Cha, and Bawang Cha Ji that specialize in instant drink brands are segmenting the market. Although CR Beverage cites a research report to claim the number one position in the Chinese chrysanthemum tea beverage market and second place in the flavored water market by retail sales in 2023, observation shows that CR Beverage's beverage products are still in the market.The influence on (the market) is quite limited, the market visibility is also not significant. This is reflected in the income as well, which did not achieve very good results.Under a multi-category strategy, this means that the company will have a large outflow of cash. As of April 30, 2024, the year-end cash and cash equivalents of China Resources Beverage amounted to 2.19 billion yuan, current assets were 5.65 billion yuan, and current liabilities were 5.308 billion yuan. While current assets can still cover current liabilities, the short-term debt pressure is significantly increasing. Therefore, in this situation, China Resources Beverage urgently needs to expand its product categories and has no choice but to seek a Hong Kong IPO for capital injection. More importantly, the real significance and purpose of China Resources Beverage planning to go public at this time is to expect capital to integrate and drive resources, such as expanding into e-commerce channels and further strengthening product diversification. In fact, China Resources Beverage not only benchmarks NONGFU SPRING but also companies like Haitian (famous for soy sauce) and Haier (originally known for refrigerators), which started with a single product and became consumer giants through accelerated development after going public. This is also the ambition of China Resources Beverage. In summary, with the "C'estbon" brand, China Resources Beverage has become the leader in the domestic packaged drinking water market with steady revenue and profit growth. However, as the growth rate of purified water market slows down, the company still needs to solidify its growth foundation through multiple product categories. However, at present, the beverage water business has not gained momentum, becoming a hidden concern for the growth of China Resources Beverage.