Sinolink: Initiate Coverage on NONGFU SPRING (09633) with a "Buy" rating, target price of 40.53 Hong Kong dollars.

Sinolink released a research report stating that it is offering coverage for NONGFU SPRING (09633) for the first time, giving it a "buy" rating, and expecting the company's net profit attributable to the mother to be 11.9/14/16.5 billion yuan for the years 2024-2026. Considering the company's strong brand and channel advantages, the fundamentals are expected to bottom out and rebound, with a target price of 40.53 Hong Kong dollars. Sinolink's main points are as follows: 1) In the medium and long term, with the growth in per capita consumption and the steady increase of the combination of natural water and purified water, the market share is expected to steadily increase. Looking ahead, the bank believes that NONGFU SPRING has an advantage in natural water and has formed strong barriers in terms of water sources, channels, and brands. With a low base, it is expected to stabilize and recover. Promotional activities for purified water will continue for some time, and competitors, seeking profit margins, are unlikely to start a vicious price war. The company will still have a relative advantage in a soft demand environment. In the long term, China's per capita consumption of packaged water still has the potential to double that of the United States and South Korea, and the packaged water industry will continue to expand steadily, with the company expected to continuously improve its market share. 2) The penetration rate of sugar-free tea is expected to increase to 50%-60% in the medium and long term, with continued optimism about doubling growth for Oriental Leaves. With the increase in consumer health awareness and the groundwork and nurturing of sugar-free beverage consumption, the penetration rate of sugar-free tea in China has been rapidly increasing in recent years. According to the bank's estimates, it will reach 20% by 2023, but there is still over four times expansion space compared to markets with similar tea-drinking habits in countries like South Korea and Japan. Oriental Leaves is expected to capitalize on its early brand promotion and consumer education, while leveraging its existing channel network resources to quickly enter the market. Considering the significant constraints on existing competing products in terms of product and channel, the bank expects Oriental Leaves to continue to benefit from the industry's expansion dividend. 3) Seizing the opportunity of differentiation in niche categories, the company is expected to continue to launch the next big product leveraging its platform advantages. Currently, the company has large-scale products in the sports and juice beverage categories, which have the characteristics of low concentration and untapped category space. The bank believes that with the company's experience in new product insights, supply chain construction, channel expansion, and penetration, other categories such as sports beverages and ready-to-drink coffee are likely to seize the next trend.