Nongfu Spring: China's Dominant Mineral Water Player Could See Further Growth Despite Rising Competition

Last updated: 26 January 2023


Founded in 1996, Nongfu Spring is a Chinese beverage company listed on the Hong Kong stock exchange (HKG:9633). They are most famous for their natural mineral water brand "Nongfu Spring", the leading packaged water brand in China, widely recognized for its emphasis on natural water sourced from springs, lakes, mountains and glaciers, from exotic locations across China. The company's growing portfolio of beverage brands include:

  • RTD tea brand(s): Tea π, Oriental Leaf, Mix milk tea

  • RTF coffee brand(s): Tan Bing

  • Functional drink brand(s): Victory vitamin water, Scream isotonic drink

  • Fruit juice brand(s): NFC juice, 17.5° juice

99% of the company's revenues and profits are generated from China. For the year ended December 2022, the company generated CNY 29.7 billion in revenues, of which 57.4% was generated from packaged drinking water products, 15.4% generated from tea beverage products, and 12.4% generated from functional beverage products and 8.8% generated from juice beverage products. Other products which include coffee beverage products, sparkling flavored beverage products, soda beverage products and fresh agricultural products such as oranges accounted for the remaining 6% of revenues. During the four years between 2017 and 2021, Nongfu Spring's revenues have grown at a CAGR of 14%.

Gross profits rose 30.7% YoY to CNY 17.66 billion in 2021, with a gross margin of 59% for the year, unchanged from last year. Net profits rose 35.7% YoY to CNY 7.2 billion representing a net margin of 24% in 2021, up slightly from 23% in 2020. Bulk of the company's profits were generated from their packaged drinking water business which generated CNY 6.57 billion in segment profits followed by RTD tea which generated CNY 1.8 billion, functional drinks products which generated CNY 1.6 billion, juice beverages which generated CNY 503 million and other products which generated CNY 225.7 million.

Looking ahead...

Favorable Regulations, And Rising Disposable Incomes Augur Well For Bottled Water Business; Strong Differentiation Could Help Counter Rising Competition

China is the world's biggest bottled water market accounting for 25% of global bottled water consumption. Yet, at 27.8 billion gallons of bottled water consumed in 2020, China's bottled water consumption is only about double that of second-placed U.S.'s 15 billion gallons of bottled water consumption despite having a population that is about four times bigger than the U.S. In fact, China does not even make the top 10 in terms of per capita bottled water consumption, suggesting tremendous room for further growth.

China's "Three Reductions and Three Kinds of Health" (three reductions refer to reducing intake of salt, oil and sugar, while three kinds of health refers to oral health, healthy weight, and healthy bones) program could drive a shift in consumption away from sugary beverages such as sodas and juices, and towards non-sweetened beverages including drinking water, notably natural mineral water which is often viewed as rich in healthy minerals and micro nutrients.

In addition, with China on the cusp of becoming a high-income country, demand is projected to grow for premium bottled water products which have already been seeing robust demand; Chinese imports of mineral water including aerated water (HS code 220110) have grown 2.6 times between 2015 and 2021 according to data from UN Comtrade. Imported mineral water products are largely comprised of premium products (such as those from Evian), a market Nongfu Spring currently dominates but for which competition looks set to increase.

China's bottled water market is highly concentrated with the top six players commanding more than 80% of the market (Nongfu Spring led the way with a 26.5% market share) and competition is set to increase with the bottled water growth opportunity triggering greater competitive activity; American beverage giant Coca-Cola who is ramping up efforts to grow its share of China's high-end water market. Chinese sugar-free carbonated beverage startup Genki Forest who entered China's mineral water market in 2021 is also busy with its own ambitions to capture a share of China's mineral water space. Meanwhile Malaysia's largest mineral water brand, Spritzer, is setting its sights on China's bottled water market as well.

Bottled water is currently Nongfu Spring's biggest business by revenues and profits. Stiffer competition could constrain Nongfu Spring's pricing power while potentially increasing costs (particularly in terms of advertising and marketing expenditure), ultimately pressurizing margins. However, Nongfu Spring's strong differentiation could help them fend off competition; the company currently has access to 11 high quality water sources across China with bottling plants located close to those water sources to reduce transport costs. Nongfu Spring may well have already captured most of China's best water sources, presenting a hurdle for late entrants to overcome, not only in terms of locating suitable alternative water sources (suitable in terms of water quality and access to transport infrastructure) but also in terms of securing mineral water mining permits.

Nongfu Spring is also highly differentiated in terms of brand positioning with the company's brand image, packaging, and marketing and advertising centered around their motto of being "porters of nature". From packaging design featuring exotic animal species, and captivating marketing slogans portraying a healthy and natural image (such as "Nongfu Spring tastes a little bit sweet"), to documentary-style commercials highlighting the pristine natural surroundings from which their waters are sourced from, Nongfu Spring is highly differentiated in a relatively commoditized market. Arguably no competitor in China's drinking water space can boast a similar positioning.

Tea Beverages Holds Potential To Be New Growth Engine On The Back Of Growing Demand For Sugar-Free RTD Tea In China

China is the world's largest RTD tea market in the world, and the beverage continues to grow in popularity. However, at an estimated 6 liters of RTD tea consumed per person in China in 2023 (versus around 4 liters for the global average), RTD tea consumption per capita is quite saturated in China and may thus offer relatively limited growth opportunities.

Market dynamics however are changing offering business opportunities within the RTD tea segment. A notable development is the rising popularity of sugar-free tea (driven by growing health awareness particularly among China's younger consumers) a trend which could get a further boost with the government's "Three Reductions and Three Kinds of Health" program.

RTD tea beverages is Nongfu Spring's highest-margin business segment, and second-highest profit contributor. The segment has been seeing strong growth lately on the back of growing demand for sugar-free RTD tea in China, a market Nongfu Spring was among the first to enter with its Oriental Leaf sugar-free RTD tea brand, which now enjoys strong brand recognition and consumer favor in China.

Competition is increasing however; again, sparkling water startup Genki Forest has entered the fray, launching a sugar-free tea product in January 2023 in a direct challenge to Nongfu Spring's Oriental Leaf.