Zhong Shanshan, founder of bottled water giant Nongfu Spring, has been credited with having a savvy understanding of Chinese consumption trends that enabled him to become the country’s second-richest man. But some are questioning whether his beverage stock may be getting frothy.
Shares of Nongfu Spring closed at HK$36.15 ($4.66) on Monday, a gain of 68% since their debut a week ago. The company now trades at a price-to-earnings ratio of 69, more than three times the P/E multiples of Hong Kong-listed food and beverage peers Tingyi and Want Want China.
Nongfu saw a successful open because it’s a solid company with a proven model generating predictable revenue and profit, which can be a rarity in today’s China market, according to Brock Silvers, former chief investment officer at Adams Asset Management in Hong Kong. But he also expressed a note of caution.
“There’s an IPO fever right now, with both issuers and investors scrambling to ride the wave,”Silvers said. “There were also technical reasons contributing to the positive momentum, such as an undersized float and oversized cornerstone participation. Right now, the stock looks risky for retail investors, and shares don’t seem compelling at current pricing.”
At the current price, Zhong’s stake in Nongfu Spring has a market value of $43.8 billion because his shareholding amounts to 84% of its stock, and company filings also include a warning regarding its limited public float. Investors are recommended to “exercise extreme caution in dealing in the shares” because the high concentration of shareholding by a small number of investors can move the price substantially.
Zhong also has a 75% stake in vaccine maker Beijing Wantai Biological Pharmacy, which has seen its share price increase 14-fold after the company listed in April in Shanghai. Zhong’s combined fortune now stands at $53.7 billion–placing him just Tencent cofounder Pony Ma’s $59.1 billion, and ahead of Alibaba cofounder Jack Ma’s $50.5 billion, according to Forbes Real-Time Billionaires List.
“Right now, the stock looks risky for retail investors, and shares don’t seem compelling at current pricing.”
Last year, Nongfu Spring’s revenue jumped 17% to 24 billion yuan, and sales of bottled water accounted for two-thirds of it. (The rest came from beverage products such as juice and tea-based drinks). Profit was 5 billion yuan, a 21% jump from a year ago. Nongfu Spring has more than one-fifth of China’s bottled water market, which is estimated to grow at an annual rate of 11% to reach 337 billion yuan in 2024, according to Frost and Sullivan figures cited in its prospectus.
“Nongfu Spring’s stock is expensive, but it is one of the major brand names in China in the consumption sector,” said Eugene Law, business development director at China Galaxy International Securities. “Just the brand name itself is worth quite a lot of money, fund managers will think it is a must-hold stock.”
Nongfu Spring has managed to stand out in China’s fiercely competitive bottled water market by being the first to differentiate his offerings, says Jason Yu, a Shanghai-based managing director at consultancy Kantar Worldpanel. While the company’s signature red-capped 2 yuan bottled water can be found anywhere from supermarkets to mom-and-pop stores, Zhong has also taken advantage of a rising level of health awareness in China through the company’s marketing and branding.
For example, Nongfu Spring has made what it describes as natural drinking water for infants, and mineral water that it says is rich in minerals. The company also launched a third line of water products that comes in upscale glass packaging, so it can target banquets as well as conference goers.
“Investors have looked past the pandemic to focus on long-term prospects,” says Ke Yan, head of research at Singapore-based DZT Research.
But the company hasn’t been immune to the pandemic. As stores were once forced to close amid strict quarantine rules, sales for the first five months of the year dropped 13% to 8.7 billion yuan. Still, that hasn’t stopped enthusiastic investors.
Nongfu Spring didn’t respond to repeated requests for comment, but local media reports say that Zhong comes from a humble background. Born in 1954 in the southeastern city of Hangzhou, his schooling was interrupted during China’s tumultuous Cultural Revolution. He dropped out of school at an early age and found work in construction, but eventually he managed to get into college in 1977, studying Chinese at what is now called Zhejiang Radio & TV University.
He later got a job as a journalist working for the state-run Zhejiang Daily newspaper. Zhong quit in 1988 to venture into business. He sold mushrooms, worked as a sales agent for Chinese beverage company Wahaha, and peddled healthcare supplements before founding his bottled water company in 1996.
Mark Tanner, managing director of Shanghai-based consultancy China Skinny, said the retail network Zhong has painstakingly built up is just as important as his drinks and beverages. Nongfu Spring has enlisted almost 4,500 distributors, who ensure that its products are sold everywhere in China. “They have distribution that is second to none,” Tanner says.
Diversification started in 2003, when Zhong branched into beverages to sell juice. Over the years, he expanded into coffee, yoghurt, sports drinks and tea-based beverages.
Though Nongfu Spring has been able to fend off its competitors in the bottled water market up till now, it still needs to do more to grow its beverage business, says Kantar Worldpanel’s Yu. “The company needs a product that is as strong as its water, and it still has a long way to go before winning more consumers over with some of the newer offerings.”
Yu says one promising category is the company’s sparkling beverages, which is aimed at taking advantage of China’s new-found love for such bubbly drinks. Nongfu Spring launched in 2018 lemon- and pomegranate-flavored sparkling tea, and this year put forward a sparkling water series that comes in three flavors.
“The entire market for sparkling water is growing very fast,” Yu says. “The company’s products are good, but it needs to think about how to reach consumers more quickly.”