Why Nongfu Spring will "fall", the 40% retracement should not be the end of the decline

Rui Dalio concluded in the book "Principles" that after the summary of all kinds of successful entrepreneurial projects, there are three simple words: rigid demand, high frequency, and big market.

Wang Xing also directly stated that high frequency has great advantages over low frequency.

Most of the big business from ancient times to the present has been concentrated on "clothing, food, housing, transportation", and human survival needs to meet these most basic high-frequency and rigid needs.

Nongfu Spring stock price performance (September 2020 to present)

In food, clothing, housing and transportation, the most frequent is food; the most frequent in food is drinking.

The business related to drinking is the high-frequency rigid demand in the high-frequency rigid demand.
It is not surprising that Nongfu Spring (HK: 09633) can achieve such a success.

Even the founder of a company with a market value of nearly one trillion Hong Kong dollars, who rushed to the sixth place on the Hurun Global Rich List, has only cut away a limited portion of this market.

In a large market with high frequency and rigid demand, it has a competitive advantage, close to 60% and year-over-year increase in gross profit margin, more than 40% ROE, and abundant cash flow brought by the first payment after delivery system.

Brand value cannot be defined by a specific amount.
.
.
…A company with almost no shortcomings is bound to be popular in the capital market.

Proportion of each category in the global soft drink market in 2019

But no matter how optimistic about the capital, for a consumer company, a price-earnings ratio of more than 100 times is too high.

This is also one of the core reasons for the recent 40% retracement of Nongfu Spring’s stock price.

Entering Nongfu Spring in 2021, the stock price has reached the point where it must fall-and after such a sharp decline, the current valuation of more than 70 times the price-to-earnings ratio is still not low.

Unlike securities analysts who make quantitative analysis, Juchao Business Review interprets this company more from qualitative analysis.

For investors, using the richest possible perspective to observe, you can get the most true answer.

Exclusive brand, high valuation

Exclusive brand, high valuation

In China, packaged water, protein drinks and fruit juices account for half of the soft drink market, of which packaged water alone accounts for 20.

34%.
Beverages-soft drinks-packaged water-natural water, 2 yuan a bottle of packaged water is the current market mainstream price, Nongfu Spring basically monopolizes this range.

The power of monopoly is strong.

For consumer companies, it is difficult to achieve a 100% monopoly in the traditional and narrow sense, but it can achieve a certain degree of "monopoly" of natural water.

For enterprises, this kind of monopoly usually means both the abandonment of interests and the possession of them.

The so-called abandonment is that while Nongfu Spring is occupying the market with its products, brands and channels, it has given up its dominance over the price of packaged water, and does not seek to actively and continuously increase prices for profit, and part of the profits that could have been obtained through price increases.

To consumers.

By giving up this part of the potential profit, Nongfu Spring has gained stronger brand power and market control: users can completely save all choices and thinking and buy a bottle of natural water from Nongfu Spring for 2 yuan.

This is the side where Nongfu Spring’s monopoly on the natural water market takes advantage of its interests.

Comparison of gross profit margin and net profit margin between Nongfu Spring and similar companies (2017-2020H1)

The role of brand power tends to be underestimated in the Internet era.
What we see is the rise of many new brands through Internet channels, and we judge that the original brand control will be weakened.

But the actual situation is that although the industry and product environment are becoming more complex, consumers’ consumption psychology and behavior patterns have not changed significantly.
Consumers will still equate strong brands with specific consumer products to reduce The time and energy required for decision-making and judgment.

To sum it up with a common saying, Nongfu Spring occupies the "consumer mind".

This means certainty in product sales for enterprises, and certainty is the most sought after investment in the secondary market.
So since the listing, the valuation of Nongfu Spring has always been at a high level.
Since the IPO, Nongfu Spring’s price-to-earnings ratio (TTM) has never been lower than 60 times, and it rose to 138.
70 times at the highest point in early January 2021.

How high is this number? We can compare it with the following extreme cases:

In 2015, when the GEM bubble was at its craziest, the P/E ratio was 144 times;

On November 5, 2007, the first day of PetroChina's listing, the stock price was 48.
6 yuan, and the price-earnings ratio was 64 times;

During the global Internet bubble in 2000, the overall P/E ratio of NASDAQ index companies reached the highest 200 times.
One of the leading companies, Cisco (NASDAQ: CSCO), had the highest P/E ratio of more than 200 times.

It is not impossible for a listed company to have a high price-earnings ratio, but it needs reasonable support.
A listed company that can maintain a high price-to-earnings ratio and not be killed in valuations needs to meet two conditions at the same time: the net profit is in rapid growth, and this growth is continuous.

Numerous brokers have made a detailed and comprehensive analysis of the packaged water industry and have come to a definite conclusion: Nongfu Spring’s net profit growth can be sustained for a long time.
This also gives the capital the confidence and confidence to buy at a high price-earnings ratio.

But in terms of the growth rate of net profit, no broker dared to give a super high number.

Haitian Flavor Industry's Net Profit Growth

Strong certainty, high expectations

Strong certainty, high expectations

There are not many companies in the A-share market that have both high net profit growth and clear growth continuity, and most of them are given very high valuations by the market.
Aier Ophthalmology (SZ: 300015) is a typical representative of them.

Due to the unique "industrial fund + in vitro incubation + listed company repurchasing hospital assets", in the context of the continuous high growth of the domestic ophthalmology diagnosis and treatment market, Aier Ophthalmology can ensure that the annual net profit growth rate is stable at more than 30%.
This has been the case every year since 2014, and the compound growth rate of net profit in the past ten years has reached 32%.

Capital therefore gave it a very high price-to-earnings ratio valuation.
The average price-earnings ratio of Aier Ophthalmology in the past five years was close to 100 times.
At the beginning of 2021, it was fired to a historical peak of 234.
56 times.
After a large retracement, it is still as high as 120 times.

The charm of the certainty of profit growth can be seen from this.

However, it is not easy for consumer companies to achieve an annual net profit growth rate of more than 30% like Aier Ophthalmology.

On the one hand, although there is a brand moat for consumer products, most of the similar products are highly substitutable, and there are not many companies that can achieve monopoly + constant price increase at the same time;

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