Nongfu reported 22% YoY net profit growth on 16% YoY total revenue growth in 1H25. Its packaged drinking water sales largely outperformed competitors, reflecting effective execution of marketing strategy since last year, coupled with the abatement of PR crisis. Despite competition from other RTD beverage brands & freshly-made tea store players (e.g.
　　Mixue), Nongfu’s RTD tea maintained robust sales growth momentum in 1H25. OPM exceeded expectations due to cost tailwinds, as well as disciplined expenses control. We are confident that Nongfu will be the long-term F&B winner. Reiterate BUY rating.
　　Key Factors for Rating
　　1H25 results review. Nongfu released its 1H25 results on 26 August after the market close and hosted an earnings call at 9:00am HKT on 27 August. In 1H25, total revenue reached RMB25,622m (+16% YoY), basically in-line. Overall GPM was 60.3% (+1.5ppts YoY), well above expectations, primarily driven by lower procurement cost of raw materials (such as PET, sugar, cardboard, etc.). Notably, S&D expenses ratio considerably improved 2.9ppts YoY to 19.6%, as a result of sales leveraging & good execution. Net profit reached RMB7,622m (+22% YoY), with NPM of 29.7% (1H24: 28.1%), beating expectations, in 1H25.
　　Segment wise: Packaged drinking water sales rose 10.7% YoY to RMB9,443m in 1H25 (accounting for 37% of total revenue), reflecting that the impact of the defamation incident last year has been subsiding. Remarkably, Nongfu continued to highlight its competitive edge in natural water sources when communicating with the end market, with three water sources (e.g. Hunan Badagong Mountain, Tibet Nyenchen Tanglha Mountain and Sichuan Longmen Mountain) newly added in 1H25. Nongfu also expanded its ice product line and its new pure transparent edible ice product has gained popularity among young consumers at Sam’s Club in particular. RTD tea sales rose 19.7% YoY to RMB10,089m in 1H25 (accounting for 39% of total revenue). In 2Q, Nongfu accelerated product innovation, with good feedbacks on its “Oriental Leaf Longjing Spring Tea” (the seasonal limited edition), “Oriental Leaf Chenpi White Tea” (the new flavour), and “Iced Tea” (a brand new carbonated tea beverage priced at RMB5/600ml). From 2Q, Nongfu initiated its “Open Cap & Win Prize” campaign, with a maximum prize of RMB666 to stimulate sales turnover. Functional beverage sales rose 13.6% YoY, in-line with the latest category trend. Juice sales rose 21.3% YoY, largely attributable to its new “17.5°” series.
　　Guidance: Management now looks for mid-teen% YoY total revenue growth in 2025; GPM and NPM are likely to be modestly higher YoY. Capex for 2025 should increase YoY due to heavier investment i　　water sources and supporting facilities.
　　Dividend payout policy will stay steady.