Nongfu’s 1H25 revenue grew 15.6% YoY (in-line) and net profit rose 22% YoY (5% above BBG consensus), driven by water biz recovery and strong tea/functional/juice performance, as well as effective cost control especially on raw materials. We raise TP by 24% to HK$57.75 mainly to reflect a 1-year forward earnings (4-month FY25E + 8-month FY26E) and a 15% increase in target P/E given 1) largely eased pressure on core biz, 2) solidified leadership in tea segment; 3) more visibility on barriers to widen the gap vs peers; 4) diversified strategy execution significantly ahead of competitors. Maintain BUY.
Tea biz: solid growth with leading position strengthened. Segment revenue increased 20% YoY to RMB10.1bn in 1H25, moderating from 59%/32% in 1H24/FY24 as scale expansion entered a more stable growth phase. OP margin expanded 4.3ppts YoY to 48.4%, benefiting from the company's cost control in raw material procurement, product mix optimization, and scale efficiencies. Amid intensified competition in 1H25, the performance further solidified its leadership position in the tea beverage field.
　　Water biz: recovery underway with enhanced competitive barriers. In 1H25, segment revenue rose 11% YoY to RMB9.4bn, based on a low base in 1H24 and 1H25 efforts including expanding consumption scenarios and rolling out of water knowledge education etc. OP margin climbed 3.3ppts to 35.4% on further PET price decline. The company added three water sources in 1H25 (with plans for more), which we believe will boost its transportation efficiency and channel layout barriers, widening the gap with peers.
　　New categories emerging as growth drivers. Juice drinks and functional drinks revenue rose 21%/14% YoY to RMB2.6bn/RMB2.9bn in 1H25, supported by the product quality advantages and proactive marketing. Their OP margins climbed 7.7ppts/5.9ppts YoY to 3.3%/47.1%, driven by economies of scale and the company’s development in raw material bases. These categories are expected to become new growth engines ahead in our view. Additionally, the company’s customized product collaborations for emerging channels have provided more high-end user-oriented product innovation insights, laying a stronger foundation for its diversified development.
　　Maintain Buy. We raise our TP by 24% to HK57.75, reflecting 1-year forward earnings (4-month FY25E + 8-month FY26E) and a 15% increase in target P/E to 40.3x (from 35x), justified by: 1) largely eased pressure on core biz, 2)solidified leadership in the tea beverage segment; 3) increasingly visible competitive moat that will further widen the gap vs peers; and 4) diversified strategy execution significantly ahead of competitors, with new growth engines now well-established. Risks: 1) food safety incidents; 2) raw material price hikes.