Why Nongfu Spring’s Troubles Could Signal a Buy

Nongfu Spring (SEHK:9633) hasn't had a good year. A string of PR issues has plagued the company. First was the passing of Zong Qinghou, the founder of Wahaha, which reignited comparisons between Wahaha and Nongfu Spring. This event intensified scrutiny on Nongfu Spring’s earlier practices, which were deemed unethical and appeared less patriotic. The scrutiny brought about criticism of its bottle design, which resembled Japanese elements, and even extended to the fact that Nongfu Spring’s founder, Zhong Shanshan, had his son study in the U.S.

Another PR blunder involved Nongfu's brush with the Consumer Council in Hong Kong, which labeled its drinking water’s bromate residue as above the legal limit. After discussions, the Consumer Council acknowledged it had wrongly classified Nongfu’s drinking water as mineral or spring water when it should have been labeled as natural drinking water, which has a more accommodative bromate residue tolerance. Nongfu passed the criteria under this classification.

As a consumer brand, such PR disasters have a direct impact on its business. Chinese consumers can be unforgiving, often enforcing cancel culture and boycotting products. This has also affected the share price, which has fallen 41% year-to-date. Zhong Shanshan, who had held the title of the richest man in China for years, lost this status following the significant decline in Nongfu’s share price.

Adding to Nongfu’s troubles, China has entered a phase of lower consumption due to the property crisis, which has hit most Chinese consumer brands hard. At the same time, competition is intensifying, especially with China Resources Beverage seeking a US$1 billion listing on SEHK in October, raising more capital to compete. China Resources Beverage's drinking water brand, C'estbon, is currently the second most popular water after Nongfu.

But bad news can sometimes be good news. Nongfu Spring has been a popular stock due to its dominance in the bottled beverage market. Its IPO was oversubscribed, and shares surged 85% to HK$39.80 on its market debut from an initial public offering price of HK$21.50. The recent bad news has brought the share price back to earth, making its valuation more reasonable.