Why is "C'estbon", with a market value of 30 billion yuan, not favored by the market? | Zhike

Author | Ding Mao

Editor | Zheng Huaizhou

On October 23, China Resources Beverage, the parent company of "C'estbon" pure water, officially listed on the Hong Kong Stock Exchange.

As the "perennial runner-up" in the packaged drinking water sector, the market has shown great enthusiasm for this IPO. With the support of luxurious cornerstone investors, the share price of China Resources Beverage soared on the first day of listing, closing up more than 15%. However, as the enthusiasm cooled down, the company's share price experienced a significant correction in the following trading days, and then remained volatile around HK$15 per share. As of the close on November 4, the cumulative decline of the company since its listing has exceeded 11%.

Then, as a leading enterprise in the domestic ready-to-drink soft drink market, what is the fundamental situation of China Resources Beverage? Is it worth paying attention to in the future?

Ninety percent of revenue comes from "C'estbon"

Consumers are no strangers to the "C'estbon" pure water with the small green bottle, but in fact, "C'estbon" is only one of the 13 brand matrices of China Resources Beverage. As a leading enterprise in the domestic ready-to-drink soft drink market, China Resources Beverage has 13 sub-brands including "C'estbon", "Zhiben Qingrun", "Honey Water Series", "Holiday Series" and "Zuowei Chashi", with a total of 59 SKUs. Its products cover many soft drink categories such as packaged drinking water, tea beverages, fruit juices, coffee, milk tea, etc. At the same time, the company relies on a network of more than 1,000 distributors nationwide to promote its rich products to more than 200 retail outlets in China to reach consumers.

From 2021 to April 30, 2024, the company's operating income was 11.34 billion yuan, 12.62 billion yuan, 13.51 billion yuan and 4.15 billion yuan, respectively, with corresponding year-on-year growth rates of 11.28%, 7.05% and 5.33%. Among them, the revenue of packaged drinking water products with "C'estbon" as the core was 10.797 billion yuan, 11.887 billion yuan, 12.405 billion yuan and 3.691 billion yuan, respectively, with year-on-year growth rates of 10.1%, 4.4% and 2.1%, accounting for 95.21%, 94.19%, 91.82% and 88.94% of the total revenue in the same period.

Figure: China Resources Beverage's Revenue and Growth Rate   Data Source: Prospectus, 36Kr Collation

Overall, although China Resources Beverage has continuously enriched its product categories and brand matrices in recent years, in fact, "C'estbon" is still the main source of revenue for China Resources Beverage, with a long-term revenue share remaining at around 90%. In the past, under the strong brand effect of "C'estbon", the compound annual growth rate of the company's packaged drinking water revenue was much higher than the industry growth rate in the same period, contributing good stability to investors. According to CIC data, from 2021 to 2023, the compound annual growth rate of China's packaged drinking water industry was 4.1%, while the compound annual growth rate of China Resources Beverage's packaged drinking water products reached 7.4% in the same period.

However, while creating stability, with the changes in the drinking water market environment in recent years, the revenue growth rate of "C'estbon" has continued to decline, while the revenue of other beverages has grown rapidly. However, due to the high proportion of C'estbon products and excessive reliance on the "C'estbon" brand, the overall growth of the company has declined.

When analyzed in detail, the main reason for the decline in the revenue growth rate of packaged drinking water represented by "C'estbon" pure water is the continuous reduction in the average product price. From 2021 to April 30, 2024, the sales growth rates of China Resources Beverage's packaged drinking water business were 8%, 6% and 8.2%, respectively, remaining relatively stable overall, but the average price dropped from 918 yuan/ton to 894 yuan/ton. The year-on-year growth rates of the average price in the same period were 1.9%, -1.3% and -5.1%, respectively.

Figure: China Resources Beverage's Packaging Water Price and Volume Growth   Data Source: Prospectus, 36Kr Collation

The reasons behind the price reduction are, on the one hand, the company actively adjusted the product structure to increase the proportion of bottled drinking water in medium and large sizes to adapt to changes in market demand, resulting in a decline in the average price; on the other hand, in the fierce bottled water price war in recent years, China Resources Beverage has increased discounts to distributors to enhance channel attractiveness in order to stabilize market share, further exacerbating the decline in the average price.

Improved but not outstanding profitability

In terms of profitability, from 2021 to April 30, 2024, the company's comprehensive gross margin increased from 43.8% to 47.1%. Among them, the gross margin of packaged drinking water increased from 44.6% to 49%; the gross margin of beverage products increased from 28.7% to 31%. In terms of net profit margin, from 2021 to 2023, the company's net profit was 860 million yuan, 990 million yuan and 1.33 billion yuan, respectively, with year-on-year growth rates of 15.2% and 34.7%, and the corresponding net profit margins were 7.6%, 7.8% and 9.9%, respectively. The net profit margin is relatively stable and has slightly increased.

Figure: China Resources Beverage's Gross Margin   Data Source: Prospectus, 36Kr Collation

Overall, the profitability of China Resources Beverage has improved in recent years. On the one hand, this is due to the continuous decline in the price of PET, the key raw material with the largest cost proportion; on the other hand, it is due to the increase in the proportion of self-produced packaged water products; in addition, the optimization of supply chain management and other improvements in production efficiency have also contributed certain positive factors.

Although the profitability of C'estbon has continued to improve compared to the past, when compared horizontally with its competitor Nongfu Spring, there is still a significant gap in its profitability. According to Nongfu Spring's 2023 annual report data, the company's gross margin from 2021 to the first half of 2024 was 59.5%, 57.5%, 59.6% and 58.8%, respectively; at the same time, according to the information disclosed in the prospectus, from 2019 to the end of May 2020, Nongfu Spring's gross margin was 55.4% and 59.1%, respectively, and the gross margin of packaged water products was 60.2% and 62.8%, respectively. In terms of net profit margin, from 2021 to the first half of 2024, Nongfu Spring's net profit margin was 24%, 25.4%, 28.1% and 26.9%, respectively.

Figure: Comparison of Nongfu Spring and China Resources Beverage's Gross Margin   Data Source: Prospectus, Financial Report, 36Kr Collation

It can be seen that whether compared in terms of gross margin or net profit margin, C'estbon has a large gap compared with its competitors. Then, where exactly does the deviation in the profitability of the two companies come from? By disassembling the composition of the two companies' income and cost expenses, this gap in profitability mainly comes from three aspects:

First, the difference in gross margin caused by product structure differences and scale. In terms of income structure, although the sub-brands and categories of China Resources Beverage are diversified, currently more than 90% of the income comes from packaged water products, while the proportion of Nongfu Spring's packaged water products in total income was 59.7% in 2019 and further decreased to 47.8% in 2023.

In terms of scale, the income of Nongfu Spring's other soft drinks is about 20 billion+, and the comprehensive gross margin of soft drinks is relatively high under the scale effect. According to the prospectus, the gross margin of its tea beverages and functional beverages with a large proportion in 2019 exceeded 50%; while the income scale of China Resources Beverage's other soft drinks is only 1 billion+, and under the insufficient manifestation of scale, the gross margin of its soft drinks is only more than 30%. The scale difference and gross margin difference between other soft drink products are important reasons for the difference in their comprehensive gross margin.

Second, the large gap in the gross margin of core product packaged water is the most critical factor leading to the deviation in the profitability of the two enterprises. According to the information disclosed in the prospectuses of Nongfu Spring and China Resources Beverage, if a simple calculation is made to compare the bottled drinking water of 550 milliliters, in the unit product, the ex-factory price of Nongfu Spring's (2019 data) packaged water is about 0.54 yuan/bottle, the unit cost is 0.21 yuan/bottle, the largest proportion of raw materials and packaging materials in the cost is about 0.16 yuan/bottle, accounting for 75%, followed by manufacturing expenses of 0.04 yuan/bottle, accounting for 20%, and finally, the labor salary is 0.01 yuan/bottle, accounting for 5%; while the ex-factory price of C'estbon is about 0.51 yuan/bottle, the unit cost is 0.28 yuan/bottle, of which the cost of raw materials and packaging materials is 0.17 yuan/bottle, accounting for 60.3%, followed by the service fee paid to the production partner of about 0.08 yuan/bottle, accounting for 27.6%, and the production expenses + others are 0.03 yuan/bottle, accounting for 12.1%.

Figure: Comparison of Nongfu Spring and C'estbon's Costs   Data Source: Prospectus, 36Kr Collation

It can be seen that the main reason for the large difference in the gross margin of packaged drinking water products is that C'estbon has a considerable sales cost, that is, the service fee paid to the cooperative production partner. According to the disclosure of the prospectus, from 2021 to the end of April 2023, the company's service fees were 1.992 billion yuan, 2.040 billion yuan, 2.067 billion yuan and 496 million yuan, respectively, accounting for 31.3%, 27.7%, 27.6% and 22.6%.

The reason for this fee is the difference in the production mode of the packaged water products of China Resources Beverage and Nongfu Spring. Compared with Nongfu Spring's model of mainly producing natural water independently, the pure water source of C'estbon mainly comes from the third-party water supply system, and it adopts a combination of OEM and self-production, with OEM accounting for the majority. As of 2023, China Resources Beverage has 12 self-owned factories that have been put into production and 47 self-owned production lines nationwide, while its partners in the same period have 34, with a total of 81 production lines.

This leads to the large cost of Nongfu Spring's aquatic products appearing in the capital expenditure during the early stage of water source development. After the water source is stably supplied, the cost will be in a continuous decreasing state, while C'estbon's third-party OEM model means that it needs to provide a stable OEM service fee to the cooperative supplier every year, resulting in a higher cost.

Third, with a gap of about 12 percentage points in gross margin, the gap in net profit margin between the two in 2023 is more than 18 percentage points, which is mainly due to the difference in the sales expense ratio between the two enterprises. According to the annual report and prospectus data, from 2021 to 2023, Nongfu Spring's sales expense ratio was 24.4%, 23.4% and 21.6%, respectively, while C'estbon's sales expense ratio was 33.1%, 30.7% and 30.2%, respectively. The main gap comes from promotion expenses and labor costs. Considering that most of China Resources Beverage's other soft drink products are in the market development stage, the increase in promotion expenses and labor costs is expected to continue in the future.

The valuation imagination lies in whether it can break the "C'estbon" ceiling

As of November 4, 2024, the total market value of China Resources Beverage is 31.6 billion yuan, corresponding to a PE(TTM) of 24 times. Compared with the listed market value of 36 billion yuan, it has evaporated by more than 4 billion. We select four soft drink leaders, Nongfu Spring, Dongpeng Beverage, Master Kong Holdings and Uni-President, as comparable companies. The average PE of comparable targets in the same period is 27 times. It can be seen that the current valuation of China Resources Beverage is basically in a reasonable range, and the probability of a significant valuation reduction in the short term is not high.

Figure: Comparison of Soft Drink Enterprise Valuations   Data Source: