Tea beverage products have become a new growth point.
Tea beverage products become a new growth point
The following is a summary of the 2022 mid-year financial report conference call of Nongfu Spring. The financial report interpretation can be reviewed in "Nongfu Spring: Tea drinks are against the trend, is the 'water grass' system unable to suppress it in the second half of the year?"
Key content highlights
[1] The full-year revenue target is to maintain double-digit growth, and the full-year gross profit margin is expected to be 56-57%.
[2] The category is contracting, and the focus will be on tea beverage products in the future.
Conference PPT
Q&A session
I. 2022 H1 performance and future performance guidance
Q: Breakdown of gross profit margin in 2022 H1 and outlook for gross profit margin in 2022 H2
A: PET costs have increased by 15-16% year-on-year in the first half of the year, and PET prices are expected to be at a higher level in the second half of the year. Therefore, the full-year gross profit margin in 2022 is expected to decline to 56-57%.
Since last year, the company has exhausted its locked-in PET prices and is currently supplementing PET in a spot-purchase manner.
Q: If the epidemic does not worsen, can sales and net profit maintain double-digit growth in the second half of the year or for the full year? What are the sales and net profit guidance for the full year?
A: The full-year revenue target is to maintain double-digit growth, and the full-year gross profit margin is expected to be 56-57%.
[1] Sales expense investment guidance
Under the control environment, sales and distribution will not undergo large investments.
Even strategic products like Changbai Mountain Spring, the advertising investment in 2022 H1 has shrunk. This is because consumers are more concerned about the impact of the pandemic on their lives. Therefore, the company chooses to focus on improving service levels, from top management to front-line employees and dealers, to deliver water to everyone:
① In areas where water cannot be obtained in Shanghai, such as cabin hospitals, employees sleep on cars all night to deliver water in time.
② Employees participate in water donation and delivery in water-deficient areas such as Sichuan and Chongqing.
The company's energy is not in advertising, but in making products appear where they are needed, and establishing an image of wholeheartedly serving consumers.
[2] Profit guidance
The full-year gross profit margin will shrink, and net profit will moderately decline with it, but it is still optimistic and more optimistic than 2019. However, it will have a close relationship with PET situation in 2022H2. Currently, PET inventory is almost completely consumed, and it needs to be purchased in response to the situation. Q: What is the future share-based incentive cost? Will the administrative expense normalize after increasing in 2022H1?
A: The company accounted for 70 million yuan of share-based incentive costs in the first half of the year, and another 30 million yuan of share-based incentive costs will be incurred in the second half of the year. The amortization in the next two years will decrease, so the impact on administrative expenses will also decrease. However, it is not ruled out that new share-based incentive plans will be launched.
II. Product Development Status and Future Plans
Q:2022H2 Product Structure
A: There may be lockdown measures related to dispersed outbreaks in September, so the company is expected to continue to focus on major items as in 2022H1.
Q: Juice growth in 2022H1 was less than 5%, and NFC performed well. How were Fruit Garden and water-soluble C100? What is the development plan for juice in the current highly competitive situation, and what are the new product directions in the next two years?
A:
[1] Juice Categories
(1) NFC: The ceiling of the juice category will maintain sustained and stable growth in the future. The company has made significant investments in product technology and agricultural raw materials in the early stage.
(2) Water-soluble C100: Has been in growth for several years.
(3) Low-concentration juices, such as Farmer's Orchard: Sales are mainly concentrated during holidays, so there are development opportunities in the second half of the year.
[2] Product Development Plan
(1) Major categories: Teas will still be an important part of future product lines, and new product lines or supplementary innovative products will be launched in the existing series.
(2) Functional drinks: Already have sports drinks and vitamin-based drinks, and have a good market position. Different from fashionable flavor drinks, functional drinks require high R&D requirements. Once they occupy a place in the market, their performance is relatively stable. The company will increase its R&D efforts in functional drinks in the future.
(3) Overall: In the situation of economic instability, the company focuses on operating existing product categories while slightly contracting risky attempts. If the epidemic conditions permit, the company will continue to carry out new product innovation work.
Q: Soda water performs relatively weakly in other categories. How do you view the long-term development of soda water?
A:
[1] Un-carbonated
Sales in southwestern China have performed better, and local consumer awareness has formed relatively stable consumption. Performance in the eastern region is relatively weak. The beneficiaries of soda water are relatively wide, and un-carbonated soda water is maintaining growth momentum. There are many growth opportunities in the future due to significant regional imbalances.
[2] Carbonated
Competition is relatively fierce, and market capacity is still expanding with certain bottlenecks. The company's advantage in this field is that it can produce sterile carbonated products. It will continue to pay attention to this area in the future, but may not make it an absolute priority.
Q: Development direction and upgrading measures for tea categories
A: Mainly the three major categories: "Oriental Leaves", "TeaΠ", and "Qicha".
[1] Oriental Leaves
As the concept of sugar-free health continues to be online, the company will continue to attach importance to Oriental Leaves. Oriental Leaves tops in the sugar-free product category, and will launch new flavors, limited products, new packaging, etc. In view of the unequal regional sales in the past decade, there is considerable growth space in the future. The market size of sugar-free tea is less than that of sugary tea (28-ounce sizes), but its growth rate is faster than that of sugar-containing tea.
[2] Tea
There are great opportunities for infiltration.
Previously, with a light color and flavor, this year we successfully expanded our customer base by launching a citrus Pu-erh flavor. Due to differences in regional taste preferences, we will try to promote different flavors in different regions.
[3] Qicha (tea drinks with gas)
We support the development of carbonated teas that contain gas. The new category comes with risks, but we support innovation.
[4] Milk tea
NF (Nongfu Spring) ranks third in the market position, close to second.
Q: Which will have a faster growth rate in the first half of 2022, Tea Pi or Oriental Tea? What about the future development?
A: Oriental Tea will continue to grow faster in the current and future periods.
[1] Market size
Both sugar-free tea and sugar-containing tea come in 28-ounce sizes.
[2] Product strength
Oriental Tea has more obvious advantages, while Tea Pi is more distant from the leading competitors.
Q: Why did the operating profit margin for tea beverages increase by 4% YoY in the first half of the year, while other product categories decreased?
A: It depends on the accounting principles for amortization, there are no particularly significant indicators.
Q: What is the current situation with the layout and market marketing channels of Changbaishan Snow?
A:
[1] Layout
We started our layout this year.
Water is not a fashionable product; occupying a place in consumers' perceptions requires a process, but our company has advantages in water quality and packaging.
Affected by the pandemic, we slowed down our investment in Sanyuan Water in the first half of 2022, but we are confident about its long-term development.
[2] Sales channels
Compared with Er Yuan Water, the market coverage of Sanyuan Water is still much lower, and it is only sold in the best stores in the first- and second-tier cities, which is based on the product's regularities.
Q: Does Changbaishan Snow have other sources of water besides Changbaishan Mountain? Are there any restrictions on transportation radius?
A: Our water source can only come from Changbaishan Mountain.
Transportation costs are high, but they can be fully covered by Sanyuan Water.
Q: Is the R&D system and marketing of new products based on a departmental system now?
A: It is project-based.
Innovative ideas come from technology, markets, R&D personnel, and management directives, but they need to go through several reviews. Therefore, the number of products in research and development is about 20 to 30 per year, but not so many are launched. The previous management controlled a relatively small proportion.
Most project teams include R&D and brand promotion, and different products will hire different designers to maintain the company's vitality.
Q: Tea Pi has successfully expanded its customer base with bold colors and flavors. Will Oriental Tea continue to use this approach?
A: Oriental Tea launched the citrus Pu-erh (tea and fruit combination) last year, which is an ongoing non-limited product. The product sequence of Oriental Tea aims to make it like high-quality tea that can be brewed on-the-spot. In recent years, the coverage of the products has been expanding, and young people have gradually liked Oriental Tea's sugar-free products, which are related to the trend of pursuing health in the market and the company's promotion. Therefore, no need to cater to a specific group, the entire product category is already penetrating a broader demographic.
Q: How is the layout of large packaging products for home channels? Is lightweight retail the focus of future development?
A: The layout of home channels started earlier in the industry and is ahead of its peers. Home channel needs to deliver the products to the customers' doorstep, providing them with various means to obtain the products at home. There are currently various channels, such as vending machines, water delivery, JD, etc., and in the future, more channels will be available to consumers in this direction.
Q: The growth of packaged water in the first half of the year was relatively low. Is it because the immediate consumption scenario was negatively affected by the epidemic, but tea drinks have a stronger immediate consumption property. But why only did the company's tea drinks grow explosively?
A:
[1] Packaged Water
Nongfu Spring occupies the first place in the water market, and growth requires growth in the entire market.
[2] Tea Drinks
Tea drinks rank third, with more opportunities for growth:
①Uneven distribution in regions themselves ② The contribution of new product categories such as carbonated tea③ The volume relative to the head is not large, with large room for growth.
Q: The recovery of packaged water in July and August
A: Overall, the hot weather is beneficial to the sales of water, but not to high sugar and sweet products.
Q: Tea Π growth rate; performance of large packaged water in the first half of the year; PET price changes expected this year and next year
A:
[1] Tea Π
The growth rate of tea Π is in double digits, but not as high as that of Oriental Leaves. We are confident about the future.
[2] Large Packaged Water
Under the control conditions, large packaged water belongs to livelihood supplies, and the government's support is strong, so it will continue to grow. However, competition is gradually becoming more intense. A few years ago, Nongfu Spring was the only one.
[3] PET
It remains high.
Q: Will the focus be on strong tea drink categories in the next 2-3 years?
A: It depends on promotion opportunities and the epidemic. Overall focus on strong categories. The earnings and competitive advantages of the category leader are obvious. The company currently has 3 categories in the top 3 of the industry. In addition to maintaining the position of packaged water, the other 2 categories strive for higher levels.
New categories will be attempted according to market conditions, and they will be cultivated in the future.
Q: Marketing plan for Qicha
A: Qicha was launched in April and May, but the market conditions are not suitable for large-scale investment and promotion, so the new product pace was disrupted. However, the product innovation and its own product strength are good, and the company will continue to improve. This product is suitable for sinking markets.
Q: Brand recognition and image establishment approach (whether it is biased towards taking category names such as NFC)
A: It depends on the strategy of different products.
Taking category names basically does not have competitors in the category, such as NFC, water-soluble C, Qicha, bubble milk tea, but Tea Π does not work.
Q: PET cost pressure is high. Is there a plan to increase prices for products?
A: No. Unless there is significant inflation, the current price of two yuan water is appropriate. Most of the growth of packaged water in the first half of the year came from volume growth. As a mature company, Nongfu Spring will be better than small companies in PET procurement and cost control and there is no need to worry too much.
Q: The impact of hot weather in July and August on sales
A:
[1] Overall
July and August are more favorable for sales than the first half of the year, and the annual target is still double-digit revenue growth. 【2】Category
Sales of heavily sweetened drinks are lower than those of water and sugar-free tea.
Q: What is the current competition and who are the competitors of sugar-free tea?
A: Compared to sweetened tea, sugar-free tea cannot be flavored, so it tests the technical content of the product, including raw material selection, tea extraction, and packaging. There are a few competitors in some local markets, but there are currently no clear challengers to sugar-free tea as a whole.
Q: What are the plans for putting ice chests in channels and increasing space?
A: Ice chests have played an obvious role in boosting sales in recent years and will continue to be promoted. There is also room for improvement in the company's operations.
Risk disclosure and statement of this article: Dolphin Analyst Disclaimer and General Disclosure
