Tea beverages sustain strong growth and packaged water regains share; Goldman Sachs reiterates Buy on Nongfu Spring

Overview

This report reviews Nongfu Spring's 1H26 results and management briefing and examines growth and profit drivers across tea beverages, packaged water, and functional beverages. Goldman Sachs believes strong tea beverage growth, recovering packaged water share, and scaling electrolyte beverages can support double-digit growth in 2026, but raw material costs and channel investment will create profit pressure in the second half. It therefore makes only minor revisions to forecasts and the target price while maintaining its Buy rating.

Core views

Nongfu Spring's 1H26 results announced on August 25 were in line with expectations, with sales and net profit increasing 16% and 17% year over year, respectively. At the August 26 briefing, management reiterated that the existing product portfolio would remain focused on health and natural attributes while expanding into new categories. Management believes its procurement capabilities, operating efficiency, and management capabilities can help the company address weak consumption and fluctuations in bulk raw material costs while continuing to target double-digit sales and net profit growth in 2026. Sales maintained healthy growth from July to August, with progress in line with expectations. In terms of profitability, 1H26 gross margin increased 0.6 percentage points year over year to 60.9%. Goldman Sachs believes the drivers of 2H26 gross margin will offset one another: a higher tea beverage mix will benefit the product mix, while rising PET and jasmine raw material costs will create pressure. The company's 30th-anniversary promotion runs from March through the end of September, resulting in incremental marketing expenses in both 1H26 and 2H26. Management stated that the selling expense ratio remains below the industry average and that expenses will be allocated flexibly according to market conditions. Goldman Sachs therefore forecasts recurring net profit growth of only 6% year over year in 2H26, slower than revenue growth during the same period. Tea beverages are the most important growth engine. Tea beverage sales increased more than 30% year over year in 1H26 and accounted for 44% of group revenue. Management attributed the continued improvement in tea beverage margins to operating leverage across production, equipment, marketing, and headquarters fixed costs. Consumer penetration and drinking frequency for Oriental Leaf continue to rise. Even with its approximately 85%+ share of the sugar-free tea market, management has yet to see a clear ceiling for the category. The company continues to expand product formats and consumption occasions, including 335ml and 900ml Oriental Leaf products and refrigerated cold-brew Longjing tea; the latter has shown positive initial performance since launching at Sam's Club in April. Management expects tea beverages to continue growing faster than the group in 2H26 and to generate further favorable revenue mix shifts. Packaged drinking water returned to growth and regained market share despite an overall industry decline in 1H26, although sales have yet to return to their 2023 peak. Management's medium- to long-term view is based on consumers' increasing attention to water quality and sources, as well as China's per capita packaged water consumption being only about one-third of that in the United States and Europe. The company added two water sources in 1H26, bringing its nationwide total to 17, and continues to expand use cases such as household, maternal and infant, tea brewing, foodservice, and outdoor consumption. The recovery in this business remains relatively moderate, with Goldman Sachs forecasting packaged water revenue growth of only 1.6% in 2026 and 1% in 2H26. In functional beverages, the newly launched Nongfu Spring electrolyte beverage received positive initial sales and consumer feedback. Its differentiated features include higher electrolyte content, added vitamins, and lower sugar content than mainstream sugar-sweetened products. Management stated that electrolyte water is growing faster than traditional energy drinks, with consumption occasions expanding from sports to outdoor activities, travel, and daily drinking. However, segment margins declined due to increased promotional expenses, including the expansion of the 30th-anniversary bottle-cap campaign to Vitamin Water and the new electrolyte product. Goldman Sachs expects the scaling of electrolyte water to help functional beverage revenue grow 17% in 2026 and 18% in 2H26. Regarding capacity and supply chain, management expects FY26 capital expenditure to be slightly higher than FY25, primarily for new water-source plants and additional aseptic beverage and drinking water production lines at existing plants. The company believes localized production of heavy beverages and water products can reduce logistics costs and that historical investment returns have been healthy. A vertically integrated supply chain also provides greater flexibility to adjust production than reliance on third-party contract manufacturers. The dividend policy remains dynamic, with the company making no commitment to a fixed payout ratio and needing to balance business reinvestment with shareholder returns. Regarding forecast revisions, Goldman Sachs raised its 2026E-2028E revenue forecasts by less than 1%, primarily reflecting stronger-than-previously-expected tea beverages, partly offset by slower growth in packaged water and other businesses. Goldman Sachs now forecasts 2026 revenue growth of 14% and recurring net profit growth of 12%, with tea beverage, juice, and functional beverage revenue growing 25%, 13%, and 17%, respectively, and packaged water growing 1.6%. Group revenue is expected to grow approximately 12% year over year in 2H26, with segment growth of 1% for packaged water, 20% for tea beverages, 12% for juice, and 18% for functional beverages. Considering pressure from PET and jasmine raw material costs and higher channel investment, Goldman Sachs lowered its 2026E-2027E reported net profit forecasts by less than 0.5% and broadly maintained its 2028E net profit forecast. The forecast table shows revenue of RMB59,925.8 million, RMB66,842.0 million, and RMB74,136.9 million for 2026E-2028E, respectively, with reported EPS of RMB1.61, RMB1.82, and RMB2.06, respectively. Regarding valuation, Goldman Sachs states that Nongfu Spring trades at approximately 24x/21x 2026E/2027E P/E based on the main text and considers the company one of the fastest-growing food and beverage companies within its coverage. The corresponding P/E ratios shown in the report's forecast summary table are 22.9x/20.3x. The 12-month target price was slightly adjusted from HK$59.9 to HK$59.8, with the methodology unchanged: applying a 30x target 2027E P/E and discounting to mid-2027 using an 8.5% cost of equity. Goldman Sachs maintains its Buy rating.

Analysis framework

Goldman Sachs first compares actual 1H26 revenue, profit, and gross margin against expectations and then incorporates information from the management briefing to assess full-year targets. It subsequently breaks down revenue growth, product mix, promotions, and cost drivers across tea beverages, packaged water, and functional beverages while analyzing capital expenditure and supply chain efficiency. Finally, it revises its 2026E-2028E earnings forecasts accordingly and updates the 12-month target price using a target 2027E P/E and cost-of-equity discounting.

Methodology notes

• Valuation MethodPE/PEG valuation

  Target P/E valuation and discounting

  The report estimates value using a 30x target 2027E P/E and then discounts it to mid-2027 using an 8.5% cost of equity, resulting in a 12-month target price of HK$59.8.

• Corporate Fundamentals and Financial FrameworkOperating/Financial Leverage Analysis

  Operating leverage in the tea beverage business

  The report believes rapid tea beverage revenue expansion can dilute fixed costs across production, equipment, marketing, and headquarters, thereby driving continued improvement in the segment's margin.

• (Out-of-Vocabulary Method)

  Segment revenue growth and cost scenario analysis

  The report separately forecasts growth rates for packaged water, tea beverages, juice, and functional beverages and incorporates product mix, PET and jasmine costs, promotions, and channel investment into group revenue and profit forecasts.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Nongfu Spring (09633.HK)

  Strong tea beverage growth, recovering packaged water share, and electrolyte beverage expansion constitute the primary sources of growth; Goldman Sachs maintains its Buy rating.

  Strengths

  Tea beverage sales increased more than 30% year over year; Oriental Leaf has an approximately 85%+ share of the sugar-free tea market; the company has 17 water sources and a vertically integrated supply chain; Goldman Sachs considers it one of the fastest-growing food and beverage companies within its coverage.

  Weaknesses

  Packaged water has yet to recover to its 2023 peak; anniversary promotions and new product marketing increase expenses; PET and jasmine raw material costs may constrain 2H26 profit.

  Comparison

  Management states that the selling expense ratio is below the industry average; China's per capita packaged water consumption is only about one-third of that in the United States and Europe.

  Risks

  Weaker-than-expected sales momentum in tea beverages or packaged water, higher-than-expected cost inflation, and intensifying competition in the beverage industry.

Key data

• 1H26 Sales Growth16% YoYResults in line with expectations
• 1H26 Net Profit Growth17% YoYResults in line with expectations
• 1H26 Gross Margin60.9%Up 0.6 percentage points year over year
• Tea Beverage Revenue PerformanceGrowth of more than 30%, accounting for 44% of group revenuePrimary growth engine in 1H26
• Oriental Leaf Sugar-Free Tea Market ShareApproximately 85%+Management has yet to see a clear category ceiling
• Number of Water Sources Nationwide17Two new water sources added in 1H26
• 2026 Revenue and Recurring Net Profit Growth Forecast14%/12%Goldman Sachs' latest forecast
• 2026 Segment Revenue Growth ForecastPackaged water 1.6%/Tea beverages 25%/Juice 13%/Functional beverages 17%Packaged water is slower, while tea beverages continue to lead
• 2H26 Group Revenue and Recurring Net Profit Growth ForecastApproximately 12%/6%Costs and channel investment cause profit growth to lag revenue growth
• 2H26 Segment Revenue Growth ForecastPackaged water 1%/Tea beverages 20%/Juice 12%/Functional beverages 18%Tea beverages and electrolyte water are expected to contribute the majority of incremental growth
• 2026E-2028E Revenue ForecastRMB59,925.8/66,842.0/74,136.9 millionOverall increase of less than 1% from prior revenue forecasts
• 2026E-2028E Reported EPSRMB1.61/1.82/2.062026E-2027E reported net profit forecasts lowered by less than 0.5%
• 2026E/2027E P/EApproximately 24x/21x in the main text; 22.9x/20.3x in the forecast summary tablePresentation bases used in different sections of the report
• 12-Month Target PriceHK$59.8Previously HK$59.9
• Target Price Valuation Parameters30x 2027E P/E; 8.5% cost of equityDiscounted to mid-2027

Impact & implications

The report believes strong tea beverage growth and operating leverage, recovering packaged water share, and scaling electrolyte beverages will support double-digit revenue and recurring net profit growth for Nongfu Spring in 2026. However, the packaged water recovery remains moderate, while PET and jasmine costs, promotions, and channel investment mean 2H26 profit growth may be significantly slower than revenue growth. Based on slightly higher revenue forecasts and slightly lower near-term net profit forecasts, Goldman Sachs only marginally lowers its target price and maintains its Buy rating.

Risks

• Tea beverage or packaged water sales momentum falls below expectations.
• Cost inflation for PET, jasmine, and other inputs exceeds expectations.
• Competition in the beverage industry intensifies further.

What to watch

• Monitor whether tea beverages can continue growing faster than the group in 2H26 and provide a positive product mix contribution.
• Monitor whether the return to growth and market share recovery in packaged water can be sustained.
• Monitor the scaling of electrolyte water and its expansion from sports into outdoor, travel, and everyday consumption occasions.
• Monitor the impact of PET and jasmine costs on 2H26 gross margin and recurring net profit growth.
• Monitor the impact of the 30th-anniversary promotion running through the end of September and channel investment on the selling expense ratio.