Capital Markets Equity Research

The upcoming IPO of Nongfu Spring

Nongfu Spring, a Chinese bottled water manufacturer, is preparing for their upcoming initial public offering where the company will be taken public on the Hong Kong Stock Exchange.  This comes as the city’s capital markets are beginning to see more activity following the pandemic, which caused a long dry spell. Therefore, this is a very welcoming sign for the capital market bankers in Hong Kong. 

Nongfu Spring 

Founded: 1996

Industry: Retail — Consumer Staples

Founder & Chairman: Zhong Shanshan

Type: Private 

Value: Up to $1bn

Sponsors: China Capital International Corp. (CICG), Morgan Stanley, and Freshfields Bruckhaus Deringer (legal)

Deal overview

Nongfu Spring is planning a $1bn IPO in Hong Kong as the city’s capital markets start to recover following a lack of activity due to the pandemic. The company is currently the leading bottled water producer in China and a top 3 player in the bottled tea and juice markets according to their prospectus. They recorded a 24bn yuan ($3.4bn) revenue in 2019, which was up from 20.47bn yuan in 2018. This then corresponded to profits of 4.95bn yuan and 3.61bn yuan respectively, a 20.6% increase in profit from 2018 to 2019. Nongfu Spring has said its mainland production plants had been closed after Chinese New Year following the Coronavirus outbreak in Wuhan, but since May all of its plants have been operational again. The pandemic has, however, had a negative impact for the beverage industry, with sales of beverage products having decreased compared with the same period in 2019; revenue and net profit for Nongfu Spring decreased in the three months ending March 31st 2020, in comparison to the same period in 2019. But the firm has been outperforming the industry in terms of profit: average profit margin for the beverage market in China is less than 10%, much lower than the 20% Nongfu has seen in the past three years. 

A welcomed sign of activity

The $1bn listing will be given a very warm welcome by Hong Kong capital market bankers, who will be glad to see some prospect of emerging activity in the markets. Nongfu Spring will provide the largest IPO so far this year in the city, with the current largest having been the $333m listing of drug developer Akeso in mid-April. This year there has only been $2.45bn worth of IPOs so far, a large decrease from the $4.27bn for the same time period in 2019 — demonstrating the huge effect COVID-19 has had on certain areas of market activity. There has still been $12.81bn worth of equity capital market activity in Hong Kong during 2020, but this has primarily been in follow-on deals and convertible bond transactions, Refinitiv data showed. 

Too rich to be listed?

Nongfu Spring’s IPO prospectus revealed that the company paid out 9.6bn yuan in dividends by the 2019-year end. This was more than 26 times that of the previous year. However, it also pointed out that the company even borrowed 1bn yuan for this dividend payment, a strange move if the company is looking to raise funds. Investors doubt that Nongfu would have a need to raise money through the IPO if it did not decide to pay out such a large dividend. But the prospect of a substantial dividend may attract investors and lead to a higher valuation of the firm. 

The future for Nongfu Spring 

Future development strategies for Nongfu include further brand building, expansion of production capacity, raising investment in infrastructures, and exploration of overseas market opportunities, it said in its filings. With the brand having maintained the top market share of China’s packaged drinking water market for 8 consecutive years, according to a report by Frost & Sullivan, it seems to have made its mark on the Chinese water market. In terms of expansion, the company is currently finalising the purchase of its first overseas water source and production plant, Otakiri Spring in New Zealand — so Nongfu is already on its way to pursuing its future development strategies. 

The China Securities Regulatory Commission has given Nongfu Spring approval to issue no more than 1.38 billion overseas shares, paving way for its Hong Kong issuance. It is expected they will get listing approval from the Hong Kong Exchanges and Clearing in the next week at the earliest. Then the company is aiming towards a listing in the third quarter, hopefully in September if it goes through as quickly as possible.


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