China Resources Beverage Pumps Up Water Fight With Market Leader

Key Takeaways:

• China Resources Beverage is preparing a Hong Kong IPO, saying it’s China’s biggest purified drinking water company with 32.7% of the market
• Archrival Nongfu Spring has thrown down the gauntlet by re-entering the purified drinking water business in a direct challenge to China Resources Beverage

By Lee Shih Ta

China’s leading water fight is heading to the financial market.

That’s the bottom line after a listing application by China Resources Beverage (Holdings) Co. Ltd., parent of leading Chinese purified water bottler C’estbon, was reportedly approved recently by the Hong Kong Stock Exchange to raise up to $1 billion. The listing would quickly spill over onto the turf of listed archrival Nongfu Spring (9633.HK), giving investors two leading stocks to lap up from China’s massive bottled drinking water market.

China Resources Beverage is part of the larger China Resources Group, a central-government-owned conglomerate that ranks among the world’s top 500 enterprises. China Resources Beverage submitted its Hong Kong IPO application in late April and received a required green light from China’s securities regulator for the overseas listing on July 10. According to a notice from the China Securities Regulatory Commission, China Resources Beverage plans to issue up to 406 million shares.

China Resources Group currently owns eight companies listed in Hong Kong and another nine listed on China’s domestic A-share markets. That means a successful IPO would make China Resources Beverage the 18th listed member of the China Resources family.

China Resources Beverage was formerly known as Shekou Longhuan Co. when it was established in 1984. In 1990, the company introduced the concept of bottled water to Mainland China from Hong Kong, and launched its purified bottled drinking water nationwide using the Chinese name Yibao and French name C’estbon. It was acquired by China Resources Ventures, a subsidiary of China Resources Group, in 1996, and adopted its current signature green packaging in 2001.

Market Leader 

According to third-party market data in its listing application, China Resources Beverage was the second-largest packaged drinking water enterprise in China last year, with a market share of about 18.4%. It was also the biggest purified drinking water company in China with 32.7% of the market, including retail sales nearly four times that of its closest rival and more than those of the second to fifth companies combined.

Its application shows China Resources Beverage sold 14.6 billion bottles of C’estbon water last year for 39.5 billion yuan ($5.54 billion). In addition to C’estbon, the company also has 13 other brands.

The company’s revenue has grown steadily from 11.3 billion yuan in 2021 to 13.5 billion yuan last year. Its gross profit rose from 4.97 billion to 6.04 billion yuan over that period, while its profit rose from about 860 million yuan to 1.33 billion yuan.

The company is a relative laggard compared with the privately owned Nongfu. China Resources Beverage posted revenue and profit growth of about 7.1% and 34.3% last year, respectively, trailing the larger Nongfu’s 28.4% revenue growth to 42.7 billion yuan, and 42.2% profit growth. China Resources Beverage also trailed in terms of margins, reporting a 44.7% gross margin last year versus Nongfu’s 59.5%.

Unlike other beverage makers like Nongfu and Wahaha, which produce a wide range of products, China Resources Beverage relies mostly on purified water for its revenues. According to its application, more than 90% of its revenue in the past three years came from its packaged purified drinking water business, while sales of its other beverages accounted for the remainder. By comparison, Nongfu now gets less than half of its revenue from drinking water.

While China Resources Beverage is firing on all cylinders to get past the IPO finish line, Nongfu isn’t just sitting still either. 

Two days after China Resources Beverage submitted its IPO application, Nongfu, which focuses on natural drinking water and eschewed purified drinking water for 24 years, suddenly announced that it was getting back into the purified drinking water business. Not only that, but Nongfu branded its new product using green packaging that was quite similar to C’estbon’s own green. And notably, Nongfu’s low-key founder and Chairman Zhong Shanshan, who is also China’s richest man, ended a years-long moratorium on media interviews and appeared on a state-media television show, responding to a slew of questions.

Explaining His Pivot

Explaining the decision to re-introduce purified drinking water, Zhong said his company’s original tag line, calling Nongfu Spring water “a little sweet” was initially designed for the company’s purified drinking water products. But the moniker was later was later switched to describe the natural drinking water that became its new mainstay as it considered that product healthier. But the tag had become a mismatch, he said, since natural water is not sweet at all.

“After thinking deep and long, we have decided to finally make good on the ‘Nongfu Spring is a little sweet’ commitment again by bringing back purified drinking water. We are giving the right of choice back to consumers,” Zhong said. And as a caveat, he added: “If you want the healthiest one, choose the red bottle,” a reference to the company’s better-known natural water packaging. “But if you want the taste more, then choose the green one.”

Fancy explanations aside, Nongfu’s real motivation is probably aimed at becoming more competitive. After bringing back purified drinking water, Nongfu also launched a price war, selling its bottled purified drinking water at just 1 yuan, or about 14 U.S. cents, per bottle – half of what such bottled water usually costs. It can afford such price cuts quite comfortably, supporting them with its sizable gross margins and rising revenue from its unsweetened tea beverage business. 

That said, Nongfu’s stock hasn’t been gushing big returns for investors lately, suffering a 34% decline since the start of the year, leaving it with a still relatively high price-to-earnings (P/E) ratio of 25 times. That pressure could have a spillover effect on China Resources Beverage, which was targeting an IPO valuation of $6 billion, according to Bloomberg. But with Nongfu stock now caught up in a swoon, potential investors are requesting China Resources Beverage to lower its valuation.

Despite the potential valuation setback, the IPO push speaks to China Resources Group’s great ambitions for C’estbon in terms of market share and brand influence, as well as potential future plans for the company’s beverage business. We expect China Resources Beverage to have a certain appeal for investors, on the back of C’estbon’s brand value and its backing by one of China’s leading consumer conglomerates. 

This article is from an unpaid external contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy.