Questions For A Bottled Water Tycoon
By Yuanchao Xu 22 December, 2020
After a deep dive into its water strategy, CWR's Xu is left with many questions for Nongfu Spring's founder
Although we are still under the dark cloud of Covid-19, Christmas is coming. Parties will not be an option this time, but still, drinking is never forgotten. To keep us healthier for fighting against the virus, we look at bottled water and soft drinks this festive season instead of the usual alcohol.
Nongfu Springs is China’s largest bottled water player
Nongfu Spring is a Chinese bottled water tycoon. Listed in Hong Kong – the most overbought IPO, Nongfu Spring has drawn world’s attention to the lucrative business of bottled water. The increasing share price since IPO has twice pushed the founder to be the richest man in China. Nongfu Spring is currently the largest player in bottled water market, with a market share 1.7 times more than the second one. In 2019, it had sold 13.4mn tonnes of bottled water, roughly 5 times the volume of Hong Kong’s Kowloon Reservoir.
Are Nongfu Spring’s water sources secured?
Back in 1996 when Nongfu Spring was founded, the bottled water market was led by Wahaha, another soft drink tycoon selling purified water. To develop market, Nongfu Spring selected natural mineral water as its main product and later came up with the well know slogan: “We are not manufacturers of water. We are porters of nature”. On top of the success of this strategy, it also ties Nongfu Spring tightly with nature, i.e., nature water resources.
Not surprisingly, Nongfu Spring has also treated quality water sources as its long-term and stable competitive strength. At the time of its IPO, Nongfu Spring had obtained access to ten quality water sources which are located in excellent ecological environments and have outstanding water quality.
Although the information given in the prospectus seems quite positive, it lacks an important indicator, water stress. To have a full picture of Nongfu Spring’s water sources, we have mapped them on the WRI water stress map. Six out of ten water sources are located in or close to highly water stressed regions, namely Manas, Mount Changbai, Mount Wuling Hebei, Mount Taibai, Mount Danjiangkou and Thousand-island lake.
6/10 of water resources obtained by Nongfu Springs at time of its IPO are in or close to highly water stressed regions…
…Does it know this? Is it taking action?
Looking further, in the past three years (2017-2019), Thousand-island Lake has been the main water sources for Nongfu Spring, accounting for one third of Nongfu Spring’s annual water withdrawal. The chart below shows that Nongfu Spring’s current water withdrawal is well below the permitted amount, indicating its potential for expansion. However, the situation may be affected by future water competition.
Thousand-island Lake has been the main water source for Nongfu Spring…
…yet, competition from Zhejiang, Jiaxing & Shanghai might affect this so what will it do?
For example, although Thousand-island Lake is located in a low water stressed region, it is very close to the super cities in the Yangtze River Delta (YRD) where there is very high water demand. As the largest freshwater lake in YRD, Thousand-island Lake has become the target for water diversion projects. Zhejiang province has invested nearly RMB10bn for the water diversion project from Thousand-island Lake to Hangzhou city. Another water diversion project to Jiaxing city is under construction and to be completed in 2021. Shanghai is also keen to take a share.
Seasonality is also an important factor for bottled water production. According to the environmental impact assessment report for Nongfu Spring’s water withdrawal project in Mount Wuling Guizhou, the river flow may not be enough for production during dry seasons.
Are environmental and climate change risks properly disclosed?
Apart from water issues, plastic is also a concern for investors. You may conclude that Nongfu Spring is actually selling plastic instead of water after reading its income statement. Compared to the negligible cost of water, PET (Polyethylene terephthalate, used for blow moulding of plastic bottles) accounts for the largest share of cost of sales. As more attention is being paid to plastic pollution and relevant environmental issues recent years, how will Nongfu Spring deal with the possible rising PET price and its corresponding social responsibility remains a question.
Plastic is also a concern as PET accounts for the largest share of cost of sales…
…does it have any plans for this?
With distributors all over China, Nongfu Spring relies heavily on logistics and storage which accounts for the largest share of its selling expenses. However, transportation is vulnerable to climate change especially extreme weathers (find our research here). For example, the heavy rain in July 2020 resulted negative impacts on Nongfu Spring’s product delivery.
Nongfu Spring also relies heavily on logistics, which is vulnerable to climate impacts
Our questions could be answered with a CSR report but it’s absent, so we wish for Nongfu Springs to release one
All questions regarding above environmental challenges can be addressed or at least analysed in detail in an CSR report, which is however missing for Nongfu Spring. As one of our Christmas wishes, we hope to see a comprehensive and sincere CSR report from Nongfu Spring and possibly more environmental disclosure in the market.
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