Evaluating Nongfu Spring (SEHK:9633) After HSBC’s Upgrade on New RTD Tea and Coffee Growth Prospects

HSBC’s upgrade of Nongfu Spring (SEHK:9633) from Hold to Buy has put fresh attention on the stock, with the bank highlighting new sugar ready to drink teas and Tan Bing branded coffees as growth drivers.

See our latest analysis for Nongfu Spring.

The upgrade lands after a choppy stretch, with a 30 day share price return of minus 6.8 percent and a 90 day share price return of minus 12.7 percent. However, a strong year to date share price return of 43.3 percent and a 1 year total shareholder return of 40.7 percent suggest momentum is rebuilding as investors reassess Nongfu Spring’s growth runway.

If this kind of consumer story has your attention, it might be a good moment to explore how other names are positioned and discover fast growing stocks with high insider ownership.

With earnings still growing double digits and the share price sitting at a modest discount to analyst and intrinsic estimates, is Nongfu Spring quietly offering upside, or are investors already paying up for all of its future growth?

Price to Earnings of 35.8x: Is it justified?

Nongfu Spring last closed at HK$47.5, and the stock trades on a rich price to earnings multiple that stands well above most peers.

The price to earnings ratio compares a company’s share price to its earnings per share, effectively showing how much investors are paying for each unit of current profit. For a branded beverage group like Nongfu Spring, a higher multiple often signals the market is willing to pay up for resilient margins, strong brands and steady growth rather than treating it as a low growth staple.

In Nongfu Spring’s case, the current price to earnings ratio of 35.8x sits far above the Asian beverage industry average of 18.7x and the peer average of 16.8x. This implies investors are pricing in a premium growth and quality profile. However, when set against an estimated fair price to earnings ratio of 20.8x from regression based analysis, the current valuation looks stretched and could face pressure if earnings or sentiment soften and the market moves closer to that fair ratio.

Explore the SWS fair ratio for Nongfu Spring

Result: Price to Earnings of 35.8x (OVERVALUED)

However, risks remain, including softer consumer demand that could crimp premium pricing power, as well as intensifying beverage competition that may squeeze margins and challenge the current valuation premium.

Find out about the key risks to this Nongfu Spring narrative.

Another View on Value

While the current price to earnings ratio of 35.8x flags Nongfu Spring as expensive relative to peers and its 20.8x fair ratio, our DCF model paints a softer picture. It suggests the shares are about 11 percent undervalued. Is the market overpaying for near term earnings, or underestimating long term cash flows?

Look into how the SWS DCF model arrives at its fair value.

Simply Wall St performs a discounted cash flow (DCF) on every stock in the world every day (check out Nongfu Spring for example). We show the entire calculation in full. You can track the result in your watchlist or portfolio and be alerted when this changes, or use our stock screener to discover 914 undervalued stocks based on their cash flows. If you save a screener we even alert you when new companies match - so you never miss a potential opportunity.

Build Your Own Nongfu Spring Narrative

If our view does not quite align with yours, or you prefer to dive into the numbers yourself, you can build a personalised narrative in just a few minutes, Do it your way.

A great starting point for your Nongfu Spring research is our analysis highlighting 3 key rewards and 1 important warning sign that could impact your investment decision.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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