Nongfu Spring (9633.HK): Nongfu's growing cost to serve advantage

Nongfu has a significant and expanding cost to serve advantage in Spring Water which accounts for a third of EBIT. With 17 spring locations compared to 5 for the next competitor, Nongfu's population weighted average distance to serve is 4x lower than the next competitor. The addition of 5 new springs since mid 2025, has reduced Nongfu's distance to serve by 22%, and we expect the resulting distribution costs savings to help mitigate rising PET cost pressure over the next few quarters, before they drop to the bottom line from mid 2027. With no other competitor actively expanding their spring water network, we view Nongfu's cost to serve as a medium term competitive advantage. It allows the company to occupy an affordable Spring Water price positioning that is difficult for any other player to achieve. Following the summer 2025 spring additions, Nongfu's H2 Water EBIT margin expand by c. 330bps vs 2H23, and these distribution efficiencies helped to mitigate c. 14% PET raw material prices