December 18, 2019 / 6:37 AM / 2 months ago

Chinese bottled water IPO offers up a muddy glass

HONG KONG (Reuters Breakingviews) - China’s top bottled-water supplier is pouring investors a cloudy glass. Nongfu Spring is considering a Hong Kong initial public offering to raise at least $1 billion, Bloomberg reports. A fizzy price tag, though, will require more than mainland households’ thirst for the bottled stuff.

There are good reasons to bet on rising demand for mineral and purified water. When it comes to drinking from the tap, there are justifiable concerns about municipal supplies; parts of China, like Yunnan, have suffered severe shortages to boot. On a per capita basis, the People’s Republic still drinks less bottled water than, say, the United States – so there’s room to grow, and Euromonitor expects the sector to expand at an annual rate of 6% over the next four years.

Nongfu has yet to file a prospectus, but financial statements from sister company Wantai BioPharm, which shares its controlling shareholder, show the water and juice outfit racked up a net profit of 3.6 billion yuan ($514 million) last year. If earnings this year grow around 7% - in line with what Refinitiv estimates for Tingyi, a rival drinks and snacks-maker - and assuming a multiple roughly in line with Tingyi and other peers at around 20 times earnings - Nongfu could be worth a hefty $11 billion.

Slaking China’s thirst on a national scale brings problems, though, for a country where water is becoming ever scarcer, and more polluted. First, food safety, where rules remain lax and unevenly applied. Researchers at China Water Risk say bottlers are not obliged to disclose the sources of their water, nor to publish results from factory tests. With Beijing already tackling food standards more aggressively, expect far tougher crackdowns.

More worrying is the risk of environmental backlash, for a sector that is both energy and water intensive, and consumes plentiful plastic. Much of China’s bottled water is simply purified, suggesting an improvement to tap water might see hard-pressed or greener consumers turn back.

In the short term, competition may well hurt the most: even at number one, according to Euromonitor, Nongfu has just 10% of the market. It deserves more than a drop of caution.

On Twitter twitter.com/AlecMac11

CONTEXT NEWS

- Chinese bottled-water supplier Nongfu Spring is considering an initial public offering in Hong Kong that could raise at least $1 billion, Bloomberg reported on Nov. 26, citing people familiar with the matter.

- The Hangzhou-based company, which also makes other beverages, including vegetable and fruit juices and soft drinks, is working with financial advisers on the sale. The listing could come in the first half of 2020, the report said.

- For previous columns by the author, Reuters customers can click on [MAC/]

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