Credit: China Visual Group

By Huixia Sun

BEIJING, September 9 (TMTPOST)—The year 2020 witnessed the rise of China’s newly minted richest man, from an unlikely place – the bottled water business. On September 8, Zhong Shanshan, 65, surpassed Tencent’s founder Pony Ma briefly to ascend to the position of the wealthiest person in China.

On Tuesday, Zhong-controlled consumer goods giant Nongfu Spring floated an IPO on Hong Kong Stock Exchange with the issue price of HK$21.5. The stock opened at HK$39.8 on its debut day due to strong demand, implying the market valuation of HK$445.2 billion (about US$57.9 billion) and sending Zhong to the very top of China’s billionaires list.

At the share price of HK$39.8, Zhong’s total wealth was worth nearly US$59 billion, overtaking $57 billion for social media and gaming mogul Pony Ma and $51 billion for e-commerce giant Alibaba’s founder Jack Ma. However, his new status was short-lived. It ended when the stock fell to HK$33.1 at the close of the day.

Zhong had ranked No. 1,063 with a net wealth of $2 billion in the 2020 Forbes Billionaires List released in April. He is also the largest shareholder of Beijing Wantai Biological Pharmacy Enterprise, which was listed in Shenzhen in June. His 75.15% stake in the pharmaceutical firm is worth about $10 billion.

The journalist-turned-entrepreneur held an 84.4% stake directly and indirectly in the firm, 65.62 % of which was held through a firm he controlled, according to an announcement made by the firm on September 7. Prior to the IPO, the beverage firm did not accept investments from PEs, thus ensuring the concentration of the shares in the hands of the company’s sole founder and senior executives.

“Slightly Sweet”

Nongfu Spring’s US$11 billion IPO was another success story for the Hong Kong Stock Exchange, which had attracted Ant Group’s jumbo IPO among other big listings. But it stood out because it came from the consumer goods sector, which was often dismissed by investors for lacking potentials for growth.

Nongfu Spring, known for its promotion slogan “Nongfu Spring, Slightly Sweet”, was in a sweet spot for investors mainly due to its large market share, high gross margins and steady growth in revenues and net profits in recent years.

Nongfu Spring, which literally means “farmers’ spring water” in Chinese, was founded in Hangzhou in 1996. Over the past 24 years, it has evolved into a dominant player with about 25% share in China’s bottled water markets due to its aggressive marketing and differentiation business strategies. In the eight consecutive years through 2019, the company had secured the largest share in bottled water markets. 

Furthermore, the gross margin of the firm was as high as 60.2%, only below the lucrative liquor industry in China.  

In the past three years, the beverage company reported a CAGR of 17.2% in revenues. The 2019 revenues stood at RMB24.021 billion in 2019, up from in RMB20.475 billion in 2018 and RMB17.491 billion in 2017. Meanwhile, net profits went up steadily to RMB4.954 billion in 2019 from RMB3.612 billion in 2018 and RMB3.385 billion in 2017. The net profit margin was 19.4%, 17.6% and 20.6%, respectively, in 2017, 2018 and 2019, according to the firm’s prospectus.

The firm’s net profit margins were higher than the average of China’s beverage industry – 6.9% in 2017, 7.1% in 2018 and 9.6% in 2019, and that of the world beverage industry –3.9% in 2017, 7.6% in 2018 and 8.5% in 2019, according to a report by Frost & Sullivan, an independent consulting firm. 

Risk Factors

Nongfu Spring has been working hard to differentiate its products from those of its rivals. Another promotion slogan of the company is “We don’t produce water. We are just the porter of the nature.” Instead of producing botttled pure water, the firm sells bottled spring water, which means they have to build factories in deep mountains.

The company has 10 high-quality water sources across China, including Qiandao Lake in Zhejiang, Changbai Mountain in Jilin, Danjiangkou in Hubei and Wanlv Lake in Guangdong, according to the prospectus. But it caused environment conservation-related problems.

In early 2020, Nongfu Spring was involved in a scandal of damaging the vegetation in a national park in Wuyi Mountains, according to China’s national broadcaster CCTV. In 2018, the company wanted to buy a water source in New Zealand but was forced to drop the plan in the face of a protest by tens of thousands of local residents.

Just three years ago, Zhong said publicly that he would not seek an IPO given the bottle water business was a cash cow.

However, the company distributed RMB9.598 billion in dividends to its shareholders in 2019, resulting in a drop in its structured savings account from RMB3.6 billion at the end of 2018 to RMB200 million at the end of 2019. The 2019 dividend to shareholders was 26 times as much as that in 2017 and 2018. Based on his stake in the company, Zhong received about RMB8.39 billion in dividend just in one year.  

In a surprising development, the company borrowed RMB1 billion in 2019 to offset its huge dividend payout. In 2018, the company had zero debt.