On Thursday, UBS downgraded Nongfu Spring Co Ltd (9633:HK) (OTC: NNFSF)stock from Neutral to Sell, significantly reducing the shares target to HK$24.24 from HK$46.73. The downgrade was influenced by anticipated declines in the company's water segment revenue and potential margin risks.
The firm forecasts a decrease in Nongfu's water operating profit margin (OPM) by 10% over the period from 2023 to 2025, compared to a 4% year-over-year decline in the first half of 2024. This is expected to contribute to a 16% decline in the company's overall EBIT for 2023.
The downward revision of the price target reflects lowered earnings expectations for the years 2024 to 2026, ranging from 8% to 16%. UBS's projections for Nongfu's earnings are now 3% to 14% below the consensus estimates.
The firm's analysis suggests that the competitive landscape in the tea segment is intensifying, with rivals Tingyi and UPC prioritizing sugar-free tea in their new product launches across various price tiers. This strategic focus by competitors is seen as a potential threat to the growth of Nongfu's tea drink segment.
UBS's report points to market challenges for Nongfu Spring, particularly in the tea drink sector where competition is escalating. The company's rivals have been actively expanding their sugar-free tea offerings, which could impact Nongfu's market share and sales growth.
The firm's revised earnings estimates take into account these industry dynamics and the expected financial performance of Nongfu Spring in the coming years.
The updated analysis by UBS suggests a cautious outlook for Nongfu Spring Co Ltd's financial health, highlighting the need for investors to be aware of the possible headwinds facing the company. The new price target and rating reflect the firm's latest evaluation of Nongfu's market position and future earnings potential.
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