Cici Shi

China Resources Beverage, whose flagship C'estbon brand helped it rake in a profit of 1.3 billion yuan (HK$1.4 billion) last year, has applied to list in Hong Kong.

The bottled water giant had been working with banks as far back as last July with the aim of raising up to US$1 billion (HK$7.8 billion).

CR Beverage commands an 18.4 percent share of the bottled water market in China and is ranked second behind Nongfu Spring (9633), according to China Insights Consultancy.

However, amid keen competition, Nongfu Spring's share price has dipped 32 percent so far this year.

While Nongfu Spring produces its mineral-infused water using natural resources, C'estbon's water is made from tap or groundwater that's been filtered and purified.

Purified water accounts for 56.1 percent of the bottled water market in the mainland, and CR Beverage ranks first in this segment in terms of sales.

CR Beverage's bottled water costs 0.92 yuan per liter on average.

Its profits rose by 34 percent to 1.3 billion yuan in 2023 from a year earlier and more than 90 percent of its revenue came from drinking water, which also contributed to a high gross margin of 44.7 percent.

But CR Beverage now faces a fresh challenge from Nongfu Spring, which launched its own purified water on the heels of CR Beverage's application.

Meanwhile, CR Beverage, which currently has 12 factories and 34 manufacturing partners mainly in Guangdong, Hunan and Sichuan, is also pressing ahead with expansion.

It plans to build new plants and expand existing ones in Zhejiang, Hubei, Chongqing, and Shanghai before 2026, where C'estbon hasn't dominated the markets due to a lack of factories and high transportation costs.

CR Beverage's net assets dropped 88.8 percent year-on-year to 369.62 million yuan last year, partly due to construction projects and purchases.

It says funds raised will first be used for "strategic expansion and optimization of production capacity."

But the bottled water industry will grow slowly during the next five years despite being the largest segment in the Chinese soft beverage sector, Haitong International Securities notes.

The sector will be worth 314 billion yuan in 2028 with a compound annual growth rate of 5.8 percent, while the tea and functional beverages have CAGRs of 7.2 percent and 7.7 percent respectively, CIC's report shows.

However, CR Beverage has been slow to diversify its product and revenue streams despite its emphasis on a "multi-category strategic roadmap."

The proportion of revenue from bottled water only inched down from 95.4 percent to 92.1 percent between 2021 and 2023.

CR Beverage currently has 13 brands in its portfolio, including C'estbon, tea beverages Zhi Ben Qing Run and Zuo Wei Cha Shi, the Mi Shui and Sekai-no-Kitchen range of juices, the sports drink Mulene and Fire coffee.

Though beverage sales rose at a CAGR of 38.6 percent from 2021 to 2023, they only contributed 7.9 percent of total revenue as of last year.

This was in sharp contrast to Nongfu Spring, whose beverage products generated over half of its revenue last year.

CR Beverage's net profit margin stood at 9.9 percent last year.

Under a strategy of diversifying its offerings, it plans to enhance research and development for new products using the proceeds from the initial public offering.

Its R&D costs rose 25.6 percent to 61.5 million yuan from 2021 to 2023.

Three of its 13 brands -- Gogo-no-Kocha milk tea, Fire and Sekai-no-Kitchen -- were introduced from Kirin, a Japanese beer and beverage producer that once held a 40 percent stake in CR Beverage. Kirin sold its shares to Plateau Consumer in 2022, and the IP collaboration expires in 2025.

Plateau Consumer is indirectly owned by Bank of China, which, together with Citic Securities, BofA Securities and UBS, is sponsoring the IPO.

If the IPO succeeds, CR Beverage will become the ninth Hong Kong-listed subsidiary of the state-owned conglomerate China Resources, which holds a 60 percent stake in the water and beverage producer.

Beverage giant thirsts for cash