The initial public offering was the most overbought stock sale in Hong Kong history. The founder suddenly has found himself the third-richest man in China. The stock's first-day performance is blistering, with the shares closing up 54%.
But do not buy this stock.
The company in question is Nongfu Spring HK:9633, and in its Tuesday debut its shares opened 85% higher than the offer price of HK$21.50. Wednesday has seen them stabilize but still close up 54% from their debut.
That performance has left its founder, Zhong Shanshan, with a real-time net worth of US$50.9 billion, according to the Bloomberg Billionaires Index. Only Alibaba Group (BABA) co-founder Jack Ma, at US$56.4 billion, and the Tencent Holdings TCEHY founder Pony Ma (no relation), at US$51.2 billion, are currently worth more in China.
To put it in a global context, Zhong is now worth US$6 billion more than the Mexican telecom magnate Carlos Slim and about US$6 billion less than industrialist Charles Koch.
Zhong is sometimes called the "Lone Wolf" in business circles and the financial press, keen to go it alone and steer clear of business groups and politics. "I am a man on my own," he told the Chinese media. "I don't care about what my peers are doing and thinking."
The Lone Wolf dropped out of school at the age of 12 after his parents were targets of the Cultural Revolution, according to the Financial Times. He grew mushrooms, worked as a reporter and then turned to selling pills to treat erectile dysfunction. When these "cures" that were made in part from turtle parts drew the attention of the authorities, he turned to bottling water.
A big first-day pop generates excellent PR. However, you've got to question the investment bankers who priced the deal when they got it wrong and left so much of the company's money on the table. The offer was priced at the high end of the range, but that range was clearly too low. The offering was underwritten by CICC HK:3908, Morgan Stanley (MS) , Citigroup (C) and CLSA.
The retail portion of the initial public offering (IPO) was overbought by a record 1,147 times, according to the South China Morning Post. That was large enough to lock up HK$677 billion (US$86.3 billion), about one-third of the entire daily cash in normal circulation in Hong Kong.
Cornerstone investors led by fund manager Fidelity, tech-focused hedge fund Coatue Management and the Singaporean sovereign wealth fund GIC took large chunks of the deal. The institutional portion was just 60 times oversubscribed. The scramble over the shares in the open market came in part as institutional investors that didn't get the stock in the international placement looked to secure positions.
Founder Zhong owns 87.4% of the company through a 69.6% direct holding and other indirect interests. That falls to 84.4% after the listing.
Zhong is also chairman and the biggest shareholder of the biotech company Beijing Wantai Biological Pharmaceutical Enterprise Co. Although it has been around two decades, it recently began making Covid-19 testing kits and went public in Shanghai on April 29 as SH:603392.
Zhong owns 75% of that company, which has seen its value skyrocket more than 2,000%, from an 8.75 yuan offer price to 176.86 yuan today. The Wantai stake contributes US$8.4 billion to Zhong's net worth at its current value.
Nongfu Spring sold off 388.2 million shares, raising HK$8.34 billion (US$1.06 billion). It says it is interested in using part of the proceeds to develop its international business.
Its 42.2 billion yuan (US$5.9 billion) in sales for bottled water make it the market leader by some stretch, with 20.9% of China's 201.7 billion yuan packaged-water market.
Nongfu Spring traces its roots to 1996, when Zhong established it under the less-catchy name of Xin'an River Yangshengtang Drinking Water. Nongfu Spring - always the name of its brand - sprang in 2001.
Its red-topped glass bottles, with Chinese animals and plants in a pretty frosted pattern in white, have become a common sight at any high-end meeting in China, of which there are plenty. Its bottles sat in front of 29 heads of state and the United Nations Secretary-General as the official supplier to the Belt and Road Forum in 2017, not to mention the G20 meetings in 2016 in the Hangzhou-based company's hometown.
It's the minerals
Nongfu Spring has sold its water on its mineral content, whereas most water in China is just marketed on the fact it is filtered.
Its water originally comes from the famously pristine "Thousand Island Lake," Qiandao Hu, southwest of Hangzhou. Now it draws from 10 water sources around the country, boasting that its water products "contain minerals that are beneficial to human body, such as potassium, sodium, calcium, magnesium and metasilicate."
Besides water, Nongfu Spring also makes Oriental Leaf tea, a line of juices and "functional beverages," by which it means isotonic sports drinks, under the name Scream. Its newest line, introduced last year, is Tanbing-brand coffee.
Why shouldn't you buy this stock?
First of all, the company now has a market cap of US$47.3 billion. That's more than Danone, at US$45.8 billion, which produces Evian and Volvic mineral waters, not to mention all its dairy products, baby formula and more. It's considerably larger than the US$35 billion market cap of Constellation Brands (STZ) , which owns brands such as Robert Mondavi and Corona beer. It doesn't make sense.
I can't vouch for the 10 water sources that the company cites. But here in Hong Kong, we try not to buy vegetables and fruits grown in China because we have no idea what kind of pesticides have been put on or inside them. There's plenty of industrial runoff across the country that I wouldn't want to drink.
But most of all, bottled water is wrong. It's an environmental disaster, and absolutely unnecessary in any developed nation. Filter your tap water if you want. That's good enough. In developing nations such as China, you have other issues to consider, true. But it's a product that by all rights should die away.
Thank you, Thankyou
The Australian company Thankyou said as much last month when it decided to stop making bottled water, which was its original product.
"We've said it from the start, bottled water is a 'silly product' and that it shouldn't exist," Thankyou said on its blog. The company sought to provide a better choice for people who did want to buy water, using profits to fund projects in developing nations.
The Melbourne-based company says it can no longer justify "making" water and hasn't succeeded in finding sustainable ways to produce or package it. It has branched out into hand wash, lotions and baby products and will now stick to that.
"We naively always thought we'd eventually find a solution that's a win-win for humanity and the planet," the company explained. "We were wrong."
Co-founder Daniel Flynn said he hopes the death of Thankyou bottled water "sends a message to other consumers and brands," he told The Guardian. The company "got in on" bottled water to "extract money," ultimately with the aim of reducing poverty.
Bottled water "doesn't make sense in Australia," Flynn said, or in any developed nation with perfectly good drinking water coming out of the tap. The company has toyed with changing the name of its water to Sorry. But it has pulled the plug instead.