Nomura Orient International Securities: Nomura Orient: Eastroc Beverage's functional drinks under pressure in the third quarter; earnings forecasts and target price cut

Why did third-quarter results miss expectations?

In the third quarter of 2026, Eastroc Beverage reported revenue of 6.15 billion yuan, up 0.8% year on year, and net profit of 1.28 billion yuan, down 7.8% year on year. Both were below Nomura Orient's forecasts, which the firm attributed mainly to pressure on functional drink revenue.
The quarter's performance was weaker than the overall growth rate for the first nine months of 2026, when revenue was 18.6 billion yuan and net profit was 4.14 billion yuan, up 10.4% and 10.2% year on year, respectively.

Third-quarter functional drink revenue fell 8.6% year on year, while sports drink revenue rose just 0.5%. According to data from Mashangying, nationwide sales of functional and sports drinks fell 12.8% and 10.9%, respectively, over the same period.
Tea drinks and other beverages grew rapidly: their revenue rose 183.0% and 32.9% year on year, respectively, in the first three quarters, while functional and sports drink revenue grew 1.7% and 6.5% respectively. Nomura Orient expects demand to remain under pressure in the fourth quarter, after which tea drinks and other beverages will become the main growth drivers, while functional and sports drink revenue may stabilize or grow slightly.
Tea drinks have been disclosed separately since 2026; they were previously included in other beverages. This reporting change needs to be considered when comparing changes across categories.

In the first three quarters of 2026, gross margin rose 2.3 percentage points year on year to 47.5%, but the total expense ratio also rose 2.4 percentage points to 20.2%, and net margin remained flat at 22.3%. The financial expense ratio rose 1.2 percentage points and the administrative expense ratio rose 0.6 percentage points.
Nomura Orient expects fourth-quarter gross margin to be below the level of the first three quarters because of seasonal factors, but cost savings from locked-in raw material prices could support year-on-year improvements in gross and net margins.

Following weaker-than-expected third-quarter functional and sports drink revenue, the firm cut its revenue forecasts for 2026–2028 by 4.0%, 5.9% and 6.9%, respectively, to 23 billion yuan, 25.57 billion yuan and 28.36 billion yuan.
Given the higher administrative expense ratio in the first three quarters, Nomura Orient raised its forecast for that ratio by 0.2 percentage points in each of the next three years and cut its net profit forecasts for the same period by 6.3%, 8.6% and 9.7%, respectively, to 5.01 billion yuan, 5.35 billion yuan and 6.14 billion yuan.
The firm maintained its buy rating and cut its target price from 203.78 yuan to 160.31 yuan. It shifted the valuation benchmark from 2026 to 2027 and lowered the target price-to-earnings multiple from 28 times to 22 times, below the comparable-company forecast average of 24.6 times for 2027, to reflect its expectation that the company's earnings will grow more slowly than peers'.