By Joanne Chiu

Investor exuberance about China's biggest bottled-water company, Nongfu Spring Co., has combined with a shortage of tradable shares to send its stock soaring.

The company went public in Hong Kong in September, raising $1.24 billion in a hot initial public offering. Since then, the stock has nearly tripled in value to roughly $85 billion.

Nongfu Spring's high profit margins and growth potential in areas such as flavored-tea drinks have impressed investors and analysts. So has its strong brand--Nongfu Spring water is easily recognized, with signature red bottle caps--and the resilience of a business that can thrive during a downturn or heightened geopolitical tension.

A simple lack of stock seems to be helping, too. For smaller companies, Hong Kong's stock exchange insists on a public float of at least 25% of shares. But it often grants waivers allowing larger companies to go public with smaller free floats of 10% to 15%, provided there will still be large absolute amounts of stock available to buy and sell. Small stakes held by investors who aren't tied to major shareholders can count toward that float, even if those investors have signed lockup agreements pledging not to sell soon after an IPO.

After deducting founder Zhong Shanshan's roughly 84% stake and other interests held by company executives and Mr. Zhong's sister-in-law, Nongfu Spring calculates its public float at 14%.

However, this figure includes stakes held by dozens of individual investors, including current and former employees and other relatives of Mr. Zhong's. These investors have agreed not to sell stock within a year of the listing. The stock sold in the offering, a narrower measure of shares that might be easily bought or sold, is 4% of all shares, and even that includes stakes held by cornerstone investors who have committed not to sell for six months.

Ronald Wan, chief executive for investment banking at Partners Capital International Ltd., said that making exceptions on minimum free floats had allowed more companies to list in Hong Kong but that the city's listing rules might need to be revised to introduce more thresholds.

"A company's share price may not accurately reflect the actual value of a stock, given limited free-float shares, especially when some investors irrationally chase after the stock," he said.

Hong Kong Exchanges and Clearing Ltd. said it doesn't comment on individual companies. Nongfu Spring said the amount of shares it sold was based on its needs and prevailing market conditions. It said its public float was approved by regulatory authorities including the stock exchange.

Nongfu Spring's reputation in mainland China has also helped. Mainland investors have bought in through the Stock Connect program, which links Hong Kong to exchanges in Shanghai and Shenzhen. They now hold about 116.4 million shares. That equates to about 1% of the stock, or roughly a quarter of the easily traded shares.

The rising influence of mainland investors in Hong Kong has enabled Chinese brands to command premium valuations, much as they could in the onshore market, Mr. Wan said. "Some mainland investors are just buying the stock in anticipation that it will rise further, regardless of fundamentals."

On Friday, Nongfu Spring traded at 58.55 Hong Kong dollars a share, the equivalent of $7.55, compared with its offer price of HK$21.50. That gives the company a price of roughly 83 times forecast earnings over the next 12 months, according to FactSet, a very high price-to-earnings multiple for the usually more-staid consumer-goods sector.

To be sure, market-watchers say Nongfu Spring's business has more fundamental attractions, too.

Tristan D'Aboville, a research analyst at William O'Neil & Co., said Nongfu Spring's access to water sources across China cut its logistics costs and that its seven-year record as China's largest player gave it an advantage. "Building customer trust is not easy in the packaged drinking-water industry," he said.

Nongfu Spring has also been quick to diversify into drinks such as sugar-free tea and fresh juice, to capture spending from increasingly wealthy Chinese consumers, said Yoyo Pang, an analyst at Bocom International. Ms. Pang said that while the pandemic's social-distancing requirements had hurt demand for beer and spirits, it had boosted household consumption of Nongfu Spring water, including the company's larger bottle sizes.

In any case, the surge is welcome for its founder, Mr. Zhong, who is now China's richest person according to Forbes, with an $89 billion fortune thanks to Nongfu Spring and the health-care business he controls. It has also been good news for foreign backers such as Fidelity International, which took a role in the IPO as a cornerstone investor.

Eugene Yiu, an executive director at Hong Kong-based hedge-fund manager Pureheart Capital Asia Ltd., said his firm bought stock during the IPO and after it. He said his firm was keeping the shares as a way to bet on the domestic Chinese economy. "Nongfu's domestically focused businesses are immune to any geopolitical spats," he said.

Some say things have gotten too bubbly. Edmond Fan, an individual investor in Hong Kong, said he recently sold all his shares, reaping a profit of more than $7,000.

Mr. Fan, a 60-year-old lecturer in "I Ching," the ancient Chinese book of divination, said he first learned of Nongfu Spring during business trips to China in the 1990s and was attracted to the stock because of its strong brand and high profitability. "I still like the company, but it has become too pricey," he said.

Write to Joanne Chiu at joanne.chiu@wsj.com

(END) Dow Jones Newswires

01-29-21 0544ET