Near-Term Headwinds and Transformation Remain for Hengan; FVE Cut to HKD 60

Following our discussion with Hengan’s management, we took a fresh look and are sizably cutting our earnings projection and lowering our fair value estimate to HKD 60 from HKD 73. We have reduced the volume assumptions mainly for sanitary napkins to a level more in line with the market growth and increased the marketing spend as a ratio to sales. We reckon that Hengan’s selling expenses would rise considerably given investment required for brand building for the new channels and premium brands, a crucial step to catch up in the online channels and premium segments. Nevertheless, concerns over rising input costs, inventory clean-up of low-end and midrange baby diapers, as well as price competition may continue to weigh on the near-term share performance, although we consider these concerns one-off negatives.