Hengan: Lower Input Costs a Tailwind for 2024, Though Price Competition Could Intensify

We lower our 2023-24 earnings forecasts by 6% to 10% for no-moat Hengan International following a recent discussion with management and update our view for 2024. We reduce our fair value estimate slightly to HKD 35 per share from HKD 37 per share, which implies 13 times 2024 P/E and is consistent with its five-year historical average. We think the tissue segment will be Hengan’s medium-term top-line growth driver. While sanitary napkins will remain the primary profit driver, the new normalized gross margin should be in the low 60% range, versus around 70% in the past, due to stiff competition. The company should face a cost tailwind in 2024 as wood pulp and petrochemical prices are expected to fall, but price competition would be a headwind to revenue growth. We think the company’s shares are undervalued with an implied 10 times 2024 P/E and over 5% dividend yield for 2024. In our view, concern about the modest medium-term growth outlook is priced in.