Company Reports

No-moat Hengan International reported 2023 results that trailed our estimates on revenue but beat on gross and net profit. A favorable cost environment drove better-than-expected margins for major categories, while the notable increase in net profit was due to a significant reduction in foreign exchange loss compared with last year. The company has demonstrated decent progress in penetration into e-commerce and new retail channels, which lifted revenue growth, and we think these are good venues to drive product mix shift in the long term.

Hengan International operates in the tissue, sanitary napkin, and diaper markets in China and is one of the leading brands in tissue and sanitary napkins. Being one of the early movers in personal-care products, it has developed an extensive offline distribution network in China. It has also penetrated lower-tier cities, which contributed close to 80% of its sales in 2021. With its focus on lower-tier cities, the majority of the firm's products sit in the mass market below-premium segments.

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.

Hengan International operates in the tissue, sanitary napkin, and diaper markets in China and is one of the leading brands in tissue and sanitary napkins. Being one of the early movers in personal-care products, it has developed an extensive offline distribution network in China. It has also penetrated lower-tier cities, which contributed close to 80% of its sales in 2021. With its focus on lower-tier cities, the majority of the firm's products sit in the mass market below-premium segments.

Hengan International operates in the tissue, sanitary napkin, and diaper markets in China and is one of the leading brands in tissue and sanitary napkins. Being one of the early movers in personal-care products, it has developed an extensive offline distribution network in China. It has also penetrated lower-tier cities, which contributed close to 80% of its sales in 2021. With its focus in lower-tier cities, the majority of the firm's products sit in the mass market below-premium segments.

We lower our fair value estimate on no-moat Hengan International to HKD 37.00 from HKD 40.00 after disappointing first-half 2023 results. Net profit missed the Refinitiv consensus estimate primarily due to continued weakness in sanitary napkin sales. Gross margin also fell short of our estimates. The tissue segment delivered strong top-line growth thanks to competitive pricing. Management expects margins to improve in second-half 2023 with lower pulp costs. But we continue to see pressure to long-term profitability of the sanitary napkin business, which made up close to 80% of Hengan’s EBIT over the last five years. We lower our long-term margin projection, but the company should see alleviating cost pressure in the near term, which could limit possible negative reaction to the weak results.

Hengan operates in the tissue, sanitary napkin, and diaper markets in China and is one of the leading brands in tissue and sanitary napkins. Being one of the early movers in personal-care products, it has developed an extensive offline distribution network in China. It has also penetrated lower-tier cities, which contributed close to 80% of its sales in 2021. With its focus in lower-tier cities, the majority of the company’s products sit in the mass market below-premium segments.

No-moat Hengan reported fiscal 2022 results in which top-line and net profit missed Refinitiv consensus estimates. We keep our fair value estimate unchanged at HKD 40 per share, which implies 13 times 2023 P/E, consistent with the five-year average. We do not expect a near-term catalyst to the stock due to the absence of turnaround signals in its medium-term growth outlook. The major overhang for the company remains the lack of a growth driver for its profit engine, the sanitary napkin business.

We updated our 2022 and 2023 estimates for no-moat-rated Hengan following a discussion with the company. We think Hengan could deliver faster top-line growth in 2023 than we previously anticipated thanks to share gain in the tissue business. But the company’s margin outlook could still be dragged by elevated input cost and lackluster growth of the sanitary napkin segment. Although we raise this year’s net income projection moderately, reacceleration of sanitary napkin profit growth is still absent, in our view. Our fair value estimate, unchanged at HKD 40 per share, implies 12 times 2023 P/E (versus the five-year average of 13 times).

No-moat Hengan reported first-half results, with top-line growth outpacing our estimates but profit missing due to mounting cost pressure and insufficient price hikes to offset cost inflation. New channel penetration (e-commerce and new retail) and competitive pricing drove resilient sales for the company. We regard the progress in diversifying the sales channel as positive and consistent with our view that Hengan possesses levers to retain its market position through product mix and channel maneuvers. But we maintain our view that medium-term net profit margin will fall to a lower-than-historical level (midteens versus the average of roughly 19% in the last five years), as more investments are required for new channels and product pricing would have to stay competitive. We have raised our fair value estimate to HKD 40 per share from HKD 39.50 due to the time value of money. The implied 2022 price/earnings multiple of 16 times is slightly higher than the historical average, but we believe the market views Hengan’s progress in channel shift positively, with multiple expansion possible if management could deliver more evidence that the company is back on a medium-term growth trajectory. We now consider the stock as fairly valued and could turn more positive if Hengan translates its channel mix shift to faster and more sustainable bottom-line growth.

Hengan operates in the tissue, sanitary napkin, and diaper markets in China and is one of the leading brands in tissue and sanitary napkins. Being one of the early movers in personal-care products, it has developed an extensive offline distribution network in China. It has also penetrated lower-tier cities, which contributed close to 80% of its sales in 2021. With its focus in lower-tier cities, the majority of the company’s products sit in the mass market below-premium segments.

Hengan operates in the tissue, sanitary napkin and diaper markets in China, particularly as one of the leading brands in tissue and sanitary napkins. Being one of the early movers in personal-care products, it has developed an extensive offline distribution network in China. It has also penetrated lower-tier cities, which contributed close to 80% of its sales in 2021. With its focus in lower-tier cities, the majority of the company’s products sit in the mass market, below premium segments.

We are transferring coverage of Blue Moon and Hengan to a new analyst, lowering our fair value estimate of no-moat Hengan to HKD 39.50 per share from HKD 49 per share; and narrow-moat Blue Moon to HKD 7.40 per share from HKD 10.50 per share. A more cautious view on medium-term top-line and profit growth is the main factor for our downward revision to the fair value estimates of these companies. We think Blue Moon’s shares offer more value at this point, although with less upside versus our previous fair value estimate. We think Hengan’s shares are fairly valued, with low expectations priced in, but we have little conviction that the company could deliver upside surprises. We expect the company to face margin compression over the medium term with pressure on pricing and volume, due to fierce competition in both the tissue and sanitary napkin markets. At the same time, Hengan has to cope with channel transition from offline to online, whereas Blue Moon has adapted better to the changing channel landscape.

No-moat Hengan reported 2021 results that missed our estimates across both the top line and margins. Continued disruptions in global logistics and rising commodities prices have dragged both sales and profits for the company. Progress in channel transition has been weaker than our expectations and was unable to reignite growth for the company. We lowered our 2022 estimates on revenue and profit margins due to continued headwinds in market competition and expectations for further cost pressure. We revise down our fair value estimates to HKD 49 per share from HKD 60 per share as a result, which implies 15 times 2022 P/E, 9 times EV/EBITDA, and 6% FCF yield. We think the near-term share price lacks catalysts and would be weighed on by low visibility in earnings.

Health and hygiene product manufacturer Hengan is one of the few Chinese firms on equal footing with global behemoths such as Procter & Gamble, Kimberly-Clark, and Unicharm in the Chinese market. The firm is China’s leading player in the tissue paper, sanitary napkin, and diaper industries, with 10%, 22%, and 12% market shares, respectively.

Health and hygiene product manufacturer Hengan is one of the few Chinese firms on equal footing with global behemoths such as Procter & Gamble, Kimberly-Clark, and Unicharm in the Chinese market. The firm is China’s leading player in the tissue paper, sanitary napkin, and diaper industries, with 10%, 22%, and 12% market shares, respectively.

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.

No-moat Hengan's first-half results were disappointing, with sales and operating profits down 8.7% and 20%, respectively. Intensified price competition depressed the top line and gross margins while consumers’ channel shift continued to damp sales at the brick-and-mortar channel, Hengan’s strength. We expect cost inflation will weigh on margins but ease price competition into the second half. Additionally, tightened competition rules of online channels could reduce discounting. We have cut our 2021 profit forecasts by 9% to reflect the first-half weakness and higher input costs. The adjustments were largely offset by the increased time value of money, leaving an immaterial impact on our HKD 73 fair value estimate. Concerns about raw material cost inflation and price competition might continue to weigh on the share price until we see the negative impacts dissipate.

Health and hygiene product manufacturer Hengan is one of the few Chinese firms on equal footing with global behemoths such as Procter & Gamble, Kimberly-Clark, and Unicharm in the Chinese market. The firm is China’s leading player in the tissue paper, sanitary napkin, and diaper industries, with 10%, 22%, and 12% market shares, respectively.

We increase our fair value estimate for Hengan International Group to HKD 73 from HKD 69, reflecting Chinese yuan appreciation against the Hong Kong dollar. We believe the online channel restructuring and its strategy focusing on B-to-C segment should be able to help Hengan to boost its revenue growth in the medium term. However, we expect the operating margin will be under pressure from the rising raw material costs and higher A&P costs for new premium product launches in the near term. This appears to be priced in, however, and we view the shares as being undervalued.