Company Reports

Narrow-moat Blue Moon reported 2023 results with revenue in line with Refinitiv consensus and our estimate. Gross margin was a beat, but net profit was lower than expected, dragged by elevated expenses ratio. Consequently, we have reduced our fair value estimate to HKD 2.80 per share from HKD 3.10, after incorporating higher operating expenses ratio forecasts through 2028, which cut our 2024-27 earnings by 3%-7%, despite leaving the top-line growth estimates largely unchanged. Although the shares are currently undervalued, we think investors could remain sidelined until the company executes concrete margin expansion strategies.

As one of the major players in the home care sector in China, Blue Moon has been an early mover in terms of product innovation and channel penetration, which has driven above-industry sales growth in recent years. The majority of Blue Moon’s sales come from laundry detergent, where the market has grown at a CAGR of midsingle digits in the past decade. Consumption premiumization coupled with rising per capita income have led to a market transition from powder detergent to liquid detergent. Blue Moon was one of the early movers in the latter category and has been the market leader in terms of value share for the past 10 years consecutively. Likewise, the company’s early entrance in the liquid soap market with competitive offerings has helped secured its number one position during the same period, despite the advent of international peers such as Procter & Gamble and Reckitt Benckiser. These investments in products that could cater for shifting consumer preferences have conferred satisfactory returns for Blue Moon.

Narrow-moat Blue Moon’s profit warning for 2023 was disappointing, with guided net profit slightly below our estimates. 2023 net profit is expected to decline by at least HKD 230 million versus 2022’s HKD 611 million. Our previous estimate for 2023 earnings is HKD 488 million. We think the weak results were consistent with our cautious view toward second-half 2023 top-line growth and margins. After factoring in the guidance, we reduced our medium-term annual revenue growth forecasts from 2024 onward to an average of 5.0%, from 5.8%, as we believe the company would face headwinds from soft consumer sentiment and intensified competition. Our steady-state net margin estimate is also lowered to 8.7% from 9.3%. Consequently, we have cut our fair value estimate to HKD 3.10 per share, from HKD 3.60 per share. We believe the firm is currently undervalued, but we expect investors will stay sidelined on the stock given the uncertainty on its longer-term growth outlook. While we acknowledge that Blue Moon’s balance sheet remains strong with net cash position, we think the market is dissatisfied with the lack of earnings-accretive expansion by the management.

As one of the major players in the home care sector in China, Blue Moon has been an early mover in terms of product innovation and channel penetration, which has driven above-industry sales growth in recent years. The majority of Blue Moon’s sales come from laundry detergent, where the market has grown at a CAGR of midsingle digits in the past decade. Consumption premiumization coupled with rising per capita income have led to a market transition from powder detergent to liquid detergent. Blue Moon was one of the early movers in the latter category and has been the market leader in terms of value share for the past 10 years consecutively. Likewise, the company’s early entrance in the liquid soap market with competitive offerings has helped secured its number one position during the same period, despite the advent of international peers such as Procter & Gamble and Reckitt Benckiser. These investments in products that could cater for shifting consumer preferences have conferred satisfactory returns for Blue Moon.

As one of the major players in the home care sector in China, Blue Moon has been an early mover in terms of product innovation and channel penetration, which has driven above-industry sales growth in recent years. The majority of Blue Moon’s sales come from laundry detergent, where the market has grown at a CAGR of midsingle digits in the past decade. Consumption premiumization coupled with rising per capita income have led to a market transition from powder detergent to liquid detergent. Blue Moon was one of the early movers in the latter category and has been the market leader in terms of value share for the past 10 years consecutively. Likewise, the company’s early entrance in the liquid soap market with competitive offerings has helped secured its number one position during the same period, despite the advent of international peers such as Procter & Gamble and Reckitt Benckiser. These investments in products that could cater for shifting consumer preferences have conferred satisfactory returns for Blue Moon.

After disappointing first-half results, we cut our fair value estimate for narrow-moat Blue Moon to HKD 3.60 from HKD 6.60. We also lower our longer-term sales growth projections due to uncertainty around the growth outlook for its major product segments. The company mentioned the potential of expanding into other new personal care categories, but we remain neutral until there are more tangible signs. We now project an average annual sales growth rate of 5.8% from 2024 onward and a five-year net profit CAGR of 4.8%. The implied multiple, at 24 times 2024 price/earnings, is now closer to that of international peers, due to slower medium-term growth. We look for more consistent improvement in channel execution that flows through to the bottom line before revisiting our long-term view. We see Blue Moon shares as fairly valued.

Narrow-moat Blue Moon reported 2022 results that missed Refinitiv consensus and our estimates on the top line and net profit. The company attributed the profit miss to higher channel investments that did not bear fruit as well as elevated input costs. But management is optimistic about a potential sales recovery and that costs will become more favorable in 2023. We have reduced our fair value estimate to HKD 6.60 per share (from HKD 7.40 per share) due to lower 2023 top-line and profit projections, but continue to consider the stock undervalued. Our fair value estimate implies 31 times 2023 P/E and 3.8% dividend yield. We think the company can benefit from offline sales growth and lower input costs in 2023, thereby expanding its margins.

As one of the major players in the home care sector in China, Blue Moon has been an early mover in terms of product innovation and channel penetration, which has driven above-industry sales growth in recent years. The majority of Blue Moon’s sales come from laundry detergent, where the market has grown at a CAGR of midsingle digits in the past decade. Consumption premiumization coupled with rising per capita income have led to a market transition from powder detergent to liquid detergent. Blue Moon was one of the early movers in the latter category and has been the market leader in terms of value share for the past 10 years consecutively. Likewise, the company’s early entrance in the liquid soap market with competitive offerings has helped secured its number one position during the same period, despite the advent of international peers such as Procter & Gamble and Reckitt Benckiser. These investments in products that could cater for shifting consumer preferences have conferred satisfactory returns for Blue Moon.

Narrow-moat Blue Moon reported first-half 2022 results with a net loss slightly larger than the estimate it issued in its profit warning during July. The company reported decent progress in developing an omnichannel model by penetrating new retail channels, lower-tier cities, and expanding offline point-of-sale coverage, which we view positively as it could benefit longer-term sales growth and margins. We acknowledge the margin pressure that Blue Moon will face in the near term as it refrains from raising prices, but we believe its investment in channel diversification will support profit growth next year and beyond. We maintain our fair value estimate of HKD 7.40 per share, which implies 32 times 2023 P/E and 17 times enterprise value/EBITDA. We consider the stock undervalued and believe the company could deliver longer-term value to investors through its channel transition endeavors.

Narrow-moat Blue Moon issued a profit warning indicating an expected net loss of HKD 132.9 million in the first half of 2022. While management indicated the loss was primarily caused by the translational losses of cash denominated in U.S. and Hong Kong dollars, we note the pull forward in selling, general, and administrative expenses, or SG&A, has likely led to a larger operating loss than in first-half 2021, despite stronger revenue growth and higher gross profit. We lowered our gross and net margin estimates for the full year and expect a low-single-digit year-on-year decline in 2022 net income (versus low-double-digit growth in prior forecasts); but we believe Blue Moon could monetize on channel investments in the first half and deliver stronger operating results in second-half 2022. A higher gross profit in first-half 2022 could have served as a cushion for investments in future growth.

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.

As one of the major players in the home care sector in China, Blue Moon has been an early mover in terms of product innovation and channel penetration, which has driven above-industry sales growth in recent years. The majority of Blue Moon’s sales come from laundry detergent, where the market has grown at a CAGR of mid single digits in the past decade. Consumption premiumization coupled with rising per capita income have led to a market transition from powder detergent to liquid detergent. Blue Moon was one of the early movers in the latter category and has been the market leader in terms of value share for the past 10 years consecutively. Likewise, the company’s early entrance in the liquid soap market with competitive offerings has helped secured its number one position during the same period, despite the advent of international peers such as Procter & Gamble and Reckitt Benckiser. These investments in products that could cater for shifting consumer preferences have conferred satisfactory returns for Blue Moon.

Narrow-moat Blue Moon reported 2021 results that missed our forecasts on revenue but met our estimates for net profit. We like the progress reported by management regarding the improvement in offline channel sales following reforms in first-half 2021 as well as efforts committed to diversify Blue Moon’s e-commerce presence. We think the latter is key to sustaining the growth rate for the online channel given the proliferation of new channels such as O2O, video streaming platforms and online fresh groceries apps. We maintain our fair value estimate of HKD 10.5 per share and think the company has returned to a growth trajectory after handling distributor channel reform and inventory issues last year.

Blue Moon had already disclosed that its first-half performance would be nowhere near expectations, and it was a relief the release of interim results brought no more bad news. In fact, confirmation from management that price discounts and distribution trends had normalized in the first few weeks of the second half of the year increases our conviction that the gross margin contraction, caused by aggressive distributor discounting and bundling, is not likely to be sustained. We have fine-tuned our valuation assumptions and now assume a slightly lower long-term revenue growth rate, and as a result we are lowering our fair value estimate to HKD 10.50 per share from HKD 12. This, however, does not change our investment thesis that Blue Moon is undervalued and the company has strong growth drivers ahead.

There are three drivers to Blue Moon's growth strategy: per capita consumption growth; footprint expansion; and new product development. We think the company is well-positioned to benefit from all three, and should achieve growth well into the double digits for at least three years. We think the underlying growth rate of the concentrated liquid laundry detergent market in China is in the mid-teens. Growth was slower in 2020 due to fewer social occasions in lockdown and lower laundry volume, but according to Euromonitor, concentrated liquid laundry detergent grew at an average annual rate of 20% between 2015 and 2019. Conversely, despite a very strong year in 2020, we expect liquid hand soap to revert to levels also in the midteens, slightly above the 11% growth rate of recent years. Urbanization and increasing workforce participation, as well as growing disposable incomes are the secular drivers of this strong underlying growth rate. Management has positioned Blue Moon to be a leader in the online channel, which is growing even faster. With a leading brand in its categories, Blue Moon is likely to leverage emerging e-commerce platforms to further drive growth.

We are lowering our fair value estimate for Blue Moon to HK $12 from HK $13, after the company issued a profit warning ahead of first-half 2021 results, which are expected in August. The company blamed a huge gross margin shortfall in the first half of the year on several factors, but the downside surprise involved competitive events that have pressured pricing power. On balance, we would treat volatility in the stock as opportunistic entry points, but we acknowledge that visibility into short-term earnings has decreased significantly and the market may not rerate the stock to our estimate of intrinsic value until Blue Moon can demonstrate that it can regain control over its pricing and the gross margin will rebound, in spite of ongoing inflationary pressures.

There are three drivers to Blue Moon's growth strategy: per capita consumption growth; footprint expansion; and new product development. We think the company is well-positioned to benefit from all three, and should achieve growth well into the double digits for at least three years. We think the underlying growth rate of the concentrated liquid laundry detergent market in China is in the mid-teens. Growth was slower in 2020 due to fewer social occasions in lockdown and lower laundry volume, but according to Euromonitor, concentrated liquid laundry detergent grew at an average annual rate of 20% between 2015 and 2019. Conversely, despite a very strong year in 2020, we expect liquid hand soap to revert to levels also in the midteens, slightly above the 11% growth rate of recent years. Urbanization and increasing workforce participation, as well as growing disposable incomes are the secular drivers of this strong underlying growth rate. Management has positioned Blue Moon to be a leader in the online channel, which is growing even faster. With a leading brand in its categories, Blue Moon is likely to leverage emerging e-commerce platforms to further drive growth.

There are three drivers to Blue Moon's growth strategy: per capita consumption growth; footprint expansion; and new product development. We think the company is well-positioned to benefit from all three, and should achieve growth well into the double digits for at least three years. We think the underlying growth rate of the concentrated liquid laundry detergent market in China is in the mid-teens. Growth was slower in 2020 due to fewer social occasions in lockdown and lower laundry volume, but according to Euromonitor, concentrated liquid laundry detergent grew at an average annual rate of 20% between 2015 and 2019. Conversely, despite a very strong year in 2020, we expect liquid hand soap to revert to levels also in the midteens, slightly above the 11% growth rate of recent years. Urbanization and increasing workforce participation, as well as growing disposable incomes are the secular drivers of this strong underlying growth rate. Management has positioned Blue Moon to be a leader in the online channel, which is growing even faster. With a leading brand in its categories, Blue Moon is likely to leverage emerging e-commerce platforms to further drive growth.

We are initiating coverage of Chinese home and personal care manufacturer Blue Moon Group Holdings with a fair value estimate of HKD 13.50 and a narrow economic moat rating. With the benefits of scale in several Chinese provinces and a focused portfolio, we think the company sits in a sweet spot among competitors. It is large enough to have the benefits of scale, but it is focused enough to be able to allocate capital efficiently, and it leads its categories in the fast-growing premium segments and in e-commerce. There is around 17% upside to our estimate of intrinsic value, which implies 34 times 2022 earnings, and if first-half results show a resumption in the upward trend of laundry volume in China, both the business and the stock could regain momentum in the coming months.