Hengan International (1044 HK) Summary
Core Content
Hengan International is a leading player in the Consumer Staples sector in China, with a target price of HKD76.70, indicating a -16% drop from the current share price of HKD91.55. The company's market capitalization is HKD112.1B, with an average daily trading volume of USD26M. The firm has been downgraded to SELL due to concerns about its performance in the upcoming interim results.
Main Points
- Sales Weakness: The company is facing across-the-board sales weakness, particularly in the sanitary napkins segment, where distributors have built up inventory but sales growth has slowed.
- Margin Pressures: The threat of rising imports, especially from Japan due to the weak yen, is expected to narrow Hengan's price attractiveness. The company is also launching lower-priced, lower-margin products, which could dilute earnings.
- Strategies: Hengan plans to increase A&P efforts in the second half of 2015, accelerate its presence in e-commerce and baby stores, and penetrate the remaining 50% of baby stores by 2016-17.
- Earnings Cut: The EPS forecast for FY15 and FY16 has been reduced by 8% and 12%, respectively, due to lower sales growth and margin assumptions. The target price multiple has been lowered from 27X to 22X.
- Market Performance: The company's share price has shown positive growth of 2.7% over one month and 12.6% over twelve months, but it has been underperforming relative to the index in the last three months.
Key Financial Data
| Metric |
FY12A |
FY13A |
FY14A |
FY15E |
FY16E |
| Revenue (HKD m) |
18,524.2 |
21,186.4 |
23,830.8 |
25,699.4 |
27,878.4 |
| EBITDA (HKD m) |
5,301.6 |
5,790.8 |
6,504.7 |
6,994.0 |
7,510.9 |
| Core Net Profit (HKD m) |
3,518.7 |
3,721.0 |
3,915.8 |
4,280.8 |
4,679.1 |
| Core EPS (HKD) |
2.86 |
3.02 |
3.19 |
3.49 |
3.81 |
| Core P/E (x) |
32.0 |
30.3 |
28.7 |
26.3 |
24.0 |
| P/BV (x) |
8.0 |
6.8 |
6.4 |
5.8 |
5.3 |
| Net Dividend Yield (%) |
1.9 |
2.0 |
2.2 |
2.4 |
2.6 |
| ROAE (%) |
26.6 |
24.3 |
22.9 |
23.1 |
23.0 |
| ROAA (%) |
13.4 |
10.7 |
9.5 |
9.9 |
10.6 |
| EV/EBITDA (x) |
16.6 |
19.5 |
17.2 |
16.0 |
14.8 |
| Net Debt/Equity (%) |
12.0 |
Net Cash |
Net Cash |
Net Cash |
Net Cash |
Sales and Growth Projections
| Segment |
FY11A |
FY12A |
FY13A |
FY14A |
FY15F |
FY16F |
| Sanitary Napkins |
4,114,425 |
4,915,462 |
5,972,695 |
7,427,740 |
8,541,901 |
9,823,186 |
| Disposable Diapers |
2,723,014 |
2,685,473 |
2,938,186 |
3,094,573 |
3,187,410 |
3,283,032 |
| Tissue Paper Products |
8,017,520 |
9,146,766 |
10,204,020 |
10,857,293 |
11,183,012 |
11,630,332 |
| Food & Snacks |
1,542,511 |
1,387,487 |
1,604,655 |
1,534,749 |
1,504,054 |
1,473,973 |
| Others |
653,087 |
389,045 |
466,812 |
916,423 |
1,282,992 |
1,667,890 |
| Total |
17,050,557 |
18,524,233 |
21,186,368 |
23,830,778 |
25,699,369 |
27,878,414 |
Sales Growth Rate
| Segment |
FY11A |
FY12A |
FY13A |
FY14A |
FY15F |
FY16F |
| Sanitary Napkins |
29.8% |
19.5% |
21.5% |
24.4% |
15.0% |
15.0% |
| Disposable Diapers |
11.3% |
-1.4% |
9.4% |
5.3% |
3.0% |
3.0% |
| Tissue Paper Products |
31.1% |
14.1% |
11.6% |
6.4% |
3.0% |
4.0% |
| Food & Snacks |
28.3% |
-10.1% |
15.7% |
-4.4% |
-2.0% |
-2.0% |
| Others |
31.1% |
-40.4% |
20.0% |
96.3% |
40.0% |
30.0% |
| Total |
26.9% |
8.6% |
14.4% |
12.5% |
7.8% |
8.5% |
Sales Mix
| Segment |
FY11A |
FY12A |
FY13A |
FY14A |
FY15F |
FY16F |
| Sanitary Napkins |
24.1% |
26.5% |
28.2% |
31.2% |
33.2% |
35.2% |
| Disposable Diapers |
16.0% |
14.5% |
13.9% |
13.0% |
12.4% |
11.8% |
| Tissue Paper Products |
47.0% |
49.4% |
48.2% |
45.6% |
43.5% |
41.7% |
| Food & Snacks |
9.0% |
7.5% |
7.6% |
6.4% |
5.9% |
5.3% |
| Others |
3.8% |
2.1% |
2.2% |
3.8% |
5.0% |
6.0% |
Gross Margin Assumptions
| Segment |
FY11A |
FY12A |
FY13A |
FY14A |
FY15F |
FY16F |
| Overall |
39.3% |
44.9% |
45.1% |
46.1% |
47.3% |
47.7% |
| Sanitary Napkins |
60.4% |
65.8% |
66.3% |
68.5% |
69.6% |
69.8% |
| Disposable Diapers |
35.2% |
42.9% |
44.5% |
45.3% |
46.5% |
47.0% |
| Tissue Paper Products |
31.4% |
35.4% |
34.1% |
34.5% |
35.5% |
35.3% |
| Food & Snacks |
32.4% |
38.2% |
42.3% |
42.4% |
42.0% |
42.0% |
| Others |
52.0% |
41.3% |
28.6% |
11.1% |
10.0% |
10.0% |
Operational and Financial Ratios
| Ratio |
FY12A |
FY13A |
FY14A |
FY15E |
FY16E |
| Revenue Growth (%) |
8.6% |
14.4% |
12.5% |
7.8% |
8.5% |
| EBITDA Growth (%) |
41.9% |
9.2% |
12.3% |
7.5% |
7.4% |
| EBIT Growth (%) |
43.9% |
7.3% |
13.0% |
5.2% |
8.2% |
| Pretax Profit Growth (%) |
39.4% |
10.5% |
6.5% |
5.3% |
9.3% |
| Net Profit Growth (%) |
32.8% |
5.8% |
5.2% |
9.3% |
9.3% |
| EBITDA Margin (%) |
28.6% |
27.3% |
27.3% |
27.2% |
26.9% |
| EBIT Margin (%) |
25.6% |
24.0% |
24.1% |
23.5% |
23.5% |
| Pretax Profit Margin (%) |
24.5% |
23.7% |
22.4% |
21.9% |
22.1% |
| Payout Ratio (%) |
59.4% |
61.2% |
62.6% |
63.0% |
63.0% |
| Net Debt/Equity (%) |
12.0% |
Net Cash |
Net Cash |
Net Cash |
Net Cash |
Conclusion
The downgrade to SELL is based on the anticipated negative interim results due to sales weakness, inventory issues, and increased competition from MNCs. The company's growth strategies in e-commerce and baby stores are expected to drag margins due to lower EBIT margins in these channels. Earnings projections have been adjusted downward, and the target price multiple has been reduced, reflecting lower-than-expected sales growth and margin pressures. The core business remains profitable, but the outlook for future growth is uncertain and conservative.
