HENGAN 1044 HK Summary
Core Content
Hengan International Group Co Ltd (1044 HK) is a leading household and personal care product company in China, with three major businesses: sanitary napkins, disposable diapers, and tissue paper products. The company has been downgraded to HOLD due to increased single-product risk and the lack of recovery in its other two segments. The target price has been revised to HKD85.00, a 5% decrease from the previous target of HKD89.50.
Main Views
- Sanitary Napkins: This is the company's main growth driver, with strong revenue growth since 2005. However, the penetration rate in China is already high, which may lead to increased competition.
- Disposable Diapers: Despite some growth in the mid and high-end segments, the low-end segment remains a drag. EBIT margins are expected to gradually decline due to increased marketing expenses.
- Tissue Paper Products: This segment is currently under strong competition and has experienced a slowdown in growth. The EBIT margin is at a low level, and the company is cautious about further investment due to pulp price volatility.
- Share Buybacks: Management has shown confidence in the company's future by buying back shares since March. This suggests the company is not overly concerned about its share price falling below HKD80.
- Valuation: The target valuation multiple remains at 24x 2015E P/E, implying a 20% valuation premium over international peers, which is justified by the high dividend payout and corporate actions.
Key Information
Revenue and Earnings
- Revenue (HKD m):
- 2013A: 21,186
- 2014E: 24,414
- 2015E: 27,980
- 2016E: 32,187
- Recurring Net Profit (HKD m):
- 2013A: 3,511
- 2015E: 4,356
- 2016E: 5,211
- Recurring EPS (HKD):
- 2013A: 3.13
- 2015E: 3.54
- 2016E: 4.23
Share Price Performance
- Current Share Price: HKD82.95
- Target Price: HKD85.00
- Change in Target Price: -5.0%
- Share Buybacks: 4.5855 million shares at HKD78.30-79.85
- Market Recommendations: 18% positive, 11% neutral, 4% negative
Key Assumptions
| Segment |
Revenue Growth (%) |
GP Margin (%) |
OP Margin (%) |
| Sanitary Napkins |
23.0 |
66.7 |
40.8 |
| Disposable Diapers |
10.0 |
44.2 |
16.1 |
| Tissue Paper Products |
12.0 |
33.2 |
8.1 |
| Food and Snack Products |
2.0 |
43.5 |
7.3 |
| Skin Care and Others |
65.0 |
18.0 |
3.2 |
| Total |
15.0 |
44.9 |
22.5 |
Earnings Sensitivity
| Factor |
2014E |
2015E |
| Raw Material Cost Change (%) |
16 |
13 |
| Diluted Recurring EPS (HKD) |
3.13 |
3.54 |
| Change from Base (%) |
- |
- |
Risks to the Call
- Competition in Tissue Paper Industry: Continues to increase.
- Pulp Price Rebound: Could negatively impact tissue paper segment margins.
- Sanitary Napkin Growth Slowdown: Could reduce the company's only growth engine.
Catalyst
- 2014 Full-Year Results: Expected in March 2015, which will reveal competition trends in the tissue paper industry and likely impact the share price.
Financial Ratios
| Ratio |
2013A |
2014E |
2015E |
2016E |
| Recurring P/E (x) |
26.5 |
23.4 |
19.6 |
19.6 |
| Dividend Yield (%) |
2.2 |
2.2 |
2.6 |
3.1 |
| EV/EBITDA (x) |
17.4 |
15.3 |
13.2 |
12.3 |
| Price/Book (x) |
5.8 |
6.0 |
6.6 |
6.6 |
| Net Debt/Equity (%) |
5.1 |
7.2 |
9.6 |
9.6 |
| ROE (%) |
22.5 |
25.1 |
32.1 |
32.1 |
Revenue Breakdown
| Segment |
2012A |
2013A |
2014E |
2015E |
2016E |
| Sanitary Napkins |
4,915 |
5,973 |
7,346 |
8,816 |
10,358 |
| Disposable Diapers |
2,685 |
2,938 |
3,232 |
3,652 |
4,200 |
| Tissue Paper Products |
9,147 |
10,204 |
11,429 |
12,571 |
13,828 |
| Food and Snack Products |
1,387 |
1,605 |
1,637 |
1,669 |
1,703 |
| Skin Care and Others |
389 |
467 |
770 |
1,271 |
2,097 |
Valuation Comparison
| Code |
Name |
Recom |
Price (USD) |
P/E 2014E |
P/E 2015E |
EV/EBITDA 2014E |
EV/EBITDA 2015E |
P/B |
ROE |
Dividend Yield |
| 1044 HK |
Hengan Int'l Group Co Ltd |
HOLD |
83.0 |
26.5 |
23.4 |
17.4 |
15.3 |
6.2 |
22.5 |
2.2 |
| 3331 HK |
Vinda International |
NR |
12.0 |
24.7 |
19.7 |
14.2 |
12.5 |
5.8 |
10.0 |
1.1 |
| 8113 JP |
Unicharm Corp |
NR |
6843.0 |
41.8 |
28.1 |
16.9 |
12.4 |
2.4 |
18.2 |
0.6 |
| 4452 JP |
Kao Corp |
NR |
4386.5 |
27.8 |
24.7 |
9.9 |
9.1 |
3.4 |
12.3 |
1.6 |
| 7956 JP |
Pigeon Corp |
NR |
6210.0 |
31.2 |
27.5 |
16.7 |
14.1 |
5.9 |
18.2 |
1.5 |
| PG US |
Procter & Gamble Co/The |
NR |
83.0 |
18.6 |
17.2 |
12.5 |
11.8 |
3.3 |
18.0 |
3.1 |
| KMB US |
Kimberly-Clark Corp |
NR |
108.0 |
17.7 |
16.4 |
10.6 |
10.2 |
8.6 |
45.3 |
3.1 |
| CL US |
Colgate-Palmolive Co |
NR |
64.4 |
25.6 |
24.5 |
24.5 |
25.0 |
28.8 |
35.6 |
29.9 |
| Total Average |
- |
24.4 |
21.0 |
13.8 |
12.3 |
|
|
|
|
|
Share Buybacks
- Share Buybacks: 4.6 million shares at HKD79 per share from March to June.
- Management Confidence: Indicates strong belief in future growth despite current challenges.
Conclusion
Hengan's performance is heavily reliant on its sanitary napkin business, which has shown consistent growth but may face increased competition. The tissue paper and diapers segments remain under pressure, with the former facing overcapacity and the latter needing to improve EBIT margins. Despite these risks, the company's dividend yield and share buybacks suggest a strong financial position and management confidence. The target price is set at HKD85.00, based on a 24x P/E ratio for 2015E, reflecting a 20% valuation premium over international peers. The next catalyst is expected to be the 2014 full-year results, which could provide insights into the company's performance and future outlook.
