20150924-招商证券_香港_-Morning_Express_11页_441kb

Hengan International Summary

Core Content

Hengan International (1044 HK), a leading manufacturer of personal care products, has experienced slight sales improvement in the second half of 2015. Sales have rebounded YoY since mid-August, driven by new product launches, distributor destocking, and price adjustments. The company is expected to report a 4.8% YoY sales growth in 2H15, which is better than the 3.3% growth in 1H15.

The gross margin is expected to improve due to depressed raw material prices, despite higher costs of sales in 2H. The overall gross margin is projected to increase by 1.4 percentage points for the full year, reaching 47.5%. However, the RMB devaluation is expected to negatively impact earnings, as the company procures raw materials from the U.S. and has RMB assets in HK. For every 1% devaluation, net profit is projected to decline by 0.19%. Assuming an RMB exchange rate of 6.5 by year-end, the 2015-2016E revenue and profit estimates are cut by 5%-10%, with earnings estimates 4% below the market consensus.

Key Points

• Sales Performance:

  • 2H15 sales growth: 4.8% YoY
  • 1H15 sales growth: 3.3% YoY
  • Sales rebound since mid-August due to:
    1. Launch of new products (tissue paper, overnight sanitary napkins, extra strong sanitary pads)
    2. Distributor destocking due to lack of stockpiling in June
    3. Price cuts on tissue paper products to enhance competitiveness

• Gross Margin:

  • Full year gross margin improvement: 1.4ppts
  • Projected full year gross margin: 47.5%
  • Cost of sales will rise in 2H, but offset by reductions in other expenses (e.g., donations, trade receivables)

• RMB Devaluation Impact:

  • Net profit reduction: 0.19% per 1% RMB devaluation
  • RMB assets in HK (dividends payable) affected negatively
  • No impact on loan value due to absence of USD and HKD loans in mainland
  • Cut 2015-2016E revenue and profit by 5%-10%
  • Earnings estimates 4% below consensus

Valuation

• P/E Ratios:

  • 2015E P/E: 22.1
  • 2016E P/E: 19.8
  • Historical average: 19.7
  • Peer average: 20.0
  • Consumer staples average: 20.6

• Target Price (TP):

  • HK$75.0
  • Cut from HK$75.2 based on 20x 2015E P/E

• Rating: NEUTRAL

Key Risks

• Lower-than-expected gross margin improvement due to higher-than-expected raw materials prices

What to Watch

Economic Data

Company Events

Research Coverage

Contact

• Equity Research:

  • Head of Equity Research: Sam LEE (samlee@cmschina.com.hk)
  • Deputy Head of Equity Research: Cliff ZHAO (wenlizhao@cmschina.com.cn)
  • Deputy Head of Equity Research: Liangsheng DENG (dengls@cmschina.com.cn)
  • Deputy Head of Equity Research: David XIE (xieyx@cmschina.com.cn)

• Macro Research:

  • Chief Strategist: Cliff ZHAO (wenlizhao@cmschina.com.cn)
  • China Macro Economy: David XIE (xieyx@cmschina.com.cn)
  • Overseas Macro Economy: Lynn SONG (lynnsong@cmschina.com.hk)
  • HK Market Strategy: Ivy ZHAO (zhaox@cmschina.com.hk)
  • HK Market Strategy: Vincent JI (vincentji@cmschina.com.hk)

• Industry Research:

  • Alternative Energy: Nelson LEE (nelsonlee@cmschina.com.hk)
  • Auto & Railway: Yonghuo LIANG (liangy6@cmschina.com.cn)
  • Banking: Donger WANG (dongerwang@cmschina.com.hk)
  • Telecom & Hardware Technology: Alex NG (nglh@cmschina.com.hk)
  • Gaming, Lodging & Leisure: Angela HAN LEE (angelahanlee@cmschina.com.hk)
  • Healthcare: Milo LIU (miloliu@cmschina.com.hk)
  • Machinery: Yiding JIAO (jiaoyd@cmschina.com.cn)
  • Oil & Gas: Anna YU (annayu@cmschina.com.hk)
  • Property: John SO (johnso@cmschina.com.hk)
  • Retail: Gloria WANG (wangxd6@cmschina.com.cn)
  • Retail: Eugene MAK (eugenemak@cmschina.com.hk)
  • Small-Mid Cap: Vivien CHAN (vivienchan@cmschina.com.hk)
  • Technology, Media & Telecom: Jeff HAO (haoyf@cmschina.com.hk)