20140509-高盛-Intensifying_competition_in_Tissues_and_Diapers__reiterate_Sell_11页_373kb

Hengan International (1044.HK) Summary

Core Content

Hengan International (1044.HK) is a consumer staples company facing challenges in its core segments due to intensifying competition and margin pressures. Goldman Sachs has reiterated its Sell rating, citing the company's weak performance in Tissues, Diapers, and Sanitary Napkins, and has revised its financial forecasts accordingly.

Main Points

• Tissues:

  • Facial Tissue ASP (Average Selling Price) fell 7% YoY in 1Q14, indicating a decline in pricing power.
  • The company's tissue sales are expected to grow 11% YoY in 2014, but OPM (Operating Profit Margin) is projected to deteriorate by 2.7ppt to 12.1%.
  • Management has not increased promotional intensity in FY14, but the competitive environment and commoditization of the sector make this difficult.

• Diapers:

  • Diaper sales growth turned negative in the rolling 12 months to March 2014.
  • The shift to online and maternity stores is a key factor, and Hengan is lagging behind competitors like Kimberly Clark.
  • Despite a positive mix shift to higher-end products like the Super Absorbent and Pull-Up Series, we forecast 60bps EBIT margin erosion in 2014.
  • Hengan's market share in the diaper pants segment is expected to be 20%, with HK$700m in sales in 2016E.

• Sanitary Napkins:

  • The segment is under pressure from aggressive competitors such as Unicharm, which saw a 25% YoY sales growth in China in 2013.
  • We expect 15% YoY sales growth for 2014/15, but OPM will remain steady at ~37%.
  • The company may need to reinvest additional GPM (Gross Profit Margin) to defend its position.

• Financial Forecast Revisions:

  • We have reduced our 2014/15E NPAT by 5% / 8%, reflecting a 90bps / 1.5ppt erosion in EBIT margins compared to 2013.
  • Our new 12-month TP (Target Price) is HK$77.70, down from HK$82.90.
  • For 2013–2015, we forecast a 2-yr revenue CAGR of 14% and NPAT CAGR of 10%, due to margin erosion.

• Valuation:

  • The company is currently trading at 23.5x average 2014/15E P/E, slightly below the historical average of 24x.
  • We value the company at 22.8x average 2014/15E P/E, with a 5% discount to the Staples sector target P/E.
  • Key valuation metrics include:
    • P/E (analyst): 27.9x (12/13), 25.5x (12/14E), 21.9x (12/15E), 18.3x (12/16E)
    • P/B (Price-to-Book): 6.3x (12/13), 5.6x (12/14E), 5.1x (12/15E), 4.5x (12/16E)
    • EV/EBITDA: 19.0x (12/13), 17.1x (12/14E), 14.8x (12/15E), 12.5x (12/16E)
    • Dividend Yield: 2.2% (12/13), 2.4% (12/14E), 2.8% (12/15E), 3.3% (12/16E)
    • ROE (Return on Equity): 24.3% (12/13), 22.7% (12/14E), 24.3% (12/15E), 26.1% (12/16E)
    • CROCI (Compound Return on Capital Invested): 22.3% (12/13), 21.7% (12/14E), 22.0% (12/15E), 22.4% (12/16E)

• Key Risks:

  • A better-than-expected competitive environment in Tissues, Diapers, and Sanitary Napkins.
  • Worse-than-expected pulp prices, which account for ~30% of COGS and could impact margins.

Key Financials

Growth and Margins

Key Risks

• Competitive pressures in Tissues, Diapers, and Sanitary Napkins.
• Pulp price volatility, which is a significant cost component.
• Market share erosion in Diapers due to the shift to online and maternity stores.
• Lack of differentiation in Hengan's Pull-Up Pants product.

Investment Profile

• Returns: Return on Capital
• Market Cap: HK$98,565.8m / US$12,715.1m
• Foreign Ownership: Not disclosed
• Price Target: HK$77.70 (down from HK$82.90)
• 12-Month Price Target: HK$77.70
• Price Performance (vs. MSCI China):
  • 3-month: -4.8%
  • 6-month: -4.1%
  • 12-month: +7.4%

Analysts

• Lisa Deng – Lead Analyst
• Xiaochun Ni – Supporting Analyst

Summary of Financial Projections

• 2014E NPAT: HK$3,874.5m (down 4.1% YoY)
• 2015E NPAT: HK$4,518.2m (down 6.2% YoY)
• 2016E NPAT: HK$5,398.7m (up 19.5% YoY)

Conclusion

Hengan International faces intensifying competition in its core segments, leading to margin compression and lower-than-expected profitability. The company's target price has been reduced due to these concerns, and its investment profile remains below the sector average. While the company is expected to see some top-line growth, the EBIT margin erosion and increased marketing costs are significant concerns for the analysts.