EUR 850.00 For Business Accounts Only

Morningstar | Hengan's 1H18 Expected to Grow at High-Single-Digit Pace, Shares Fairly Valued. See Updated Analyst Note from 31 Jul 2018

We are trimming our fair value estimate for no-moat Hengan International Group, or Hengan, by 5% to HKD 70 per share from HKD 74, owing to the depreciation of the Chinese yuan against the Hong Kong dollar. The firm's small sales team strategy (Amoeba) began to bear fruit in the second half of 2017 and we expect the company to deliver a high-single-digit revenue growth in the first half of 2018, driven by promising tissue paper sales. We think the shares are fairly valued at current levels, trading at 17 times P/E ratio and 12.3 times EV/EBITDA.

We expect the sales in the tissue paper segment increased at double-digit pace in first-half 2018, attributable to strong volume growth, as Hengan largely maintained its ex-factory prices, while other rivals raised their prices by about 5%-10%. Given the nature of low consumer loyalty in the tissue paper industry, consumers are very price-sensitive and are inclined to purchase the cheaper products. We believe Hengan has gained some market share in the first half due to its low pricing strategy. As we expected, the company has increased its ex-factory prices for toilet rolls, one third of the division sales, by mid-single digits since June, given the paper pulp price has risen 30% year on year. We think this price hike will improve the firm's margins, but the top-line growth will be decelerating in the second half.

Hengan's most profitable business, sanitary napkins, is expected to deliver high-single-digit sales growth (6%-8%) in the first half, helped by its Amoeba team's deeper penetration into lower tier regions. However, we expect the diaper business has yet to resume sales growth despite a market rebound, with sales declining at a low-single-digit rate, given it lacks shelf space in the maternity stores and has seen slower development in the e-commerce platform.