Under pressure in the near-term
- Profitability remains under pressure given high raw material costs and escalating expenses
- Latest “618” festival scored a double-digit growth on prudent promotional costs proves Hengan’s brand & product power
- Yet, margin challenge prompts our earnings cut. Downgrade to HOLD and revise TP to HK$38.72
Investment Thesis
GP margin could only improve at a later stage. On the back of rising raw material costs and intense market competition, Hengan’s GP margin decreased by 4.9ppt y-o-y to 37.4% in 2021. As prices of wood pulp and petrochemical materials remain at high levels, these could add pressure on 2022F profitability.
New retail channel amongst the key drivers. Revenue from ecommerce and new retail (e.g., O2O) accounted for 23.1% and c.10% of overall sales in 2021, respectively, and is expected to reach over 25% and over 10% this year. Continuous expansion in divisional sales should also fuel better performance ahead and support medium-term prospects.
Big premiumisation trend. More efforts towards high-end product innovation and brand building should support an expanding proportionate sales of premium products. Such initiatives should reinforce Hengan’s overall growth potentials.
Valuation:
In view of high raw material costs and a low visibility in China’s near-term economic performance, we take a more prudent view and revise down FY22F/23F earnings by 11.1%/13.9%. Our TP is lowered accordingly to HK$38.72 as we continue to benchmark 12x FY22F PE, equivalent to 1SD below its average PE (previous TP: HK$43.71).
Where we differ:
As raw material costs sustain at a high level while market competition stays intense, we expect the recovery of GP margin to take a slower pace. Our latest FY22F/FY23F GP margin are estimated at 36.2%/36.8% (FY21: 37.4%).
Key Risks to Our View:
Higher-than-expected raw material prices; failure to regain sales growth momentum; challenges to improve product-mix.
