More time needed to release cost pressure
- 1H22 results below expectations, profitability remains under pressure given high raw material costs
- Continuous investment in channel enhancement and brand innovation brought positive feedback and should enhance medium-term prospects
- Lower visibility in 2H22. Downgrade to HOLD and cut TP to HK$20.13
Investment Thesis
Continuous cost pressure in 2H22F. Given the high production costs, including pulp, energy, petrochemical materials, and packaging materials, Vinda’s GP margin decreased by 5.4ppts y-o-y to 32% in 1H22. As prices of raw materials remain at high levels, more time is required to see GP margin rebound.
Expansion of high-margin products. Vinda’s high-end tissue product portfolio, which scored over 15% y-o-y growth in 1H22, is expected to sustain its rapid expansion given the rising premiumisation trend in China. Vinda’s feminine care products also achieved fast growth in China, along with a substantial increase in repeated purchases. The performance should help supporting its total market position and profitability.
E-commerce advantage. Vinda is among the leading players in the industry that sustain a strong e-commerce penetration in China (78% of group revenue in 1H22). With continuous investment in
channel deployment, its strength should continue to drive performance ahead.
Valuation:
In view of the high raw material costs and low visibility in the COVID-19 situation, we take a more prudent view and revise down FY22F/23F earnings by 35.4%/29.4%. Our TP of HK$20.13 is based on a 15x 12-month rolling PE, which is equivalent to its four-year average PE (previous TP: HK$25.53).
Where we differ:
We maintain a conservative attitude amid potential raw material cost fluctuations and the pandemic impacts. Nevertheless, increasing investments in brand building, channel deployment, etc. should all support growth and profitability over the next few years.
Key Risks to Our View:
Higher-than-expected raw material price hikes, intensified market competition, and the resurgence of new COVID-19 cases.