1H23's performance met our expectations
The company announced 1H23 results: revenue of 12.2 billion yuan, +9% year on year, revenue from core business (tissues, sanitary napkins, diapers) +15% year on year; net profit of 1.2 billion yuan, -4% year on year, in line with expectations.
Development trends
1H23 New retail channels continue to gain strength, and tissue revenue performance is strong. 1H23 tissue/sanitary napkin/diaper revenue is +22.7%/+2.9%/+5% respectively. The company continues to develop new retail channels, diversified new retail platforms such as O2O, community group buying, etc. Thanks to the stable performance of this core business, the growth rate of new retail sales of 1H23 tissues/sanitary napkins/diapers is +40%/10% or more/10%, respectively, accounting for 19%/24%/50% of sector revenue. Tissues: Benefiting from a stable pricing strategy (volume increase of about 20% in the first half of the year, ASP growth in low single digits) and an increase in the share of high-end products, 1H23 recorded growth exceeding expectations in a fierce competitive environment, and continued to increase in share. Among them, the Cloud Sense series and wet wipes respectively +40% and +19%, accounting for 19% of the total sector revenue, and the company also showed double-digit growth in traditional channels. The sanitary napkin business resumed steady growth in 1H23. High-end products continued to gain strength. Pants-type sanitary napkins were +76% compared to the same period. The upgraded product, cute pajamas, performed well. We judge that the high-end upgrade trend is expected to continue. The 1H23 revenue growth rate of the diaper business was mainly driven by the growth of the high-end product Q-Mo and adult diapers. The year-on-year increase was 19%/45%, respectively, accounting for 35% and 29% of the sector. It is expected that the previous downward trend will continue to be reversed in the future under a more balanced product structure. In the second half of the year, we expect tissues to continue to grow in double digits, the sanitary napkins and diapers business is expected to maintain steady growth with the support of improved product structures, and the core business is expected to remain steady.
The gross margin of 1H23 is low, and the worst profit margin is expected to pass. 1H23 gross margin was -4.2ppt year-on-year. Among them, tissues and sanitary napkins fell 5.4ppt and 3.5ppt respectively to 17.7% and 61.8%, which are at a low level in recent years, mainly because 1Q23 pulp prices and fluff pulp prices are high, dragging down overall gross margin performance. Since 2Q23, there has been a downward trend in the price of pulp and fluff pulp. The gross margin of paper towels has rebounded to more than 20% in 2Q23 and is increasing month by month. We expect the gross margin of paper towels to continue to rise in the second half of the year. The 1H23 SG&A fee was +1.9ppt year on year, mainly due to an increase in marketing expenses. Overall, the company's net interest rate fell to around 10% in the first half of the year due to pressure on raw material prices and rising cost rates, which is a low position in recent years. We expect that as raw material prices, especially pulp prices, fall in the second half of the year, the company's gross margin is expected to gradually rise, fully hedging the increase in the cost ratio brought about by the increase in the share of new retail sales, and the company's overall profit margin level is expected to continue to rise.
Profit forecasting and valuation
The company is currently trading 10.1/8.3 times 2023/24 PE. Considering the impact of raw material prices on gross margin, the 2023/24 profit forecast was lowered by 16.3%/11.7% to $28.3/3.34 billion, corresponding to a 20.7% reduction in target price to HK$34.5, corresponding to 12.0/9.8 times PE in 2023/24 and an upward space of 18.6%. Maintain a neutral rating.
risks
Market price competition has intensified, new product performance has fallen short of expectations, and raw material prices have risen sharply.