Household paper faucet with leading market share

We covered Vida International for the first time and gave it a buying rating. As a household paper company with a leading domestic market share (2022:9.8%), we expect the company to rely on the brand moat to enjoy higher product premiums while maintaining a stable share, bringing positive feedback to further consolidate its differentiation advantages. As the price of wood pulp falls and consumption gradually picks up, we expect that 2H23 companies may usher in a good opportunity for profit recovery, and the net profit margin is expected to recover significantly from the 2H22-1H23 break-even margin. The steadily growing domestic household paper market, high-end products, and internationalization are expected to become the company's medium- to long-term growth engines. We forecast EPS of HK$0.65/1.35/1.58 for 2023/2024/2025, with a target price of HK$25.0. Based on 18.5 times the P/E in 2024, it is 10% lower than the average P/E since listing, to reflect the impact of the deceleration in the company's size expansion in recent years.

The three pillars build brand barriers

We believe that the competitive landscape of China's household paper industry is polarized. While the conflict between supply and demand in the industry as a whole is still quite prominent, we expect Vinda International to rely on its brand barriers to avoid more intense homogenized competition and enjoy a more benign competitive environment among the top four companies. The integration of knowledge and action of the company's product positioning and quality, the collaborative development of sales channels, and the persistence of marketing work are the three pillars that support the company's brand competitiveness, and the brand moat is the key for the company to enjoy both leading market share and product premiums.

Profit margin repair is expected to usher in a good opportunity

We expect lower raw material prices and a return to high demand growth, which will provide an opportunity for the company to achieve profit recovery starting in 2H23. 2023-2024 The commercial pulp market may usher in a reversal in the relationship between supply and demand. We expect 7.44 million tons/year of commercial chemical paste to be put into production globally during this period, while domestic production of 4.22 million tons/year of self-use chemical paste will replace demand for commercial pulp. The price of wood pulp may have declined significantly from the 2022 high and remained low, becoming the main driving force for the company's net profit recovery. The resumption of travel and the recovery of consumption are expected to significantly boost consumption of household paper outside the home and push household paper consumption back to a channel of high single-digit growth.

High-end and internationalization promote medium- to long-term growth

We expect that product high-end and internationalization will also be two important engines for the company's medium- to long-term growth.

The revenue share of the company's high-end household paper products has grown from 24% in 2019 to 41% in 2022, making great progress. The differentiated features of high-end products are more prominent, which is expected to bring stronger user stickiness and further consolidate brand advantages. Since the acquisition of SCA's Asia Pacific business, the company's internationalization progress has generally been slow. Considering the operation and market share of the company's Malaysian headquarters, the potential for internationalization may be further realized.

Risk warning: The investment in wood pulp production capacity was less than expected; the recovery in consumption was slower than expected.