Key points of investment

Hengan International discloses 2023 results:

The company achieved revenue of 23.77 billion yuan (+5.1%) and net profit to mother of 2.80 billion yuan (+45.5%) in 2023, including exchange profit and loss of -150 million yuan. The amount of exchange loss was -83.6% compared with the same period last year. It is proposed to pay a final dividend of 0.70 yuan/share (annual dividend of 1.4 yuan/share). Revenue from the three core business segments (tissues, sanitary napkins, and diapers) continued to grow steadily, +8.0% year over year. At the same time, products continued to be upgraded. Sales of upgrades and high-end products increased by more than 10% year-on-year, benefiting from profit elasticity, and pulp prices fell rapidly at 23H2.

The three core sectors of sanitary napkins, tissues, and diapers all grew steadily, and high-end products performed better by business breakdown: (1) Sanitary napkins: The company's sanitary napkin business achieved revenue of 6.18 billion yuan (+0.4%) in 2023.

Its sanitary napkin brand “Seven Degrees Space” continued to launch upgraded and high-end products, such as “ultra-thin,” “extended night use,” and “pant type”, which had an excellent market response. Among them, “pant type” products increased by more than 73.4% year on year. At the same time, the company launched a new high-end product “Tianshan Cashmere Cotton Series” during the year, and subsequent sales are expected to gradually increase. Benefiting from the continuous upgrading of the product structure and the continuous growth of traditional sales channel business, we expect the company's sanitary napkin business to continue to perform steadily in 2024. (2) Tissue: In 2023, the company's tissue business revenue was 13.75 billion yuan (+12.2%). The company adopted a stable price and omni-channel sales strategy to cope with market price competition, driving the company's tissue business to achieve steady growth despite increased competition in the 23H2 industry (23H2 tissue business +2.7%). High-end paper products performed well. Among them, the sales revenue of the “Cloud Feel Softening” series exceeded 1.3 billion yuan, +26.6% over the same period last year. The wet wipes business achieved sales revenue of 931 million yuan, +10.5% year-on-year. (3) Diapers: The diaper business achieved revenue of 1.25 billion yuan (+4.3%) in 2023. The revenue of Q·MO, an ace premium product, was +21.8% year-on-year, and its share of revenue increased to 36.4%.

Revenue from adult diapers was +11.5% year-on-year, and the share increased to 25.4%. We expect the company's diaper business to continue growing in 2024 as the share of high-end baby and adult diapers increases. (4) Other revenue and household goods business: Achieved revenue of approximately $2.59 billion (-14.0%) in 2023. Specifically, affected by the company's tendency to reserve raw materials to produce products and ensure that the raw materials business retains reasonable profits, the raw materials trading business achieved revenue of -13.6% to 1.40 billion yuan in 2023; the household goods business achieved revenue of 250 million yuan, -23.4% year-on-year, mainly due to the decline in household products exports; and Imperial City Malaysia achieved revenue of 4.4 billion yuan, +6.3% over the same period. In the future, it will develop and launch more high-quality products under the Huangcheng brand, driving the company's share in the Malaysian and Southeast Asian markets to further increase.

E-commerce and new retail channels continued to grow rapidly. Contributing to revenue in 2024 or further boosting the company's e-commerce and new retail channels (including retail channels and new channels) achieved revenue of over 7.16 billion yuan in 2023, +17.7% year-on-year, and the share of sales increased to 30.1% (+3.2pct). The new retail channel contributed about 35.3%/26.5%/52.8% to the sales of the company's tissue/sanitary napkin/diaper business, respectively. The share of new retail channel sales may increase further in the future. In the future, the company will vigorously expand e-commerce brand flagship stores and emerging channels (such as Douyin), enhance data analysis capabilities for end customers, cater to the industry's online trend, and enable the company's product development and upgrading.

Benefiting from the fall in pulp price+product structure optimization+rate optimization, 23H2's profitability quickly recovered to gross profit margin: in 2023, the company's overall gross profit margin was 33.7% (-0.3pct); in the second half of the year, the price of the benefiting raw material wood pulp fell and the company's product structure continued to be optimized. 23H2's overall gross margin reached 36.5%, +3.7 pct year over month, and the gross margin was significantly restored. Looking at specific business segments, the gross margin of the company's sanitary napkins/tissues/diapers business in 2023 was 63.8%/21.7%/38.1%, respectively, of which 23H2 gross margin was 66.0%/26.1%/40.0%, respectively, a significant increase over the first half of the year. Looking ahead to 2024, the company will continue the strategy of prudently investing in promotional resources and promote continuous optimization and upgrading of the product structure to drive a further increase in gross margin.

Expense rate & net interest rate: In 2023, the company moderately increased its investment in online marketing to promote the company's new products and high-end products. Sales and administrative expenses were +3.7% to 5.07 billion yuan, but the efficiency of cost investment also further improved, leveraging revenue growth that exceeded the cost increase. In 2023, the company's advertising rate/labor rate/transportation rate/R&D rate were -0.1/ -0.1/ +0.2pct, respectively. As a result, the overall cost rate was -0.3 pct to 21.3% year on year. In 2024, along with a further increase in overall revenue scale combined with effective sales promotion strategies and accurate cost allocation, the cost rate level is expected to be further optimized. Under the combined influence, the company's net interest rate to mother was 11.8% in 2023, +3.3 pct year on year, and the 23H2 company's net return to mother interest rate was 13.6%, +7.9 pct year on year, and +3.6 pct month on month.

Profit forecasting and valuation

The company continues to promote product upgrades and high-end brand strategies, and strengthens the construction of rapid development channels such as e-commerce and new retail to help the company's share rise steadily. Profitability is expected to rise steadily as pulp prices fall and high-end technology continues to advance, and the dividend amount remains stable. We continue to be optimistic about the company's value. We expect the company's revenue for 2024-2026 to be 257.47/ 275.21/ 29.056 billion yuan, respectively; net profit to mother will be 36.83/40.55/ 4.457 billion yuan, respectively, +31.5%/+10.1%/+9.9% year-on-year, corresponding to the current market value PE of 7/7/6X, respectively, maintaining an “increase in holdings” rating.

Risk warning

Competition in the industry intensified, raw material costs fluctuated greatly, and the promotion of new products fell short of expectations.