The 2023 results fell slightly short of our expectations

Haoyue Nursing announced 2023 results: revenue of 2,757 million yuan, -1.6% year on year; net profit to mother was 439 million yuan, +3.7% year over year. The performance was slightly lower than our expectations, mainly due to pressure on downstream demand for baby and adult hygiene products. In addition, the company issued an annual profit distribution plan. The company's cumulative proposed dividend ratio in 2023 is 60%. Assuming that the company maintains a 60% dividend rate, it corresponds to a dividend rate of over 5% in 2024.

Development trends

1. Sales of baby hygiene products bucked the trend, and categories such as own-brand wet toilet paper grew at an impressive rate. In 2023, the company's revenue was -1.6% year-on-year, and gross margin was +3.7ppt to 26.9% year-on-year. Mainly due to lower raw material costs, some of the superimposed raw materials were adjusted from external procurement to in-house production. By product, ① Baby hygiene products: revenue of 1,976 billion yuan, of which sales volume was +3.5%, average unit price -6.1% year over year. Against the backdrop of downstream demand pressure (according to Euro Rui, retail sales volume in 2023 -15.7%), sales volume still achieved positive growth. The unit price reduction was mainly due to lower raw material costs and an increase in the self-production ratio of some raw materials, with gross margin +1.8ppt to 23.1% year over year; ② Adult hygiene products: revenue of 555 million yuan, -10.6% year on year, of which we expect female hygiene products to be relatively high Steady, adult incontinence products declined; gross margin +2.5ppt to 27.6%; ③ Other products: Revenue of 148 million yuan, +69.7% year-on-year, mainly due to the increase in revenue from wet toilet paper and wet wipe products from its own brand; gross margin +22.8ppt to 55.8%.

2. Benefiting from the continuous restoration of gross margin, net margin increased to 15.9%. The company's expense ratio for the 2023 period was +1.5ppt to 9.2% year on year, with the sales expense ratio +1.5ppt to 5.0% year over year, mainly due to the company's increased promotion of its own brand; management/R&D expenses rates were +0.3pp/ +0.2ppt to 2.4%/3.8% year over year, mainly due to the increase in employee remuneration, depreciation and amortization, and R&D investment; and the financial expense ratio was -0.4ppt to -1.9% year-on-year, mainly due to an increase in interest income. In addition, other revenue increased by $0.17 billion to $41 million year-on-year, mainly due to VAT deductions. Under the combined influence, the company's net interest rate in 2023 was 15.9%, +0.8ppt year on year.

3. The main domestic ODM business is steady, and overseas products and independent brands are expected to contribute to growth and help increase valuation. ① OEM business: With leading product development and lean production capacity, the company continues to expand its domestic market share; and actively explores overseas market business. On the one hand, the Thai factory is the center, expanding the local markets in Thailand and neighboring countries such as Laos and Myanmar. At the same time, the export ratio of high-end products is gradually increasing. We believe it is expected to contribute to incremental performance while also helping to improve the valuation center; ② Independent brand: The company's own brand “Tafi” lays out booming categories such as wet wipes and wipes to achieve rapid growth. In addition, “Hope Baby”” Brands such as “Comfort” and “Mori no Monogatari” are developing well, and we believe they are expected to unleash long-term growth potential.

Profit forecasting and valuation

Considering the phased pressure on downstream demand, we cut 2024/2025 net profit 11%/10% to $534/650 million yuan. The current share price corresponds to 11/9 times the 2024/2025 price-earnings ratio. Considering the shift in valuation and the continued strengthening of the company's competitive advantage, we maintained an industry rating and target price of 55 yuan, corresponding to 16/13 times the 2024/2025 price-earnings ratio, with 41% upside compared to the current stock price.

risks

The risk of increased competition in the industry; the risk of a decline in the birth population; the risk of new product launches falling short of expectations.