1H24 net profit is in line with our expectations

The company announced 1H24 results: revenue of 11.8 billion yuan, -3.0% YoY; net profit to mother was 1.41 billion yuan, +14.9% YoY. Revenue fell short of our expectations, mainly due to price competition, and net profit met our expectations. The company pays a dividend of 0.7 yuan per share, corresponding to a dividend rate of 56.7%. Currently, the dividend rate is about 5-6%.

Development trends

1H24's revenue performance was under pressure due to promotions, and diapers achieved good growth. 1H24's main business revenue was -2.2% YoY, mainly due to the impact of promotions, putting pressure on ASP. Affected by the decline in trade in other raw materials, the company's overall revenue was -3.0% YoY; although revenue performance was under pressure, the company's overall performance was still ahead of the industry. By category, 1) Tissue: 1H24 revenue was -3.1% YoY, of which sales achieved double-digit year-on-year growth, but ASP fell by double digits due to increased market price competition and increased promotional expenses; 2) Sanitary napkins: 1H24 revenue YoY fell by -2.2%, of which sales remained basically flat year over year, and ASP fell about 2% yoy due to price competition; 3) Diapers: 1H24 revenue was +7.0% YoY, which accelerated the decline in diapers before 2023, and reversed the decline in diapers before 2023, mainly benefiting from the growth of high-end QMO This product is sold The share increased from less than 40% to 45%. By channel, the company's e-commerce and new retail channel revenue increased 6.5% year on year, continuing good growth, driving the online share to increase by about 3ppt to 32%, showing the company's smooth expansion of online channels.

Thanks to lower costs and favorable product structure upgrades, 1H24 gross margin improved, and the gross margin of diapers improved markedly. 1H24's gross margin was +2ppt year-on-year, mainly benefiting from lower costs such as pulp and product structure upgrades. By category, the gross margin of 1H24 tissues, sanitary napkins, and diapers increased by 1.9ppt, 0.9ppt, and 9.3ppt, respectively. Among them, the gross margin of diapers improved markedly mainly due to a significant increase in sales of Q·MO products with a gross margin of over 50% to 45%. The 1H24 sales and management rate was -0.1ppt year on year, and the performance was stable. Among them, brand building expenses were optimized year over year, while employee remuneration increased year over year. Furthermore, benefiting from a reduction in exchange losses of about 0.15 billion yuan, the company's profit growth rate was relatively good year-on-year.

2H24 is expected to have stable revenue and steady profit performance throughout the year. Our grassroots research shows that the current market competition is still relatively fierce, and we expect the company to maintain an appropriate investment in promotion expenses in the second half of the year. Considering demand and competition in the second half of the year, we expect 2H24 revenue to be stable year over year, and the share of high-end new products and online channel sales is expected to continue to increase. On the cost side, pulp prices have recently declined month-on-month, and there is still a certain year-on-year increase. We expect that the gross margin of 2H tissues may face some pressure under a high base, but product structure optimization may partially hedge against adverse effects on profit margins. We expect a steady year-on-year increase in profit margins for the full year.

Profit forecasting and valuation

Considering price competition, the 24/25 profit forecast was lowered by 15.4%/10.6% to 2.83/3.09 billion yuan. The company's current transaction is 9.5/8.7 times the 24/25 P/E; the target price was reduced by 13% to HK$30, corresponding 11.2/10.2 times the 24/25 P/E and 17% share price upward space, maintaining a neutral rating.

risks

Market price competition intensified, new product performance fell short of expectations, and raw material prices rose sharply.