Key points of investment

Hengan International revealed 2024H1 results:

In 2024H1, the company achieved operating income of 11.836 billion yuan, -3.02% year over year, realized net profit of 1.409 billion yuan, +14.95% year over year, and plans to distribute an interim dividend of 0.70 yuan/share. Revenue growth was suppressed by the decline in the size of the personal care industry, while profits benefited from a year-on-year recovery from the decline in raw material costs, while the company actively paid dividends. Overall, we think the company's 2024H1 performance is in line with expectations.

Core business growth is under pressure, but it is still superior to industry performance. The share of high-end products continues to increase by business segment: (1) Sanitary napkins: 2024H1 company's sanitary napkins achieved revenue of 3.147 billion yuan (-2.25%). Due to increased competition in the industry, domestic and foreign brands generally cut prices, causing the company to also increase promotional expenses and suppress revenue growth in the sanitary napkin business. High-end products perform excellently. The Tianshan cashmere series launched by 23H2 achieved sales of 0.23 billion yuan in 24H1, which was quickly released; the 24H1 pant product achieved sales of 0.29 billion yuan, +22% over the same period last year.

Benefiting from the increase in the share of high-end products and the leading edge of the company's traditional sales channels, 2024H2's sanitary napkin business performance is expected to improve compared to the first half of the year. (2) Tissue: 2024H1's tissue business revenue was 6.951 billion yuan (-3.06%). The company adopted a stable price and omni-channel sales strategy to deal with market price competition. However, due to increased promotional expenses and a high base for the same period last year, the revenue side declined slightly year-on-year, but the performance was still superior to the industry level. High-end paper products performed brilliantly. In March, the company launched the velvet cube series to further promote the high-end upgrading of products. At the same time, the wet wipe business achieved revenue of 0.592 billion yuan, +20.4% over the same period last year, accounting for 8.5% of the tissue business. Under the catalyst of the company's product upgrades and the increase in the share of high-end products, 24H2's tissue business performance is expected to pick up. (3) Diapers: The 2024H1 diaper business achieved revenue of 0.712 billion yuan (+6.96%). Q·MO, a premium product, achieved sales revenue of 0.32 billion yuan, +34.0% year-on-year, and increased its revenue share to 45.0%. The company's diaper business grew steadily due to the continuous increase in sales share of high-end products and sales improvements brought about by Anerle's successful transformation into the “sports” series. It is expected that 24H2 will continue the steady growth trend. (4) Other income and household goods business:

2024H1 achieved revenue of approximately 1.027 billion yuan (-10.71%). Specifically, due to the company's tendency to reserve raw materials for the production of products and ensure reasonable profits in the raw materials business, the company's raw materials trading business revenue was -15.4% to 0.49 billion yuan; the household goods business achieved revenue of 0.116 billion yuan, -8.0% year over year, mainly due to the decline in the export business of household products. (5) International business: 2024H1's overseas channel revenue was 0.833 billion yuan, -9.09% year-on-year, accounting for about 7% of overall sales. Among them, Imperial City Malaysia achieved revenue of 0.215 billion yuan, or -2.64% year-on-year.

E-commerce and new retail channels grew steadily, further increasing the sales contribution to the core business. 2024H1's e-commerce and new retail channels (including retail channels and new channels) achieved revenue exceeding 3.76 billion yuan, +6.5% year-on-year, and the sales share increased to 31.8% (+2.84pct). The new retail channel contributed about 36.4%/25.6%/53.5% 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.

24H1 gross margin increased significantly year-on-year, and 24H2 is expected to maintain a stable gross profit margin: 2024H1's overall gross profit margin was 33.3%, +2.3 pct year over year. Benefiting from the decline in raw material costs and continuous optimization of the product structure, the company's gross margin increased significantly year-on-year. Looking at the specific business segment, the gross margin of 2024H1's sanitary napkin/tissue/diaper business was 62.7%/19.6%/45.3%, respectively, +0.9/ +1.9/+9.3 pct. 24H2 will prudently invest in promotional resources, and the share of high-margin products is expected to increase further to offset the impact of the rise in wood pulp prices on the cost side. It is expected that 24H2's gross margin will remain stable.

Expense rate & net interest rate: 2024H1's sales and administrative expenses were -3.6% to 2.472 billion yuan, and the company's advertising rate/labor rate/transportation rate/R&D rate were -0.5/ +0.4/ +0.2/ -0.5pct, respectively, resulting in an overall cost ratio of -0.1 pct to 20.9% year over year. As 2024H2 continues to improve on the revenue side, the cost rate level is expected to be further optimized. Under the combined influence, 2024H1's net interest rate to mother was 11.9%, +1.86pct year-on-year.

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 242.64/ 265.68/ 28.521 billion yuan, respectively, +2.1%/+7.3% YoY; net profit to mother will be 29.98/ 33.31/ 3.64 billion yuan, respectively, +7.0%/+11.1%/+9.3%, corresponding to the current market value PE is 8/8/7X, 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.