Despite revenue pressure in the first half of the year, lower raw material costs and the growth of high-end series led to double-digit profit growth. Hengan's sales in the first half of 2024 fell 3.0% year on year, with core business revenue (tissues, sanitary napkins, diapers) falling 2.2% year on year. Due to increased revenue contributions from high-end products and lower raw material costs, gross profit increased 3.9% year-on-year to 3.94 billion yuan, and gross margin increased 2.2 percentage points to 33.3%. Benefiting from the optimization of the cost ratio, the company's operating profit margin increased 2.1 percentage points year on year, driving net profit up 15% year over year to 1.41 billion, and the net profit margin was 11.9%. Hengan paid an interim dividend of RMB 0.7 per share (first half of 2023:0.7 yuan), with a dividend ratio of 56.7%.

The share of high-end products increased; double-digit sales growth in the tissue business: by category, tissues/sanitary napkins/diapers/other businesses accounted for 59%/27%/6%/9% of sales in the first half of the year, respectively, -3%/+22%/+7%/-11%, respectively. Tissue: In the face of fierce competition, Hengan still achieved double-digit sales growth, but the increase in promotional expenses caused the average selling price to drop by double digits. The company continues to develop high-end series. For example, the wet wipe business increased by more than 20% year on year, and its contribution to the tissue business rose from medium to high single digits. Sanitary napkins: Sales remained stable, but the increase in promotional expenses still caused the average sales price to drop by 2 percentage points. The high-end series continued to develop, and the pant series sold nearly 0.3 billion yuan, an increase of 22% over the previous year. Diapers: The growth rate of the high-end series is impressive. The Chimo brand grew 34% year over year, contributing 45% to the diaper business (first half of 2023:35%), and driving the gross margin of the diaper business to 45.3% (first half of 2023:36.0%) with a high gross margin of nearly 50%.

Outlook for the second half of the year: Competition is still intensifying, and profit expectations are flat. Revenue growth will remain under pressure in the short term due to competition and continued investment in promotional expenses. Continued decline in raw material costs, combined with continued positive feedback from high-end products, gross margin is expected to continue to improve in the second half of the year. Although promotional holidays and marketing activities are concentrated in the second half of the year, the company continues to optimize the cost rate level through accurate marketing, and profits are expected to remain at a similar level to the first half of the year.

The target price was lowered to neutral at HK$27.01. As competition continues to intensify and revenue growth is uncertain in the short term, we lowered our earnings per share forecast. Considering that the current industry valuation is one standard deviation below the average for the past 3 years, we lowered our target price for Hang An to HK$27.01 (originally HK$33.85), and downgraded the rating to neutral based on 10.2 times the 2025 price-earnings ratio (originally 11.0 times the 2024 price-earnings ratio).