Performance overview for the first half of '24: Hengan's revenue decreased by 3.0% to 11.84 billion yuan (affected by fierce competition in the personal care market; however, various key upgrades and high-end products recorded an increase of more than 10%, and e-commerce channels also grew by 6.5%, and its share increased to 32%. As the Group actively faces market changes, it insists on stabilizing prices and focusing on profits; effectively increasing market share and maintaining a leading position in the market. Gross margin rose 2.3 percentage points to 33.73 (mainly due to falling and upgrading raw material prices and growth in high-end products). The operating expenses ratio was reduced by 0.1 percentage points to 20.9%. Operating profit and net profit attributable to shareholders increased by 11.4% and 15.0% to 189 billion yuan and 1.41 billion yuan, respectively. The interim dividend per share was $0.7. The balance and liability situation is stable, with net cash holdings of about 5.41 billion yuan.

The overall business was affected by fierce competition in the market, but gross margin increased: during the period, the tissue business decreased by 3.1% to 6.95 billion yuan (sales increased by about double digits, but the average price fell by about 12%). The gross margin of tissues increased 1.9 percentage points to 19.6%. The sanitary napkin business decreased by 2.2% to 3.15 billion yuan year on year (sales volume remained flat, average price fell by about 2%); its gross margin increased 0.9 percentage points to 62.7%. The average price of tissues and sanitary napkins is affected by the increase in promotional expenses, while the increase in gross margin has benefited from falling and upgrading raw material prices and the growth of high-end products. The urinary storage business increased 7.0% year over year to 0.71 billion yuan; its gross margin also increased to 45.3% from 36.0% in the first half of the year (this business mainly benefited from the high-end product “Q? Good growth in “MO”).

Other key points: Overall, the Group's growth in the second half of the year is expected to be better than in the first half. Among them, the tissue and sanitary napkin business will benefit from upgrades and growth in high-end products and a reduction in expected promotional expenses. Compared to the first half of the year, gross margin should be relatively stable. The price of wood pulp has rebounded before, but recently it has declined again. They expressed interest in the acquisition, but they have not found a suitable target; there are no plans for privatization. It's convenient to go out to sea, so you might consider it.

Target price HK$29.40, purchase rating: Despite intense competition in the industry, we expect the Group to maintain its leading position in the market because Hengan adopts a relatively stable price strategy to continuously upgrade products and increase the penetration rate of high-end products. Taking into account the Group's strategy, sound balance and payout policy, the lower valuation and dividend ratio reached 6.3%; we maintained our buy rating. The target price is HK$29.40, which is equivalent to 11.7 times the projected earnings per share for 24 years.

Important risks: We believe the following are some of the more important risks: 1) the tissue and personal care industry is fiercely competitive, 2) fluctuations in raw material prices, and 3) changes in exchange rates.