Hengan (1044.HK) Consumer Sector
25 April 2013
Target Price 12m Rating
Hengan is the largest sanitary napkin and tissue paper brand and the second largest baby diaper brand in China. We like Hengan’s strong brands, deep economic moats and solid financials. Sales growth was hampered by tissue-paper capacity constraints and slower-than-expected diaper-sales growth in FY12 but we expect growth to resume as new tissue-paper capacity ramps up and new products are introduced.
HK$93 Buy (20% upside)
Price Chart (HK$) 110
Bull HK$105
100 90
Base HK$93
80
Three reasons to buy:
70
Bear HK$66
60
Growth to resume in FY13. We expect Hengan’s growth momentum to resume and forecast 21.2% y/y revenue growth for FY13 and a 21% EPS CAGR over FY12-FY14 supported by, 1) the elimination of tissue-paper capacity constraints, 2) continued solid sales growth for sanitary napkins, 3) new products and more marketing efforts. Deep economic moats. We see several economic moats, crucial in the consumer space, for its main businesses. These include: solid distribution network, strong brands, economies of scale, and product innovation. These have created high barrier to entry. Also, increasing costs such as stricter environmental regulations for production should drive smaller players out and deter potential new entrants. Positive industry trends. We expect urbanization and living standards in China to continue their rise. This should be favorable for the personal care market, since penetration rates for these products in China remain lower than in developed markets (e.g. per capita consumption of tissue paper is 3.9kg in China v.s. 25kg in North America). Also, the three largest tissue paper producers account for only 22% of the market. Further industry consolidation should favor market leaders such as Hengan.
Valuation. We initiate coverage on Hengan with a Buy rating. Our 12-month price target is HK$93 with a 20% upside. We value the stock on 22X FY14E P/E, which is in-line with Hengan’s historical forward P/E. Our valuation also implies a PEG of 0.9X for FY14E, which is in line with consensus estimates. We also expect a moderate dividend yield of 2.6%/3.3% for FY13/FY14. Risks. 1) Fluctuations in raw-material prices, 2) Potential price wars in the tissue-paper market, 3) Slower-than-expected sales growth.
50 Apr12
Aug12
Dec12
Apr13
FY10
FY11
FY12
FY13E
FY14E
Revenue – HK$ m
13,432
17,051
18,524
22,442
27,133
Gross margin – %
44.3
39.9
44.9
45.2
45.8
EBIT margin – %
20.5
16.6
22.5
23.3
23.8
Net profit – HKm
2,438
2,649
3,519
4,200
5,186
Net-profit growth – %
15.2
8.6
32.8
19.4
23.5
Diluted EPS – HK$
1.99
2.16
2.86
3.41
4.22
EPS growth – %
12.6
8.5
32.7
19.4
23.5
P/E – X
39.0
36.0
27.1
22.7
18.4
Dividend yield – %
1.7
1.7
2.2
2.6
3.3
P/B – X Issued shares – millions
9.0
7.7
6.8
6.0
5.2
1,224
1,229
1,229
1,229
1,229
Sources: Bloomberg and Sun Hung Kai Financial
Sun Hung Kai Financial Institutional Research
Dec13
Scenario Analysis Base FY14 Rev.+20.9% y/y, GPM 45.8% Bull FY14 Rev.+26.3% y/y, GPM 46.7% Bear FY14 Rev.+14.1% y/y, GPM 40.7%
Key Data Price – HK$ 52W high/low – HK$ Mkt cap – HK$m (US$m) Shares in issue – millions Free float – % 3M avg. t/o– HK$m (US$m) Major shareholder Mr. Sze (Chairman)
77.55 83.1/67 95,311 (12,276) 1,229.0 58.8 211 (27.2) 18.6%
Sources: Bloomberg and Sun Hung Kai Financial
FY12 revenues: HK$18.5bn Food and snacks and others, 10% Disposable diapers, 14% Sanitary napkins, 27%
Figure 1: Hengan – Earnings Summary Year end 31 Dec.
Aug13
Stuwart Chen (852) 3929-6164
[email protected]
Reports available at: http://www.shkresearch.com http://www.thomsonreuters.com http://www.capitaliq.com http://www.themarkets.com Bloomberg Code:
Tissue papers, 49%
INSTITUTIONAL RESEARCH
Research Idea: Growth Back On Track
Hengan (1044.HK) – Growth Back On Track
25 April 2013
Valuation and forecasts We forecast a 21% EPS CAGR over FY12-FY14 given Hengan’s strong market position and clearer earnings visibility now that new production capacity has started up. Our FY13/FY14 earnings forecasts are 1.8%/5.5% ahead of consensus as we expect higher gross margins. While we expect tissue-paper gross margin to contract owing to management’s plans to increase marketing efforts for tissue papers, we believe this could be partly offset by new sanitary-napkin and diaper products. We also expect the company to maintain its dividend-payout ratio at ~60% for a moderate dividend yield of 2.6%/3.3% for FY13/FY14. We value the stock at 22X FY14E P/E for a target price of HK$92.76, implying 20% upside. This implies a PEG of 0.9X for FY14E, which is in line with consensus and the historical forward P/E during FY10-FY12, during which the company posted a 20% EPS CAGR. Our target price also implies 27X FY13E diluted EPS. Hengan – SHKF vs. consensus
Figure 2: HK$ m Revenue
FY10
FY11
FY12
FY13E
FY14E
FY13E-Cons.
FY14E-Cons.
13,432
17,051
18,524
22,442
27,133
22,702
27,021
y/y (%)
24.0
26.9
8.6
21.2
20.9
22.6
19.0
GPM(%)
44.3
39.9
44.9
45.2
45.8
44.1
43.9
EBIT margin (%)
20.5
16.6
22.5
23.3
23.8
23.3%
23.3%
2,438
2,649
3,519
4,200
5,186
4,132
4,923
y/y (%)
15.2
8.6
32.8
19.4
23.5
17%
19%
Diluted EPS (HK$)
1.99
2.16
2.86
3.41
4.22
3.35
4.00
y/y (%)
12.6
8.5
32.7
19.4
23.5
17.1
19.2
Net profit
Sources: Company Reports and Sun Hung Kai Financial
Figure 3:
Hengan – major assumptions
Revenue growth, %
FY11
FY12
FY13E
FY14E
Tissue papers
31.1
14.1
24.6
23.3
Sanitary napkins
29.8
19.5
24.5
22.0
Disposable diapers
11.3
(1.4)
9.5
12.5
Overall growth
26.9
8.6
21.2
20.9
Sources: Company Reports and Sun Hung Kai Financial
Gross profit margin, %
FY11
FY12
FY13E
FY14E
Tissue papers
31.4
35.4
34.5
35.0
Sanitary napkins
60.4
65.8
67.5
68.5
Disposable diapers
35.2
42.9
44.5
45.5
Overall GPM
39.9
44.9
45.2
45.8
Sources: Company Reports and Sun Hung Kai Financial
Figure 4:
Hengan – forward P/E (Next annuals)
X 35
30
25
+1Sdv. Avg. 22x
20
-1Sdv.
15
10 29-Jul-05 29-Jul-06 29-Jul-07 29-Jul-08 29-Jul-09 29-Jul-10 29-Jul-11 29-Jul-12
Sources: Bloomberg and Sun Hung Kai Financial
Sun Hung Kai Financial Institutional Research
2
Hengan (1044.HK) – Growth Back On Track
Figure 5:
25 April 2013
Hengan – scenario analysis Assumptions
Scenario
FY14 revenue growth
Base
Gross profit margin
20.9% y/y
Bull
26.3% y/y
Bear
EPS
45.8%
HK$4.22
46.7%
14.1% y/y
HK$4.58
40.7%
HK$3.15
Sources: Sun Hung Kai Financial
Figure 6:
Hengan – price target scenarios (HK$)
FY14E P/E 21x
Bear 66
Base 89
Bull 96
22x
69
93
101
23x
72
97
105
Sources: Sun Hung Kai Financial
Figure 7:
Company Hengan Vinda Prince Frog Shandong Chenming C&S P&G Kimberly-Clark Unicharm Unilever
Peer comparison
Stock code 1044.HK 3331.HK 1259.HK
Stock price (LC) 77.50 10.52 4.71
1812.HK 002511.CH PG.US KMB.US 8113.JP UN.US
2.97 22.98 82.54 105.49 6,040 41.95
Mkt. cap Ytd chg FY1 EPS FY2 EPS (US$m) (%) growth (%) growth (%) 12,276 10.9 17.1 19.3 1,354 (0.8) 24.4 25.2 613 44.5 16.3 29.5 1,129 774 225,470 40,582 12,553 125,346 Average
(2.0) 10.0 21.6 24.9 34.4 9.5 17.0
157.3 28.6 7.5 28.7 13.2 18.1 34.6
57.2 31.5 9.0 6.9 11.7 8.6 22.1
Sources: Bloomberg and Sun Hung Kai Financial
Sun Hung Kai Financial Institutional Research
3
FY1 P/E (X) 23.1 15.5 13.5
FY2 P/E (X) 19.4 12.4 10.4
FY2 PEG (X) 1.0 0.5 0.4
Div. yield (%) 2.2 1.5 1.3
8.4 25.3 20.3 18.4 34.7 17.7 19.7
5.3 19.2 18.9 17.2 30.6 16.3 16.6
0.1 0.6 2.1 2.5 2.6 1.9 1.3
2.4 N/A 2.7 2.9 0.5 2.3 2.0
Net-debt/ Equity (%) 11.7 32.4 (63.7)
ROE (%) 26.6 14.8 22.9
148.2 (25.9) 39.6 87.0 16.0 46.8 32.5
1.6 6.5 16.3 34.2 13.0 30.4 18.5
Hengan (1044.HK) – Growth Back On Track
25 April 2013
Investment Case Tissue-paper business: a volume story (49% of revenue, 33% of EBIT) Hengan started its tissue-paper segment in 1997. It is one of the company’s main businesses, contributing 49% of revenues in FY12 following a CAGR of 28.8% in the past five years, driven by continued capacity expansion and market penetration. Hengan distributes its tissue papers mainly under the Hearttex brand. According to Euromonitor, Hengan was the No. 1 tissue paper producer in China in 2011, with 9.4% market share, compared with 6.4% for its nearest competitor. The three largest players together accounted for only 22% of the total tissue paper market in 2011 and we believe there is room for further industry consolidation, which should help Hengan gain market share. Sales growth came in below management’s expectations in FY12 at only 14.1% y/y. This was mainly owing to delays in new capacity, as 240k tons of the 300k ton new production capacity added in FY12 did not fully commence production until 2H12. Capacity utilization was ~70% in FY12 based on the 900k tons capacity at the end of FY12 (600k ton in FY11), with total production of 630k tons. Considering the delays in new capacity coming online, we estimate effective capacity in FY12 at ~705k, up 17.5% y/y from FY11 and in line with the 14.1% y/y (17.4% without new invoicing policy) tissue-paper sales growth in FY12. We believe growth momentum for tissue paper should resume in FY13 now that capacity is sufficient. We forecast 24.6% y/y revenue growth for tissue papers in FY13, with an 89% capacity utilization rate and 27.1% y/y growth of production vs. the company’s target of 32% production growth for FY13. Our revenue forecast also incorporates a 2% y/y ASP decline due to increasing competition in the tissue paper market. According to Euromonitor, in 2011 the per capita consumption of tissue paper in China was 3.9 kg/year, was still far behind 15 kg/year in Japan/Europe and 25 kg/year in North America. We believe 1) the improving living standards and awareness of personal hygiene, 2) ongoing urbanization, and 3) shifting from non-wood pulp products to wood-pulp products, should support demand and consume the increased capacity. Gross margin increased from 31% in FY11 to 35% in FY12 thanks to a decline in wood-pulp prices, resulting in a robust 80% y/y increase in EBIT. We expect pressure since wood-pulp prices are no longer falling and management plans to increase marketing efforts in this segment. We expect EBIT margins of ~14.5% in the next two years for this business sector. However, we believe a moderate increase in marketing could help drive volume growth to match increases in capacity, which could help maintain margins and drive earnings. In particular we believe volumes in some of the lower-penetration non-toilet-roll categories (e.g. paper towels, kitchen paper, dining napkins), can be grown through greater consumer education. Hengan – revenue growth and gross margin forecasts
Figure 8: Tissue paper
FY11
FY12
FY13E
FY14E
Revenue growth (%)
31.1
14.1
24.6
23.3
Gross margin (%)
31.4
35.4
34.5
35.0
Sources: Company reports and Sun Hung Kai Financial
Hengan – revenue (L) and EBIT (R) trends for tissue paper business
Figure 9: HK$m
%
15,000
12,000
60
HK$m
%
2,400
25
21.4
50
44.5
20 1,800
49.9
37.2
9,000
15.4
40
31.1
30
15.7 1,200
11.7
14.5
14.6
15.0
6,000
24.6
23.3
10
10.4
20
15
9.8
600
3,000
14.1
5
10
0
0 FY07
FY08
FY09
FY10 Revenue
FY11
FY12
FY13E
0
FY14E
Rev. growth
FY08
FY09
FY10 EBIT
Sources: Company reports and Sun Hung Kai Financial
Sun Hung Kai Financial Institutional Research
0 FY07
4
FY11 EBIT margin
FY12
FY13E
FY14E
Hengan (1044.HK) – Growth Back On Track
Figure 10:
25 April 2013
Hengan – tissue paper production capacity
'000 tons 1,600 1,380
1,400
1,260
1,200 1,000
900
900
FY12
FY13E
800 540
600
600
420 400 200 0 FY09
FY10
FY11
FY14E
FY15E
Sources: Company reports, Bloomberg, and Sun Hung Kai Financial
Protected against a potential price war The tissue-paper market in China is still dominated by toilet rolls, a competitive segment that accounts for ~65% of the market, and a price war caused by potential overcapacity in the tissue paper has been a concern for investors following rapid increases in industry capacity. However, management indicated that overcapacity is mainly a concern for lower-end products, as ~49% of tissue paper manufacturing capacity is still using non-wood pulp, which is mainly for lower end products and toilet rolls. Production of non-wood pulp generates more pollution and related production capacity will be gradually phased out and replaced by wood-pulp products, due to stricter environmental regulations and rising demand for higher-quality products. Toilet rolls only contribute ~30% of Hengan’s tissue-paper revenues, compared to its close peer Vinda’s (3331.HK) 61%, and the company has a more diversified product mix than domestic peers, which includes higher-end non-toilet roll categories. In the non-toilet-roll market, Hengan has 37.1% market share, compared with its nearest competitor’s 15.3%. Apart from the company’s larger operating scale, we believe its broad range of product categories contributes to higher-than-peers margins in this segment, as non-toilet rolls carry higher margins than toilet rolls. Greater exposure to non-toilet-roll categories should help lessen Hengan’s vulnerability to potential overcapacity and price wars in the tissue paper market.
Sun Hung Kai Financial Institutional Research
5
Hengan (1044.HK) – Growth Back On Track
25 April 2013
Sanitary napkins: cash cow still growing (27% of revenue, 50% of EBIT) Hengan entered this segment in 1985 and was one of the first domestic companies to produce sanitary napkins. Its most successful brands have been ”Anle”, ”Anerle”, and “Space 7”. Hengan was the largest sanitary-napkin producer in China in 2011 with a market share of 10.7%, according to Euromonitor. Sanitary napkins are Hengan’s cash cow, contributing 26.5% of revenues and 50.2% of EBIT in FY12. Segment revenue has posted a 25% CAGR in the past five years and gross margin increased from 56.9% in FY07 to 65.8% in FY12, helped by continued introductions of innovative products ahead its competitors to optimize the product mix. In 2004, Hengan launched “Space 7”, a new line targeting younger consumers, to differentiate from its aging “Anerle” brand, which was losing market share. This helped Hengan regain market share and improve margins. The latest Space 7 Princess series launched in FY12 had a gross margin of 77%, according to the company. Currently the Space 7 brand accounts for ~70% of Hengan’s sanitary-napkin sales, and the company continues to upgrade its product lines under the “Anerle” brand to optimize its product mix. We expect solid growth and stable margins to continue in the near future, as 1) sales of sanitary napkins remained strong in 2H12, 2) the company has demonstrated its ability to grow market share and guard margins via product innovation, and ramping up the latest Space 7 Prince Series should help lift gross margin, 3) Hengan’s solid relationships with its distribution channels could also help it effectively defend market share. Figure 11:
Hengan – revenue growth and gross margin forecast
Sanitary napkins
FY11
FY12
FY13E
FY14E
Revenue growth (%)
29.8
19.5
24.5
22.0
Gross margin (%)
60.4
65.8
67.5
68.5
Sources: Company reports and Sun Hung Kai Financial
Figure 12:
Hengan – revenue and margin trends for sanitary napkin business HK$m
HK$m
%
%
8,000
4,000
40
50
45.5 29.8
43.3
3,200 6,000
31.0
45
30
26.3 24.5
23.2
46.5
40
24.5
2,400 19.5
22.0
4,000
36.2
36.3
35.9
35.4 35
20
33.9
1,600
30 2,000
10
800
0
0
0 FY07
FY08
FY09
FY10
FY11
Revenue
FY12
FY13E
FY14E
20 FY07
Rev. growth
FY08
FY09
FY10 EBIT
Sources: Company and Sun Hung Kai Financial
Sun Hung Kai Financial Institutional Research
25
6
FY11
FY12
EBIT margin
FY13E
FY14E
Hengan (1044.HK) – Growth Back On Track
25 April 2013
Disposable diapers: likely to turn around (14% of revenue, 14% of EBIT) In 2011, Hengan was the No. 2 baby diaper producer in China with 11.8% market share, behind P&G’s 44.8%. Segment growth has struggled owing to competition from domestic lower-end brands and foreign brands. Domestic players with aggressive pricing strategies have diluted Hengan’s market share in lower-tier markets, while foreign brands with superior quality and broader product lines have been the market leaders in higher-tier markets and are gaining traction in lower-tier markets too. The diaper business recorded a 1.4% y/y decline in sales in FY12 (2.4% y/y growth though after stripping out the new invoice policy in FY12), owing to: 1) more promotion activities to clear old inventory at the distributor level, 2) slower-than-expected sales growth for its mid-range to high-end products because global brands accelerated their penetration into lower-tier cities. Hengan has adopted several initiatives to boost diaper sales. On the distribution side, it has started to give distributors incentive-based sales targets for diapers, rather than linking incentives only to gross sales. This should stop distributors from only promoting Hengan’s tissue-paper and sanitary-napkin products, which are more popular and easier to sell. The company has also set up a sales team to penetrate maternity specialty stores, which are a growing channel. On the product side, Hengan has increased promotions for its new high-end brand “Q-Mo” to improve its brand image and introduced newborn-size products under the “Q-Mo” and “Anerle” brands. We believe the recently launched newborn-size products (for newborns to one month old) could be a key positive to the segment, as 1) they fill a gap in Hengan’s product line, 2) they can help build Hengan’s relationship with consumers from the beginning of their baby-product purchasing cycle, which should make it easier to sell to them at later stages. Management also says it might accelerate the introduction of new products going forward. We believe these measures should merit a return to growth for the firm’s diaper business. Hengan – revenue growth and gross margin forecast
Figure 13:
Disposable diapers
FY11
FY12
FY13E
FY14E
Revenue growth (%)
11.3
Gross margin (%)
35.2
(1.4)
9.5
12.5
42.9
44.5
45.5
Sources: Company reports and Sun Hung Kai Financial
Hengan – revenue (L) and EBIT trends (R) for diaper business
Figure 14: HK$m
%
4,000
50
HK$m
%
1,000
30
25.5 42.6
40
37.7
3,000
24.5 800
22.5
600 2,000
13.3 9.5
11.3
12.5
20
18.0 15.9
20
15.3
20.6
19.5
30
13.2
400 10
10
1,000 (1.4)
0
0
-10 FY07
FY08
FY09
FY10 Revenue
FY11
FY12
FY13E
200
0
FY14E
Rev. growth
FY08
FY09
FY10 EBIT
Sources: Company and Sun Hung Kai Financial
Sun Hung Kai Financial Institutional Research
0 FY07
7
FY11 EBIT margin
FY12
FY13E
FY14E
Hengan (1044.HK) – Growth Back On Track
25 April 2013
Food and snacks (7.5% of revenue, 1.2% of EBIT) Hengan entered the food and snacks business in 2008 through acquisitions to diversify its business. This segment contributed 7.5% of sales of FY12 and an insignificant 1.2% of EBIT. Hengan manufactures and distributes its products under its ”QinQin” brand, which generated around one-third of its sales from fruit-jelly products in FY12. Sales of food and snacks dropped 10% y/y in FY12, mainly due to the industrial-gelatin incident last year, when some medical companies were found to have used industrial gelatin in their capsules. This heightened safety concerns about jelly products in the food market and affected Hengan’s sales, even though the company had not used prohibited raw materials in its products. Segment margins improved in FY12 though, thanks to a decline in raw-material costs. Currently the company is working on integrating distribution networks for food and personal care products to improve efficiency. It is also diversifying its product categories to include more non-jelly products, such as crisp snacks. We expect growth to gradually resume as concerns from last year’s national gelatin issue eases. Hengan – revenue growth and gross margin forecast
Figure 15:
Food and snacks Revenue growth (%)
FY11
FY12
FY13E
FY14E
28.3
(10.1)
12.1
17.1
52
41.3
40
40
Gross margin (%)
Sources: Company reports and Sun Hung Kai Financial
Hengan – revenue (L) and EBIT trends (R) for food and snacks business
Figure 16: HK$m
HK$m
%
2,000
50
%
120
10 8.2
40
39.3
8 30
28.3
12.1
1,000
17.1
90 6
20
60
5.7
10 0 (10.1)
5.2 4 4.0
3.7 30
2 (10)
0
(20) FY10
FY11
FY12 Revenue
FY13E
0
0
FY14E
FY10
Rev. growth
FY12 EBIT
Sources: Company and Sun Hung Kai Financial
Sun Hung Kai Financial Institutional Research
FY11
8
FY13E EBIT margin
FY14E
Hengan (1044.HK) – Growth Back On Track
25 April 2013
Deep Economic Moats We see several economic moats, which are crucial in the competitive consumer market: Distribution networks. This is one of Hengan’s core competencies. The company maintains close relationships with ~1,900 first-layer distributors by operating 580+ sales offices around the country. This extensive sales force provides in-time service for distributors, plus sales support and inventory management, which helps ensure control over distributors and their stickiness to the company. Long-term relationships with distributors are a key weapon for Hengan to defend its market share. ~70% of its sales are from this distribution network, with the rest mostly from direct sales to large channel customers, such as Walmart and Carrefour. Hengan is also expanding its distribution channels to Business-to-Business (B-to-B) clients (e.g. airports and hotels) and specialty stores (e.g. maternity stores) to further penetrate the market. Strong market position. Hengan has strong footprints in its major product markets. It was an early entrant into personal care in China and provide products that are better quality than those of its domestic peers but cheaper than foreign brands, which entered the market later. According to Euromonitor, Hengan was ranked the No. 1 tissue producer in 2011 with 9.3% market share (37% for non-toilet rolls and 5.8% for toilet rolls). Hengan has also long been the largest sanitary napkin producer in China, under its “Anle”, ”Anerie” and “Space 7” brands, with 10.7% market share. Its paper-diaper brand “Anerle” has strong traction in lower-tier markets. The company has launched a high-end baby diaper brand “Q-mo” to further optimize its product mix. Product innovation. Product differentiation and constantly introducing new products are key to success in the fast-moving consumer market. To diversify from its old sanitary-napkin brand Anerle, Hengan launched its SPACE 7 brand in 2004, targeting younger consumers. In the tissue-paper business, Hengan also continues to introduce new products in the non-toilet-roll categories to improve margins. The company was the first domestic company to launch kitchen paper towels, in 2011. Given its track record, we believe it should be able to continually introduce new products to help guard margins, rather than competing solely on prices, which would hurt brand equity. Economies of scale. Hengan is the biggest tissue-paper producer in China with annual capacity of 900k tons in 2012. The company has production facilities in 13 provinces and has nationwide distribution networks. Such operating scale makes it easier to manage procurement cost of wood pulp from domestic and overseas suppliers compared with other domestic players, as wood-pulp prices have raised moderately from their lows in 2012.
Sun Hung Kai Financial Institutional Research
9
Hengan (1044.HK) – Growth Back On Track
25 April 2013
Financial analysis Growth should resume in FY13 While overall revenue growth slowed in FY12, we expect growth momentum to resume with clearer earning visibility in FY13 due to 1) elimination of capacity constraints, 2) solid sales growth for tissue papers and sanitary napkins in 2H12, 3) new products and greater marketing efforts helping to drive sales growth. We forecast a 22.5% y/y growth on the top-line, and 21% CAGR for EPS over FY12-14. According to management, the company has adopted a new invoicing policy for distributors in mid March 2012. The new policy deducts sales rebates granted to distributors on the invoices, which had previously been booked on Hengan’s expenses. Based on data provided by the company and our estimates, growth in sanitary napkins remained solid in 2H12 and growth in tissue paper started to pick up too. In view of this favorable trend, we are more confident about the resumption of growth. Hengan – impact of new invoicing policy
Figure 17:
Revenue growth (%)
Reported 2H12
1H12
Neglecting new invoice policy 1H12** 2H12** FY12*
FY12
Tissue papers
12.5
15.6
14.1
15.0
19.7
17.4
Sanitary napkins
22.5
17.0
19.5
26.6
22.6
24.4
7.3
(8.5)
(1.4)
10.3
(4.2)
2.4
10.4
7.0
8.6
13.0
11.1
12
Disposable diapers Total growth
Sources: Company reports and Sun Hung Kai Financial (*provided by Company, **SHKF estimates)
Hengan – revenue growth
Figure 18:
Revenue growth, %
FY11
FY12
FY13E
FY14E
Tissue papers
31.1
14.1
24.6
23.3
Sanitary napkins
29.8
19.5
24.5
22.0
Disposable diapers
11.3
(1.4)
9.5
12.5
Overall growth
26.9
8.6
21.2
20.9
Sources: Company reports and Sun Hung Kai Financial
Figure 19:
Hengan –summary of forecasts
HK$ m
FY10
FY11
FY12
FY13E
FY14E
13,432
17,051
18,524
22,442
27,133
24.0
26.9
8.6
21.2
20.9
5,945
6,800
8,315
10,140
12,428
y/y (%)
19.4
14.4
22.3
21.9
22.6
GPM(%)
44.3
39.9
44.9
45.2
45.8
2,751
2,838
4,176
5,225
6,446 23.4
Revenue y/y (%) Gross profit
EBIT y/y (%)
10.3
3.2
47.2
25.1
EBIT margin (%)
20.5
16.6
22.5
23.3
23.8
2,438
2,649
3,519
4,200
5,186
15.2
8.6
32.8
19.4
23.5
1.99
2.16
2.86
3.41
4.22
12.6
8.5
32.7
19.4
23.5
Net profit y/y (%) Diluted EPS (HK$) y/y (%)
Sources: Company reports and Sun Hung Kai Financial
Sun Hung Kai Financial Institutional Research
10
Hengan (1044.HK) – Growth Back On Track
25 April 2013
Hengan – revenue growth
Figure 20: HK$m
%
30,000
50 27,133
25,000
40.7
20,000
40
22,442
35.4 38.2
18,524 17,051
15,000
30
26.9
24.0
21.2 10,834
10,000
20.9 20
13,432
8,002 5,687
10
5,000
8.6
0
0 FY07
FY08
FY09
FY10
FY11
Revenue
FY12
FY13E
FY14E
Rev. growth
Sources: Company reports and Sun Hung Kai Financial
Margins Gross margin increased in FY12 owing to lower raw-material prices, especially for pulp. We expect margins to come under pressure this year as pulp prices are no longer falling and the company is increasing its promotion efforts for tissue paper and diapers. We forecast the tissue-paper gross margin to contract but expect overall gross margin to remain stable due to contributions from sanitary napkins and diapers. We expect the sanitary-napkin gross margin to continue rising as new products ramp up and this to support overall margins, since this segment is the group’s major profit contributor. We also expect the launch of new diaper products and recovery of sales to support gross margins. Hengan – COGS breakdown (L) and International wood pulp prices (R)
Figure 21:
US$/ton
Depreciation and others, 6%
1,100 1,000
Labour, 4%
Pulp, 38%
900
Utility, 7% 800 700
Other raw materials, 18%
600
Petrochemicals, 17%
Packaging materials, 10%
500 400 Apr-08
Sources: Company, Bloomberg, and Sun Hung Kai Financial
Figure 22:
Hengan – Gross margins
Gross profit margin, %
FY11
FY12
FY13E
FY14E
Tissue papers
31.4
35.4
34.5
35.0
Sanitary napkins
60.4
65.8
67.5
68.5
Disposable diapers
35.2
42.9
44.5
45.5
Overall GPM
39.9
44.9
45.2
45.8
Sources: Company reports and Sun Hung Kai Financial
Sun Hung Kai Financial Institutional Research
11
Oct-08
Apr-09
Oct-09
Apr-10
Oct-10
Apr-11
Oct-11
Apr-12
Oct-12
Apr-13
Hengan (1044.HK) – Growth Back On Track
Figure 23:
25 April 2013
Hengan – Revenue (L) and EBIT (R) breakdown Food and snacks and others, 2%
Food and snacks and others, 10% Tissue papers, 49%
Disposable diapers, 14%
Disposable diapers, 14%
Sanitary napkins, 27%
Sanitary napkins, 50%
Sources: Company reports and Sun Hung Kai Financial
Advertising and promotion (A&P) expenses accounted for 8.2% of Hengan’s revenues in FY12 and management expects a moderate increase this year. We consider a moderate increase in marketing investment to be positive, since constant investment in branding is crucial for a consumer company to maintain and grow its brand equity. For example, world-leading consumer company P&G has spent 11% of sales on advertisements in the past two years, excluding expenses from other promoting activities. As the penetration of household paper products (particularly non-toilet rolls) and paper diapers in China remains lower than in developed countries, we believe greater investment in branding should help drive sales growth and offset the increase in marketing costs. Hence, we expect overall EBIT margins to remain stable at ~23% during FY13/FY14. Figure 24:
Hengan – EBIT trend
HK$m
%
7,000 23.3
23.0
25
22.5
6,000 20.5
5,000
4,241
20.3 4,000
23.8
5,292
6,541
20
18.0
3,000
16.6
2,598
2,000 1,183
2,796
2,880
FY10
FY11
15
1,468
1,000 0
10 FY07
FY08
FY09
EBIT
FY12
FY13E
FY14E
EBIT margin
Sources: Company reports and Sun Hung Kai Financial
Solid financial position Hengan’s balance sheet has been solid thanks to its strong cash flows, which have covered capex and helped maintain decent dividend payouts with a payout ratio of around ~60%. We believe this is supported by strong cash flows from its sanitary-napkin business, which has been the major contributor to EBITDA. Tissue paper is a volume business and Hengan has invested significantly into capex in this segment to grow market share. Although Hengan took on more debt in FY12 to speed up capacity expansion, it still generated positive free cash flow and its balance sheet remained less levered (net gearing: 11.7%) than closest peer Vinda (32.4%), which has also been expanding tissue-paper capacity. We forecast FCF to improve to HK$3.1bn/HK$3.3bn in FY13/14E with the resumption of growth and lower capex in FY13. This should support the growth in dividends assuming the company maintains its 60% payout ratio.
Sun Hung Kai Financial Institutional Research
12
Tissue papers, 33%
Hengan (1044.HK) – Growth Back On Track
Figure 25:
25 April 2013
Hengan – capex (L) and EBITDA (R) breakdown
HK$m
HK$m
2,500
5,000
2,000
4,000
1,500
3,000
1,000
2,000
500
1,000
0
0 FY07
FY08
FY09
Tissue papers
Sanitary napkins
FY10
FY11
FY12
FY07
Sources: Company reports and Sun Hung Kai Financial
Figure 26:
Hengan – free cash flow trends
HK$m 1,900
1,400
900
400
(100)
(600) FY09
FY10 Hengan
FY11
FY12
Vinda
Sources: Company reports and Sun Hung Kai Financial
Sun Hung Kai Financial Institutional Research
FY08 Tissue papers
Disposable diapers
13
FY09 Sanitary napkins
FY10
FY11
Disposable diapers
FY12
Hengan (1044.HK) – Growth Back On Track
25 April 2013
SWOT Analysis Strengths
Weaknesses
Strong brands in the sanitary napkin and tissue paper markets Continues to introduce innovative products to guard margins and gain market share. Solid and effective distribution network, particularly in traditional distribution channels. Strong cash flows to support capacity expansion. Economies of scale.
Less exposure to modern distribution channels, such as maternity specialty stores and hypermarkets. Weaker market position in the diaper market compared with foreign brands in mid-to-high end product categories.
Opportunities
Threats
Initiatives to expand diaper business could bring growth back on track and help grab more market share. Urbanization, rising incomes and living standards, and growing demand from the adult-care market should drive growth in the long term. Increasing cost due to stricter environmental regulations in paper industry should drive smaller players out and help Hengan gain more market share.
Increasing competition from industrial paper manufacturers in the tissue-paper market. Potential price wars in the tissue-paper market, for toilet rolls in particular. Fluctuations in raw-material prices, particularly wood pulp.
Risks Fluctuations in raw-material prices. Wood pulp accounts for 50%-70% of production costs for tissue-paper product, and the production costs of sanitary napkins and diapers subject to petrochemical prices. Price fluctuations for raw materials could significantly impact Hengan. Wood-pulp prices have increased moderately from their lows in 2012, while management does not expect pulp prices to spike this year given the abundant new supply in the market. Management also expects costs of other raw materials to remain stable this year. Overcapacity in tissue paper. China’s household paper industry has expanded rapidly in recent years. According to China Paper Association, the mainland accounted for ~60% of the world’s new tissue-paper capacity during 2011-2012. Overcapacity has long been a concern for the market. However, we believe the risk of overcapacity is not that significant. 41% of tissue paper in China was made from non-wood pulp in 2011, which should be gradually be replaced by wood pulp. Also, we believe the new capacity will be consumed as penetration rates for household paper products increase. Current tissue paper consumption per capita in China is still significantly lower than in developed markets. Lower-than-expected sales growth, if sales of the new mid-range to high-end diaper products do not pick up, which would prolongs the growth recovery of the segment. Also, more aggressive marketing by competitors could hamper sales growth and margins.
Figure 27:
Hengan – shareholding structure
Mr. Sze Man Bok (Chairman) 18.6%
Mr. Hui Lin Chit (CEO) 18.3%
Other Directors 3.6%
Employees and relatives 7.1%
Hengan (1044.HK)
Sources: The Company and Sun Hung Kai Financial
Sun Hung Kai Financial Institutional Research
14
Public 52.4%
Hengan (1044.HK) – Growth Back On Track
25 April 2013
Appendix: Financial statements and forecasts Year end 31 Dec. P&L – HK$ m
FY10
FY11
FY12
FY13E
FY14E
Revenues
13,432
17,051
18,524
22,442
27,133
Gross profit
5,944.8
6,800.3
8,315.2
10,139.7
12,427.7
EBIT
6,446.4
2,750.9
2,837.7
4,176.0
5,225.0
Finance costs
(71.8)
(147.8)
(239.6)
(291.9)
(291.9)
Tax
(552.0)
(569.9)
(1,001.2)
(1,197.5)
(1,478.7)
Net profit (shareholders)
2,438.3
2,648.8
3,518.7
4,199.9
5,186.0
Diluted EPS – HK$
1.99
2.16
2.86
3.41
4.22
DPS – HK$
1.30
1.35
1.70
2.05
2.53
Weighted avg. shares – m
1,227
1,229
1,230
1,230
1,230
B/S – HK$ m
FY10
FY11
FY12
FY13E
FY14E
Cash & equivalents
5,989
8,258
9,544
10,278
10,712
Account receivables
1,396
1,893
1,870
2,244
2,578
Inventories
2,760
2,934
3,831
4,040
4,613
Net fixed assets
5,798
8,108
10,150
11,296
12,957
Total assets
18,577
23,319
29,205
31,856
34,970
Account payables
1,319
1,881
1,803
2,356
2,659
Short-term debt
3,815
6,815
7,441
7,441
7,441
Total current liabilities
6,077
10,012
10,821
11,615
12,297
Long-term debt
1,497
404
3,787
3,787
3,787
Total liabilities
7,752
10,600
14,797
15,627
16,356
Shareholders' equity
10,503
12,341
14,078
15,878
18,236
322
377
330
351
377
Minority Interests Cash flow - HK$ m
FY10
FY11
FY12
FY13E
FY14E
Pre-tax profit
3,038
3,255
4,539
5,418
6,691
383
442
559
650
781
Depn. & amortization WC
(745)
286
(996)
(28)
(398)
Operating cash flow
2,280
3,356
3,320
4,956
5,721
Capex
(1,117)
(2,428)
(2,597)
(1,853)
(2,442)
Investing cash flow
(1,577)
(5,476)
(3,960)
(1,592)
(2,177)
Financing cash flow
735
195
1,926
(2,630)
(3,110)
Net cash flow
1,438
(1,925)
1,286
734
434
Free cash flow (OCF-capex)
1,163
928
723
3,103
3,279
Ratios - %
FY10
FY11
FY12
FY13E
FY14E
Revenue growth
24.0
26.9
8.6
21.2
20.9
Gross profit margin
44.3
39.9
44.9
45.2
45.8
EBIT margin
20.5
16.6
22.5
23.3
23.8
Effective tax rate
(18.2)
(17.5)
(22.1)
(22.1)
(22.1)
EPS growth
12.6
8.5
32.7
19.4
23.5
Net debt to equity
(6.3)
(8.2)
11.7
5.9
2.8
ROA
14.9
12.6
13.4
13.5
15.5
ROE
25.0
23.2
26.6
26.4
30.4
Cash conversion cycle – days
92.6
80.6
97.5
89.5
79.9
A/R turnover - days
31.0
35.2
37.1
33.5
32.4
A/P turnover - days
58.6
56.0
60.5
60.7
59.9
Inventory turnover - days
120.3
101.4
120.9
116.7
107.4
Sources: Bloomberg, the Company and Sun Hung Kai Financial
Sun Hung Kai Financial Institutional Research
15
Hengan (1044.HK) – Growth Back On Track
25 April 2013
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In no event will SHKIS or any other member of SHKF be liable or have any responsibility for loss of any kind, whether direct, indirect, consequential or incidental, resulting from the act or omission of any third party occurring in reliance upon the contents of this report even if SHKF is aware of such act or omission at the time that it occurs. © 2013 SHKIS. All rights reserved. This report may not be reproduced or redistributed, in whole or in part, without the written permission of SHKIS and SHKIS accepts no liability whatsoever for the actions of third parties in this respect. Guide to Sun Hung Kai Financial stock ratings: Buy – We expect return of 15% or better over the next 12 months. Position Closed / Neutral – We expect return within –10% to 10% over the next 12 months. Sell – We expect return of –10% or worse over the next 12 months. Not Rated – No recommendation on the stock.
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(852) 3929 6154
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