Top 7 Things You Need To Know About Hengan International Group Before Investing

Given the huge success of consumer companies like Procter and Gamble (PG 89.03 -0.37 -0.41%), Kimberly Clark Corp (KMB 131.75 -0.08 -0.06%) and Unilever Inc (ULVR 4,302.00 -4.00 -0.09%) in the West, would consumer companies in the East has a bright future ahead as well? In fact, many consumer companies in the East has done extremely well, from food to drinks to even tissue paper, yes tissue paper!

Hengan International Group Co. Limited (“Hengan”) (1044 59.95 -0.80 -1.32%) is currently the largest manufacturer of household tissue paper, ladies’ sanitary napkins and disposable baby diapers. Established in 1985 as one of the pioneer enterprises producing sanitary napkin in China, Hengan ventured into the tissue and baby diapers business prior to their listing on the Hong Kong Stock Exchange in 1998. In 2011, Hengan was admitted as a Hang Seng Index constituent stock.

In 2016 (Hengan Annual Report 2016), Hengan was ranked in the top 10 of “2016 China Brand Value Evaluation Information Conference” with a brand value of RMB52 billion.

Here are some of their brands:

Here are the top 7 things you need to know about the company before investing.

1. STOCK SYMBOL

1
TICKER SYMBOL: HKG:1044
MARKET CAP: HKD67 Billion (17 May 2017)
MARKET PRICE / SHARE: HKD55.70 (17 May 2017)
INDUSTRY: Hygiene Products

2.FINANCIALS

Income Statement – Click here

Balance Sheet – Click here

3. THE BUSINESS

Post spin-off of Qinqin Foodstuffs Group (Cayman) Company Limited “Qinqin Foodstuffs” in 2016, today’s Hengan is a pure play in the hygiene products scene with has three core operations – household tissue paper, ladies’ sanitary napkins and disposable baby diapers.

In 2012, it was reported in their publication that Hengan’s market share of the China market was:

  • Heartex Tissue paper: 29.82%
  • Sanitary Napkins: 19.95%

Disposable Diapers: 16.84%

Since FY2012, Revenue from continuing operations increased from RMB15 billion to RMB19 billion in 2016. Shareholders’ Profit (2016) was up by 26% to RMB3.6 billion since 2012 (inclusive of RMB0.3billion from discontinued operations – Qinqin Foodstuffs).

In FY2016, here was how Hengan’s revenue of RMB19 billion came about:

  • Tissue paper: 47%
  • Sanitary Napkins: 34%
  • Disposable Diapers: 11%
  • Others: 8%

And this was how Hengan’s fared in terms of their FY2016 Operating profit of RMB4.3 billion:

  • Tissue paper: 47%
  • Sanitary Napkins: 34%
  • Disposable Diapers: 11%
  • Others: 8%

In the last two years (FY2016 & FY2016), more than 90% of their Revenue came from PRC. Note: In FY2016, Hengan’s reporting currency changed from HKD to RMB (the depreciation of the RMB relative to USD might be one of the reasons).

4. KEY OPPORTUNITIES

  1. Macroeconomic Developments in China

We could go on and on, but instead, let’s just cut to the chase and list down the positive macroeconomic tailwinds.

  • “Two children” policy
  • Urbanization
  • Rising income
  • Growing awareness of health and hygiene standards – “market potential”

It is entirely up to you to gauge the potential of these positive tailwinds. And with Hengan’s domestic sales network, they appear poised to take advantage of these headwinds.

On the flipside, there are also reports of economic slowdown. However, to mitigate that, you could say that Hengan is a producer of consumer staples, stuff that people need, no matter rain or shine.

  1. Positive Government Intervention

In Hengan’s Annual Report 2016, it was stated that the Chinese government accelerated reforms and innovations to spur domestic consumption.

Take the Tissue paper industry for example, even though the industry still faces overcapacity, the Chinese government’s implementation of environmentally friendly manufacturing regulations will help eliminate small and medium enterprises that fail to meet the standard. This is expected to further enhance the industry concentration and benefits large-scale manufacturers such as Hengan.

For the diaper department, it was reported that the China government imposed tax on cross-border e-commerce transactions – another plus for Hengan

  1. Consistent Dividend Track Record

In this case, we think that a picture is worth more a thousand words and here is an extract from Hengan’s Presentation titled, “2016 Annual Results Presentation”.

Between 2011-2016, Hengan’s dividend payout rate was between 59.4% to 65.5%. We find that rather consistent.

You may access some of their presentations HERE.

Sidenote: In the past 2 FY (FY2015 & 2016), Hengan also repurchased its shares:

  • FY2016: 13,228,500 shares
  • FY2015: 6,340,000 shares

 5. KEY RISKS

  1. Increased Competition – Local & Foreign

In 2016, it was reported that their disposable diapers operations were hit hard with a 12% drop in revenue.

A key reason was intensified market competition affecting the Group’s diaper sales from low-to-high-end products:

  • Entrance of many small and medium manufacturers into the market affected the price competition of low- and mid-end products
  • Rise of cross-border e-commerce in recent years, foreign brands hit the Chinese market and negatively impacted the sale of Hengan’s mid-to-high-end products
  1. Raw Material Fluctuations

As a manufacturer, Hengan is impacted by its key raw material prices. In the past 2 years, a decrease in the prices of two raw materials used in its core operations – Tissue wood pulp and petrochemical benefitted the Group – higher gross profit margins.

However, we do not know when or by how much this might change in future.

  1. Restructuring of its sales team “Hengan’s Amoeba model”

The benefits of this new model are:

  • Flatter hierarchy
  • Sufficient autonomy to be responsive to consumer needs
  • Potentially increase overall sales efficiency and enhance cost savings

We cannot be sure of how this will turn out and we guess we have to wait to see the effects of their restructure!

 6. Investor Relations

Deputy Chief Financial Officer:Mr. Martin Li
Address: Unit 2101D,21st floor, Admiralty Centre, Tower 1, 18 Harcourt Road, HongKong

Tel: 852-27980770
Fax: 852-27997372
E-mail:martinli@hengan.com.hk

7. MAJOR SHAREHOLDERS

  1. Sze Man Bok (Chairman) – 19.09%
  2. Hui Lin Chit (Deputy Chairman & CEO) – 19.64%

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The information provided is for general information purposes only and is not intended to be any investment or financial advice. All views and opinions articulated in the article were expressed in Value Invest Asia’s capacity. 

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