Channel Shift Drives Hengan's Strong Top-Line Growth, but Margins Suppressed; Raising FVE to HKD 40

No-moat Hengan reported first-half results, with top-line growth outpacing our estimates but profit missing due to mounting cost pressure and insufficient price hikes to offset cost inflation. New channel penetration (e-commerce and new retail) and competitive pricing drove resilient sales for the company. We regard the progress in diversifying the sales channel as positive and consistent with our view that Hengan possesses levers to retain its market position through product mix and channel maneuvers. But we maintain our view that medium-term net profit margin will fall to a lower-than-historical level (midteens versus the average of roughly 19% in the last five years), as more investments are required for new channels and product pricing would have to stay competitive. We have raised our fair value estimate to HKD 40 per share from HKD 39.50 due to the time value of money. The implied 2022 price/earnings multiple of 16 times is slightly higher than the historical average, but we believe the market views Hengan’s progress in channel shift positively, with multiple expansion possible if management could deliver more evidence that the company is back on a medium-term growth trajectory. We now consider the stock as fairly valued and could turn more positive if Hengan translates its channel mix shift to faster and more sustainable bottom-line growth.