Hengan Earnings: Elevated Input Costs Dragged Margin Despite Decent Sales Growth

We lower our fair value estimate on no-moat Hengan International to HKD 37.00 from HKD 40.00 after disappointing first-half 2023 results. Net profit missed the Refinitiv consensus estimate primarily due to continued weakness in sanitary napkin sales. Gross margin also fell short of our estimates. The tissue segment delivered strong top-line growth thanks to competitive pricing. Management expects margins to improve in second-half 2023 with lower pulp costs. But we continue to see pressure to long-term profitability of the sanitary napkin business, which made up close to 80% of Hengan’s EBIT over the last five years. We lower our long-term margin projection, but the company should see alleviating cost pressure in the near term, which could limit possible negative reaction to the weak results.