Company Reports

Narrow-moat Blue Moon’s first-half results were largely in line with its profit warning announcement in July. Top-line growth was primarily driven by the online channels, but selling and distribution expenses doubled year on year due to the increased promotional expenses to drive sales growth. The first interim dividend since listing of HKD 0.04 per share was a positive surprise, indicating management’s intention to enhance shareholder returns despite being loss-making during the period. We now expect the firm’s dividend per share to be HKD 0.06 for full-year 2024, unchanged year on year. We cut our fair value estimate to HKD 2.55 per share, from HKD 2.67, to account for the lower cash balance given the dividend payout in 2024. We expect the 2025 dividend to remain stable before improving in 2026 on the back of earnings recovery. In our view, Blue Moon is currently undervalued, but its 2024 dividend yield of 2% is not attractive versus peers. We believe the firm will need to deliver earnings improvement before it can be rerated by investors.

As one of the major players in the home care sector in China, Blue Moon has been an early mover in terms of product innovation and channel penetration, which has driven above-industry sales growth in recent years. The majority of Blue Moon’s sales come from laundry detergent, where the market has grown at a CAGR of midsingle digits in the past decade. Consumption premiumization coupled with rising per capita income have led to a market transition from powder detergent to liquid detergent. Blue Moon was one of the early movers in the latter category and has been the market leader in terms of value share for the past 10 years consecutively. Likewise, the company’s early entrance in the liquid soap market with competitive offerings has helped secured its number one position during the same period, despite the advent of international peers such as Procter & Gamble and Reckitt Benckiser. These investments in products that could cater for shifting consumer preferences have conferred satisfactory returns for Blue Moon.

Despite a roughly 38% year-on-year increase in first-half 2024 revenue and higher gross margin, narrow-moat Blue Moon said that it would record a preliminary net loss of about HKD 665 million. The loss was mainly due to an increase in selling and distribution expenses as the company ramped up investments in channel expansion, especially in the livestreaming platforms. We have previously flagged the potential drag of higher channel expenditures, but the impact to Blue Moon's earnings was larger than expected. As a result, we cut our full-year 2024 earnings estimate to a net loss of HKD 936 million from a net profit of HKD 378 million. We also expect the impact of higher channel expenditures to persist in 2025 before normalizing in 2026. Hence, we lowered our 2025 earnings estimate by 22%, but our longer-term forecasts are largely unchanged.

As one of the major players in the home care sector in China, Blue Moon has been an early mover in terms of product innovation and channel penetration, which has driven above-industry sales growth in recent years. The majority of Blue Moon’s sales come from laundry detergent, where the market has grown at a CAGR of midsingle digits in the past decade. Consumption premiumization coupled with rising per capita income have led to a market transition from powder detergent to liquid detergent. Blue Moon was one of the early movers in the latter category and has been the market leader in terms of value share for the past 10 years consecutively. Likewise, the company’s early entrance in the liquid soap market with competitive offerings has helped secured its number one position during the same period, despite the advent of international peers such as Procter & Gamble and Reckitt Benckiser. These investments in products that could cater for shifting consumer preferences have conferred satisfactory returns for Blue Moon.

We review our assumptions for narrow-moat Blue Moon before the release of its 2024 interim results. Our five-year revenue compound annual growth rate for Blue Moon rises to 7% from 5%, as we believe penetration in livestreaming platforms could accelerate its sales growth. However, the net profit CAGR in our explicit forecast period is only raised to 20.3% from 20.1%, as we factor in higher selling, general, and administrative, or SG&A, expenses. Hence, we retain our fair value estimate at HKD 2.80 per share, implying 41 times 2024 price/earnings and 20 times enterprise value/EBITDA. Despite trading at a 25% discount to our fair value estimate, we think investors would remain sidelined until the firm’s channel expansion efforts are proven to deliver improvements to its bottom line.

As one of the major players in the home care sector in China, Blue Moon has been an early mover in terms of product innovation and channel penetration, which has driven above-industry sales growth in recent years. The majority of Blue Moon’s sales come from laundry detergent, where the market has grown at a CAGR of midsingle digits in the past decade. Consumption premiumization coupled with rising per capita income have led to a market transition from powder detergent to liquid detergent. Blue Moon was one of the early movers in the latter category and has been the market leader in terms of value share for the past 10 years consecutively. Likewise, the company’s early entrance in the liquid soap market with competitive offerings has helped secured its number one position during the same period, despite the advent of international peers such as Procter & Gamble and Reckitt Benckiser. These investments in products that could cater for shifting consumer preferences have conferred satisfactory returns for Blue Moon.

Narrow-moat Blue Moon reported 2023 results with revenue in line with Refinitiv consensus and our estimate. Gross margin was a beat, but net profit was lower than expected, dragged by elevated expenses ratio. Consequently, we have reduced our fair value estimate to HKD 2.80 per share from HKD 3.10, after incorporating higher operating expenses ratio forecasts through 2028, which cut our 2024-27 earnings by 3%-7%, despite leaving the top-line growth estimates largely unchanged. Although the shares are currently undervalued, we think investors could remain sidelined until the company executes concrete margin expansion strategies.

As one of the major players in the home care sector in China, Blue Moon has been an early mover in terms of product innovation and channel penetration, which has driven above-industry sales growth in recent years. The majority of Blue Moon’s sales come from laundry detergent, where the market has grown at a CAGR of midsingle digits in the past decade. Consumption premiumization coupled with rising per capita income have led to a market transition from powder detergent to liquid detergent. Blue Moon was one of the early movers in the latter category and has been the market leader in terms of value share for the past 10 years consecutively. Likewise, the company’s early entrance in the liquid soap market with competitive offerings has helped secured its number one position during the same period, despite the advent of international peers such as Procter & Gamble and Reckitt Benckiser. These investments in products that could cater for shifting consumer preferences have conferred satisfactory returns for Blue Moon.

Narrow-moat Blue Moon’s profit warning for 2023 was disappointing, with guided net profit slightly below our estimates. 2023 net profit is expected to decline by at least HKD 230 million versus 2022’s HKD 611 million. Our previous estimate for 2023 earnings is HKD 488 million. We think the weak results were consistent with our cautious view toward second-half 2023 top-line growth and margins. After factoring in the guidance, we reduced our medium-term annual revenue growth forecasts from 2024 onward to an average of 5.0%, from 5.8%, as we believe the company would face headwinds from soft consumer sentiment and intensified competition. Our steady-state net margin estimate is also lowered to 8.7% from 9.3%. Consequently, we have cut our fair value estimate to HKD 3.10 per share, from HKD 3.60 per share. We believe the firm is currently undervalued, but we expect investors will stay sidelined on the stock given the uncertainty on its longer-term growth outlook. While we acknowledge that Blue Moon’s balance sheet remains strong with net cash position, we think the market is dissatisfied with the lack of earnings-accretive expansion by the management.

As one of the major players in the home care sector in China, Blue Moon has been an early mover in terms of product innovation and channel penetration, which has driven above-industry sales growth in recent years. The majority of Blue Moon’s sales come from laundry detergent, where the market has grown at a CAGR of midsingle digits in the past decade. Consumption premiumization coupled with rising per capita income have led to a market transition from powder detergent to liquid detergent. Blue Moon was one of the early movers in the latter category and has been the market leader in terms of value share for the past 10 years consecutively. Likewise, the company’s early entrance in the liquid soap market with competitive offerings has helped secured its number one position during the same period, despite the advent of international peers such as Procter & Gamble and Reckitt Benckiser. These investments in products that could cater for shifting consumer preferences have conferred satisfactory returns for Blue Moon.

As one of the major players in the home care sector in China, Blue Moon has been an early mover in terms of product innovation and channel penetration, which has driven above-industry sales growth in recent years. The majority of Blue Moon’s sales come from laundry detergent, where the market has grown at a CAGR of midsingle digits in the past decade. Consumption premiumization coupled with rising per capita income have led to a market transition from powder detergent to liquid detergent. Blue Moon was one of the early movers in the latter category and has been the market leader in terms of value share for the past 10 years consecutively. Likewise, the company’s early entrance in the liquid soap market with competitive offerings has helped secured its number one position during the same period, despite the advent of international peers such as Procter & Gamble and Reckitt Benckiser. These investments in products that could cater for shifting consumer preferences have conferred satisfactory returns for Blue Moon.

After disappointing first-half results, we cut our fair value estimate for narrow-moat Blue Moon to HKD 3.60 from HKD 6.60. We also lower our longer-term sales growth projections due to uncertainty around the growth outlook for its major product segments. The company mentioned the potential of expanding into other new personal care categories, but we remain neutral until there are more tangible signs. We now project an average annual sales growth rate of 5.8% from 2024 onward and a five-year net profit CAGR of 4.8%. The implied multiple, at 24 times 2024 price/earnings, is now closer to that of international peers, due to slower medium-term growth. We look for more consistent improvement in channel execution that flows through to the bottom line before revisiting our long-term view. We see Blue Moon shares as fairly valued.

Narrow-moat Blue Moon reported 2022 results that missed Refinitiv consensus and our estimates on the top line and net profit. The company attributed the profit miss to higher channel investments that did not bear fruit as well as elevated input costs. But management is optimistic about a potential sales recovery and that costs will become more favorable in 2023. We have reduced our fair value estimate to HKD 6.60 per share (from HKD 7.40 per share) due to lower 2023 top-line and profit projections, but continue to consider the stock undervalued. Our fair value estimate implies 31 times 2023 P/E and 3.8% dividend yield. We think the company can benefit from offline sales growth and lower input costs in 2023, thereby expanding its margins.

As one of the major players in the home care sector in China, Blue Moon has been an early mover in terms of product innovation and channel penetration, which has driven above-industry sales growth in recent years. The majority of Blue Moon’s sales come from laundry detergent, where the market has grown at a CAGR of midsingle digits in the past decade. Consumption premiumization coupled with rising per capita income have led to a market transition from powder detergent to liquid detergent. Blue Moon was one of the early movers in the latter category and has been the market leader in terms of value share for the past 10 years consecutively. Likewise, the company’s early entrance in the liquid soap market with competitive offerings has helped secured its number one position during the same period, despite the advent of international peers such as Procter & Gamble and Reckitt Benckiser. These investments in products that could cater for shifting consumer preferences have conferred satisfactory returns for Blue Moon.

Narrow-moat Blue Moon reported first-half 2022 results with a net loss slightly larger than the estimate it issued in its profit warning during July. The company reported decent progress in developing an omnichannel model by penetrating new retail channels, lower-tier cities, and expanding offline point-of-sale coverage, which we view positively as it could benefit longer-term sales growth and margins. We acknowledge the margin pressure that Blue Moon will face in the near term as it refrains from raising prices, but we believe its investment in channel diversification will support profit growth next year and beyond. We maintain our fair value estimate of HKD 7.40 per share, which implies 32 times 2023 P/E and 17 times enterprise value/EBITDA. We consider the stock undervalued and believe the company could deliver longer-term value to investors through its channel transition endeavors.

Narrow-moat Blue Moon issued a profit warning indicating an expected net loss of HKD 132.9 million in the first half of 2022. While management indicated the loss was primarily caused by the translational losses of cash denominated in U.S. and Hong Kong dollars, we note the pull forward in selling, general, and administrative expenses, or SG&A, has likely led to a larger operating loss than in first-half 2021, despite stronger revenue growth and higher gross profit. We lowered our gross and net margin estimates for the full year and expect a low-single-digit year-on-year decline in 2022 net income (versus low-double-digit growth in prior forecasts); but we believe Blue Moon could monetize on channel investments in the first half and deliver stronger operating results in second-half 2022. A higher gross profit in first-half 2022 could have served as a cushion for investments in future growth.

We are transferring coverage of Blue Moon and Hengan to a new analyst, lowering our fair value estimate of no-moat Hengan to HKD 39.50 per share from HKD 49 per share; and narrow-moat Blue Moon to HKD 7.40 per share from HKD 10.50 per share. A more cautious view on medium-term top-line and profit growth is the main factor for our downward revision to the fair value estimates of these companies. We think Blue Moon’s shares offer more value at this point, although with less upside versus our previous fair value estimate. We think Hengan’s shares are fairly valued, with low expectations priced in, but we have little conviction that the company could deliver upside surprises. We expect the company to face margin compression over the medium term with pressure on pricing and volume, due to fierce competition in both the tissue and sanitary napkin markets. At the same time, Hengan has to cope with channel transition from offline to online, whereas Blue Moon has adapted better to the changing channel landscape.

As one of the major players in the home care sector in China, Blue Moon has been an early mover in terms of product innovation and channel penetration, which has driven above-industry sales growth in recent years. The majority of Blue Moon’s sales come from laundry detergent, where the market has grown at a CAGR of mid single digits in the past decade. Consumption premiumization coupled with rising per capita income have led to a market transition from powder detergent to liquid detergent. Blue Moon was one of the early movers in the latter category and has been the market leader in terms of value share for the past 10 years consecutively. Likewise, the company’s early entrance in the liquid soap market with competitive offerings has helped secured its number one position during the same period, despite the advent of international peers such as Procter & Gamble and Reckitt Benckiser. These investments in products that could cater for shifting consumer preferences have conferred satisfactory returns for Blue Moon.

Narrow-moat Blue Moon reported 2021 results that missed our forecasts on revenue but met our estimates for net profit. We like the progress reported by management regarding the improvement in offline channel sales following reforms in first-half 2021 as well as efforts committed to diversify Blue Moon’s e-commerce presence. We think the latter is key to sustaining the growth rate for the online channel given the proliferation of new channels such as O2O, video streaming platforms and online fresh groceries apps. We maintain our fair value estimate of HKD 10.5 per share and think the company has returned to a growth trajectory after handling distributor channel reform and inventory issues last year.

Blue Moon had already disclosed that its first-half performance would be nowhere near expectations, and it was a relief the release of interim results brought no more bad news. In fact, confirmation from management that price discounts and distribution trends had normalized in the first few weeks of the second half of the year increases our conviction that the gross margin contraction, caused by aggressive distributor discounting and bundling, is not likely to be sustained. We have fine-tuned our valuation assumptions and now assume a slightly lower long-term revenue growth rate, and as a result we are lowering our fair value estimate to HKD 10.50 per share from HKD 12. This, however, does not change our investment thesis that Blue Moon is undervalued and the company has strong growth drivers ahead.