Hengan International (1044 HK, HK$19.39, HK$22.4bn)— Leader Status Fails to Offset Weak Consumption

Hengan is a leader in China’s tissue and personal hygiene markets, with 9.6% market share in tissue paper and 7.4% in sanitary napkins in 2025, according to Euromonitor. Near-term revenue growth remains challenged by weak consumption, market saturation and intensifying online competition.  While premiumization in sanitary napkins has supported profitability and its consistent DPS makes the counter attractive, with a projected dividend yield of 8.4%+ for FY26E-28E, even as the market anticipates only modest MSD profit growth in the coming years.

Revenue Under Pressure; Hygiene More Resilient: Hengan’s 1H26 total revenue declined 6.1% YoY to RMB11.1bn, largely due to intensified price competition in dry tissue and e-commerce channels. Hygiene products which account for about 29% of total revenue were relatively resilient, with revenue down only 2.8% YoY.  Diapers were pressured by aggressive promotions from domestic brands, while sanitary napkins remained relatively stable with continued growth in premium products.

Margin Expansion with Hygiene as Profit Engine: Despite weaker revenue, COGS declined 10.2% YoY and at a faster pace than revenue, lifting GPM by 3ppts to 35.3%. Hygiene GPM edged up from 57.3% to 58.5%, supported by premium products such as Tianshan cashmere and pants-style sanitary napkins. Tissue GPM also improved by 3ppts YoY to 24.9%, mainly benefiting from lower pulp costs and a higher mix of premium products.

Hygiene remains Hengan’s core profit engine with segment profit increasing 1% YoY to RMB716mn and contributing 56% of total segment profit. By comparison, tissue generated around 60% of total revenue but only 33% of total profit.

GPM Recovery Drives Core Profit Growth: To counter revenue headwinds and to sustain top-line scale, Hengan stepped up brand and channel investment. As a result, selling expenses rose 3.5% YoY accounting for 17.5% of revenue. Nevertheless, the GPM recovery drove core operating profit up 9% YoY to RMB1.25bn, with core OPM improving 1.5ppts YoY to 11.2%. However, FX losses and a higher effective tax rate offset part of the improvement in core operations, resulting in an 8.7% YoY decline in attributable profit to RMB1.25bn.

Payables-Driven OCF Decline, and Balance Sheet Remains Healthy: 1H26 OCF declined by 62% YoY to RMB618mn, largely due to a RMB1bn reduction in payables, which reflected higher supplier payments rather than deteriorating operating quality. Accounts receivable day improved to 35.5 days, while inventories edged down to RMB4.42bn, showing no signs of weaker collections or inventory accumulation. Capex declined 6% YoY to RMB471mn which consisted mainly of maintenance capex. Hengan held RMB6.44bn of net cash, leaving its balance sheet solid.

Our View: Judging from sluggish revenue growth and margin trend for tissue products, we are more confident in the brand equity of Hangan’s sanitary napkins. Customers tend to be more price sensitive and less loyal to tissue brand.  In contrast, for sanitary napkins, consumers focus on product safety, comfort and experience, which drives brand trust, repeat purchases and pricing power.

Hengan has progressed well in premiumization through offerings such as Tianshan cashmere and pants-style sanitary napkins, improving value and mix. Although hygiene products generate less than half of tissue revenue, they contribute over half of total profit at the segment level.  The counter is trading at 8x FY26E and 7.7x FY27E P/E, with as est. 8.5% dividend yield. (Research Department)