Hengan Earnings: Constructive Signs in Product and Channel Transition; Fair Value Estimate Retained

No-moat Hengan reported 2024 interim results where net income marginally exceeded our forecast but missed on revenue. It's worth noting that despite a 3% year-on-year sales decline, gross profit rose 4% thanks to growing volume and favorable input costs. The disappointing top line was primarily due to price competition, as tissue sales volume increased by double digits. We are positive on the company's progress in ramping up new products in the sanitary napkin business as well as improving mix shift in diapers segment. Sales growth in new channels also outperformed traditional channels, showing continued progress in channel transition, which Hengan previously lagged peers. We think the 7% share price drop post-results is an overreaction to near-term top-line pressure and overlooks the steps that management has taken to improve the earnings quality of the business. We left our earnings projections largely unchanged and retain fair value estimate at HKD 35 per share, which implies 12 times 2024 price/earnings, 6 times EV/EBITDA and 4.2% dividend yield. We continue to view shares as undervalued, underpinned by an attractive dividend yield of 6.4%.