Hengan’s FY12F net profit to jump 37%: MayBank

Management’s strict cost control discipline is however a drag.

According to Maybank Kim Eng, Hengan's net profit is expected to grow by 37% YoY to HKD3,617m in the upcoming FY12F results, on the back of
top-line growth of 15% YoY. 

Here's more:

Management hosted a group conference call with sell-side analysts last night. Overall, the conversation was largely in line with the details highlighted in our note published on 3 Jan 2013.

"Key takeaways are: i) sanitary napkin sales growth was satisfactory in 2H12, with margins rising on product mix upgrades and lower input costs; ii) tissue sales growth picked up HoH in 2H12 on new capacity additions. Though sales in December were relatively weak amid increased promotional efforts from peers, management said YTD sales appeared to be satisfactory.

Margin-wise, GPM shrank slightly HoH in 2H12 as its sales mix normalised on top of increased promotional discounts ; iii) diaper sales fell short of management’s expectations as sales in the mid- to high-end segment failed to make up for the decline in the low-end segment, which forms one-third of total sales – nonetheless, GPM improved HoH on a shift in its sales mix and lower fluff pulp input costs; and iv) snack food sales remained weak.

Some new initiatives for FY13F were highlighted, including: i) a step-up in its A&P efforts for high-end diaper products and refining its rebate policy in 2013, moving away from its past practice of basing rebates on overall sales performance and rewarding sales at individual segments instead;

Additionally, ii) spending more on A&P at the tissue segment but still staying disciplined; iii) placing greater emphasis on product portfolio enhancement at the small snack food division, as jelly still makes up of 70% of the company’s total sales in this segment.

Implication: As highlighted in our recent note, we expect Hengan’s net profit to grow by 37% YoY to HKD3,617m in the upcoming FY12F results, on the back of top-line growth of 15% YoY. Gross margins are estimated to increase by 4.8ppts YoY to 44.1% in FY12F. Meanwhile, key opex ratios are likely to decline moderately YoY in view of management’s strict cost control discipline and enhanced economies of scale.

Of note, we expect distribution and administrative costs as a percentage of sales to fall by 50bps YoY to 22.7% in FY12F. Looking ahead, we expect sales growth to accelerate in FY13F with EBIT margin improving slightly, reversing the weak top-line, strong GPM expansion trend witnessed in FY12F.