Morgan Stanley has issued a research report stating that tissue paper should remain the primary growth driver for Hengan International (01044), supported by volume growth and market share gains. However, revenue growth is likely to stay moderate due to pressure on average selling prices in online and new retail channels. Despite a flat profit trend and a lack of near-term positive catalysts, Hengan's commitment to an annual dividend per share of at least RMB 1.4 (representing a current yield of approximately 6%) provides support for its share price. The firm maintains an 'In-Line' rating, while lowering its target price for Hengan from HK$24 to HK$23, primarily due to lower government subsidies/rebates and more conservative working capital assumptions.
The report indicates that tissue paper sales are forecast to grow by 5%, 3.5%, and 4% in 2026, 2027, and 2028 respectively, primarily driven by volume. However, the increasing proportion of online and new retail channels is expected to weigh on average selling prices. Regarding gross margins, the tissue paper segment's gross margin for 2026 is projected to be around 22.5%, remaining broadly stable. Meanwhile, the sanitary napkin business remains the most challenging segment, facing intense market competition. Sales in this segment are forecast to decline by 0.5% year-on-year in 2026, with gross margins normalizing to approximately 59%-60%. The diaper segment is also under pressure due to slowing growth in premium products and adult diapers, with 2026 sales expected to fall by 1%. As the company increases investment in channels and branding, its operating profit margin is projected to decline to around 9.5%-9.6% for the 2026-2028 period.
The report further notes that net profit forecasts for 2026 and 2027 have been raised by 2.4% and 2.2% to RMB 2.449 billion and RMB 2.491 billion respectively, mainly due to gross margin adjustments. The stock currently trades at around 10 times its projected 2026 price-to-earnings ratio, representing a reasonable valuation with the dividend yield providing downside support. However, the lack of strong evidence for revenue acceleration or a clear return to sustainable growth in the hygiene products segment makes it difficult to justify a higher valuation multiple.
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