China HPC_ Risk_Reward Update_ Hengan, C&S Paper

Summary of Earnings Call for C&S Paper and Hengan Industry Overview - The report focuses on the consumer goods sector in China, specifically the paper and hygiene products industry, highlighting the competitive landscape and operational challenges faced by companies in this sector. C&S Paper Key Points - Earnings Forecasts: C&S Paper's earnings are projected to decline significantly from Rmb333 million in 2023 to Rmb60-80 million in 2024, indicating intense competition and operational challenges [2][23] - Sales Decline: Expected sales decline of 12% in 2024 due to aggressive sales growth strategies in 2023 leading to destocking pressures [2][23] - Gross Profit Margin (GPM): GPM is anticipated to improve by 1.5 percentage points year-on-year to 31.8% in 2025, driven by a decline in pulp prices [3][23] - New Price Target: The price target has been reduced from Rmb7.70 to Rmb5.10, reflecting earnings estimate cuts [3][27] - Net Profit Margin (NPM): NPM is expected to improve to 4.2% in 2025 from 0.8% in 2024, aided by ongoing expense control measures [24][23] Financial Metrics - 2024 Estimates: Revenue is expected to be Rmb8.649 billion, down 21.6% from previous estimates, with net profit projected at Rmb67 million, an 88% decline [13][25] - 2025 Estimates: Revenue forecasted at Rmb9.081 billion, with net profit expected to recover to Rmb377 million, a 45.3% decline from previous estimates [13][25] Hengan Key Points - Sales Weakness: Hengan's sales in Q3 were impacted by deeper discounts offered to channels, with a projected 3% decline in core HPC sales in the second half of 2024 [4][34] - Earnings Decline: Expected earnings decline of 37% in 2H24, with overall sales and earnings projected to decline by 3% and 14% respectively in 2024 [4][34] - Price Target Adjustment: The price target has been reduced from HK$27.00 to HK$24.00, reflecting lower earnings estimates [6][36] - Dividend Payout: Hengan has committed to a dividend payout of HK$1.4 per share, providing support to the share price despite lukewarm earnings outlook [6][36] Financial Metrics - 2024 Estimates: Revenue expected to be Rmb22.938 billion, a 6.9% decline from previous estimates, with net profit projected at Rmb2.407 billion, a 13% decline [34][36] - 2025 Estimates: Slight sales growth of 1% is anticipated, with stable earnings expected despite increased advertising and promotion expenses for premium products [5][34] Additional Insights - Market Dynamics: Both companies are facing intense competition and pricing pressures, particularly in the tissue and hygiene product segments, which are affecting their profitability and market share [2][4][34] - Pulp Prices: The decline in pulp prices is expected to positively impact GPM for both companies in 2025, although the competitive landscape remains challenging [3][5][34] - Long-term Outlook: C&S Paper is expected to experience modest revenue growth in the coming years, while Hengan's growth is projected to be stable but under pressure from competition and pricing strategies [3][5][23][34]