Morgan Stanley updates the China HPC and beauty risk/reward view: maintain a neutral sector stance and prefer defensive dividends over high-valuation recovery stories

Overview

This report is Morgan Stanley's risk/reward update on HPC and beauty names in the China and Hong Kong consumer space, focusing on Hengan International Group, C&S Paper, and Shanghai Jahwa. The core view is that the tissue paper industry still offers volume growth and share-gain opportunities, but online, new retail, and e-commerce channels are increasing promotional intensity and diluting ASP; recovery in beauty and personal care also requires sustained brand investment, so earnings improvement remains limited.

Core views

Hengan has stronger defensive characteristics. Tissue paper share gains, stable pulp prices, and a roughly 5-6% dividend yield support the share price, but sanitary napkins and diaper businesses remain under pressure, with no near-term upside catalyst. C&S Paper benefits from smaller players exiting and a nationwide channel network, but weak pricing power, low ROE, and a valuation that already reflects some recovery make the risk/reward unattractive. Shanghai Jahwa is returning to growth, but the recovery depends more on brand spending and online channel execution; short-term operating leverage is constrained by selling expenses, and the valuation remains rich relative to earnings visibility.

Analysis framework

The report combines company-by-segment forecasts, earnings estimate revisions, target price adjustments, and bull/bear scenario analysis. Hengan uses DCF as the base valuation method, supplemented by bull and bear scenarios based on 2026 EPS multiples; C&S Paper uses a 20x 2026E target P/E as the base case, with 30x and 17x for the bull and bear cases, respectively; Shanghai Jahwa evaluates target price using a 2026E P/E scenario framework.

Methodology notes

• Valuation methodsDCF

  Hengan base target price

  Hengan's HK$23.00 target price comes from a discounted cash flow model, with key assumptions of a 14% WACC and 1% terminal growth rate.

• Valuation methodsP/E multiple

  C&S Paper target price

  C&S Paper's Rmb5.70 target price is based on a 20x 2026E forward P/E, below its five-year average NTM P/E of 24x, to reflect intensifying competition.

• Risk/RewardBull/Base/Bear case

  Bull/base/bear scenarios

  The report lays out base, optimistic, and pessimistic cases, with core variables including volume growth, pricing power, pulp prices, expense ratios, net margins, and target P/E.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Hengan International Group (1044.HK)

  Covered company; maintained at Equal-weight

  Strengths

  Share gains in tissue paper, relatively manageable pulp costs, stable cash flow, and an annual dividend commitment corresponding to about a 5-6% dividend yield.

  Weaknesses

  Sanitary napkin competition is intense, diaper demand is weak, online and new retail channels dilute ASP, and operating expense ratios are rising.

  Comparison

  Compared with C&S Paper and Shanghai Jahwa, Hengan has more defensive earnings and a lower valuation, but lacks a clear rerating catalyst.

  Risks

  Unfavorable raw material prices, intensifying sanitary napkin competition, inability to pass costs through to consumers, and weak business restructuring results.

• C&S Paper Co Ltd (002511.SZ)

  Covered company; maintained at Underweight

  Strengths

  A leading tissue paper brand with a nationwide manufacturing base and multi-channel network; smaller players exiting the market should support share gains.

  Weaknesses

  Growth is mainly driven by volume and share gains, pricing power is limited, online and new retail promotions dilute ASP, and ROE is low.

  Comparison

  It has less dividend support than Hengan, and its valuation still looks expensive relative to the modest earnings recovery.

  Risks

  Intensifying industry competition, pulp costs falling more slowly than expected, higher-than-expected spending required to sustain revenue growth, and ineffective price increases.

• Shanghai Jahwa United Co. Ltd. (600315.SS)

  Covered company; maintained at Underweight

  Strengths

  Strong online channels, recovery in beauty categories, and brands such as Herborist and Dr. Yu are growth drivers; the offline business for Liushen should stabilize.

  Weaknesses

  The recovery relies heavily on brand investment, Douyin and online content/traffic costs are high, selling expenses remain elevated, and profit visibility is limited.

  Comparison

  Compared with tissue paper names, it has higher revenue upside but greater uncertainty around earnings delivery; a valuation above 35x 2026E P/E looks demanding.

  Risks

  Insufficient return on brand investment, rising online traffic costs, slower-than-expected profit recovery, and valuation de-rating.

Key data

• Hengan target priceHK$23.00, previous HK$24.00Cut by 4%, mainly due to lower government subsidies/tax rebates and more conservative working-capital assumptions.
• C&S Paper target priceRmb5.70, previous Rmb5.60The valuation rolls forward to 2026, but the target P/E is lowered from 22x to 20x.
• Shanghai Jahwa target priceRmb14.00, previous Rmb16.00The target price was cut to reflect slower-than-expected earnings recovery and persistently high selling expenses.
• Hengan 2026-2028 revenue growth4%/3%/4%Mainly driven by tissue paper volume growth and share gains.
• C&S Paper 2026/2027 net profit forecast revision-20%/-27%Mainly due to downward revisions to other income, with only a moderate earnings recovery.
• Shanghai Jahwa 2026/2027 net profit forecast revision-35%/-39%Reflects elevated selling expenses and slower-than-expected profit recovery.
• Hengan dividend yieldabout 5-6%A stable dividend commitment provides defensive support for the share price.
• C&S Paper 2026 valuation and ROEabout 24x 2026E P/E; 2026E ROE around 6.5%The report argues the valuation is not cheap relative to low ROE and limited earnings leverage.

Impact & implications

The report is cautious for investors: in the China HPC and beauty sectors, simple volume recovery and channel expansion are not enough to justify valuation rerating. Investors need to distinguish between genuine price power and margin improvement versus mere revenue share gains. Hengan's high dividend and stable cash flow make it more of a defensive holding, while C&S Paper and Shanghai Jahwa, despite some recovery signs, face weak risk/reward because of valuation, spending pressure, and competition.

Risks

• Rising pulp prices or other raw material costs compress tissue paper companies' gross margins.
• Rising competition from e-commerce, new retail, and emerging brands drives higher promotional spending and pressure on ASP.
• Companies fail to pass cost pressure through to consumers via price increases.
• Brand, channel, and content investment exceed expectations, limiting operating leverage.
• Demand recovery for sanitary napkins, diapers, or beauty categories is weaker than expected.
• Valuations already reflect earnings recovery, but profit delivery falls short of expectations.

What to watch

• Whether Hengan can continue to gain share in tissue paper and stabilize sanitary napkin sales.
• Pulp price trends and their impact on gross margins.
• Whether the rising share of online and new retail channels continues to dilute ASP.
• Whether C&S Paper can implement effective price increases and improve net margins.
• Whether Shanghai Jahwa's beauty brand recovery can translate into profit growth rather than just sales growth.
• Whether management guidance is revised upward, new product launches succeed, and expense ratios remain under control.