Hengan International's 1H26 Sales Were Under Pressure, but Lower Pulp Prices and an Improved Product Mix Supported Gross Margin

Overview

The report reviews Hengan International's 1H26 results: intensified competition drove a 6% YoY decline in sales, but lower pulp prices and an improved product mix lifted gross margin to 35.3%. The company aims to stabilize sales in 2H26 while using product innovation, channel adjustments, and price management to counter weak demand and competitive pressure; Morgan Stanley maintained its Equal-weight rating and HK$23.00 target price.

Core views

1H26 sales were weak and modestly below consensus expectations, with the report also pointing to slight downward revisions to consensus EPS over the next 12 months. Total sales declined 6% YoY, mainly due to further intensification of competition. By category, sales of tissue paper, diapers, and sanitary napkins declined 5.9%, 8.8%, and 1.2% YoY, respectively; volumes declined 4.0%, 7.8%, and 2.6%, respectively, while average selling prices changed by -2.1%, -1.0%, and +1.4%, respectively. This means tissue paper and diapers faced pressure from both volume and pricing, while the smaller sales decline in sanitary napkins reflected price increases partially offsetting the volume decline. Profitability was more resilient than sales. Gross margin was 35.3% in 1H26, up 3 percentage points YoY, mainly driven by lower pulp prices and an improved product mix. However, the revenue decline caused operating deleverage, while increased brand investment and new-channel development lifted the operating expense ratio by 2 percentage points YoY, offsetting part of the gross margin improvement. Management expects the operating expense ratio to improve in 2H26 compared with the first half. There has not yet been a clear sales reversal, although the recent decline has narrowed. Hengan targets a stable sales trend in 2H26 while acknowledging that intense competition and moderate demand remain the main pressures. In addition to e-commerce competition, retailers' private-label products are also increasing. The company said it would not sacrifice pricing to gain market share and would instead rely on product innovation to address competition. Quarter-to-date sales were flat YoY, while diapers showed relative improvement following internal adjustments. Channel migration is a key focus of the sales strategy. New retail and e-commerce together account for approximately 40% of total sales, and the company expects online sales to achieve low-single-digit growth. Traditional e-commerce has been affected by traffic diversion to emerging channels, with sales on Tmall and JD.com declining slightly while Pinduoduo and Douyin continued to grow; Meituan Instashopping had strong momentum, with sales growth exceeding 100%. The company is strengthening price management by differentiating online and offline products and has entered snack-retailer channels, which are growing steadily with acceptable gross margins. The gross margin outlook faces temporary pressure to decline. Due to the high base in 2H25, the company expects the gross margin of tissue paper to contract by 2 to 3 percentage points in 2H26 and aims for a stable gross margin in 2027. The company believes pulp prices may remain relatively stable or decline slightly, but petrochemical feedstock prices remain uncertain; approximately three months of raw material inventory helps buffer short-term price fluctuations but cannot eliminate the effects of the high base and cost changes. The company plans to keep its dividend per share stable while retaining cash for potential M&A, particularly in overseas markets. Morgan Stanley's model forecasts EPS declining from RMB2.23 in 2025 to RMB2.15 in 2026, then recovering to RMB2.19 and RMB2.27 in 2027 and 2028, respectively; over the same period, revenue is forecast to increase from RMB23.069 billion to RMB23.967 billion, RMB24.695 billion, and RMB25.570 billion, indicating that the recovery in sales and earnings is expected to be gradual. The valuation uses a base-case DCF model, assuming a WACC of 14% and a terminal growth rate of 1%, resulting in a target price of HK$23.00. Relative to the closing price of HK$24.12 on August 19, 2026, the target price implies 5% downside, and the report therefore maintains its Equal-weight rating; the rating is based on risk-adjusted total return relative to the industry coverage universe over the next 12 to 18 months.

Analysis framework

The report first breaks down 1H26 sales by category into changes in volume and average selling price to identify the sources of competitive pressure; it then analyzes the effects of pulp prices, product mix, operating deleverage, brand expenses, and channel investment on gross margin and the expense ratio. It subsequently assesses the 2H26 trend using quarter-to-date sales, the performance of established and emerging e-commerce platforms, new retail channels, and inventory buffers, and forms its rating and target-price judgment based on company financial forecasts and DCF valuation.

Methodology notes

• Industry/Sector Analysis FrameworkPrice-Volume Decomposition

  Break down category sales changes by volume and average selling price

  The report separately presents the YoY changes in sales volumes and average selling prices for tissue paper, diapers, and sanitary napkins to determine whether sales declines resulted from lower demand volumes, pricing pressure, or both.

• Company Fundamentals and Financial FrameworkOperating/Financial Leverage Analysis

  Operating deleverage analysis

  When sales decline, fixed or semi-fixed expenses cannot contract at the same pace, causing the operating expense ratio to rise; the report uses this to explain the 2-percentage-point YoY increase in the 1H26 expense ratio.

• Valuation MethodDCF Discounted Cash Flow

  Base-case discounted cash flow model

  The report discounts future cash flows using a 14% weighted average cost of capital and a 1% terminal growth rate, deriving a target price of HK$23.00.

Asset mapping & comparison

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

• Hengan International Group (1044.HK)

  The Hong Kong-listed consumer products company directly covered by the report; 1H26 sales were under pressure but gross margin improved, and the Equal-weight rating was maintained.

  Strengths

  Lower pulp prices and an improved product mix support gross margin; Pinduoduo, Douyin, Meituan Instashopping, and snack-retailer channels continue to grow; approximately three months of inventory can buffer short-term raw material price fluctuations.

  Weaknesses

  Sales and volumes declined in major categories; operating deleverage, brand investment, and channel development increased the expense ratio; sales on traditional e-commerce platforms declined slightly.

  Comparison

  The report does not provide an operating-data comparison with specific peers; Equal-weight indicates that risk-adjusted total return over the next 12 to 18 months is expected to be in line with the average of the industry coverage universe.

  Risks

  Intensified competition, weak demand, unfavorable raw material prices, an inability to pass costs on to consumers, and ineffective business restructuring.

Key data

• 1H26 Total Sales-6% YoYMainly affected by intensified competition
• 1H26 Sales by CategoryTissue paper -5.9%; diapers -8.8%; sanitary napkins -1.2%All figures are YoY changes
• 1H26 Sales Volume by CategoryTissue paper -4.0%; diapers -7.8%; sanitary napkins -2.6%All figures are YoY changes
• 1H26 Average Selling Price by CategoryTissue paper -2.1%; diapers -1.0%; sanitary napkins +1.4%All figures are YoY changes
• 1H26 Gross Margin35.3%Up 3 percentage points YoY
• 1H26 Operating Expense RatioUp 2 percentage points YoYAffected by operating deleverage, increased brand expenses, and new-channel development
• Share of New Retail and E-commerce40%Share of total sales
• Online Sales TargetLow-single-digit growthCompany expectation
• Meituan Instashopping Sales GrowthOver 100%The report described momentum as strong
• 2H26 Tissue Paper Gross Margin GuidanceContraction of 2 to 3 percentage pointsMainly due to the high base in 2H25
• Raw Material InventoryApproximately 3 monthsUsed to buffer short-term price fluctuations
• EPS ForecastsRMB2.23, RMB2.15, RMB2.19, RMB2.27Corresponding to 2025, 2026 forecast, 2027 forecast, and 2028 forecast, respectively
• Revenue ForecastsRMB23.069 billion, RMB23.967 billion, RMB24.695 billion, RMB25.570 billionCorresponding to 2025, 2026 forecast, 2027 forecast, and 2028 forecast, respectively
• Key DCF AssumptionsWACC 14%; terminal growth rate 1%Base-case valuation parameters
• Rating and Target PriceEqual-weight; HK$23.00The target price is 5% below the HK$24.12 reference share price

Impact & implications

The report believes Hengan's core near-term challenge remains the pressure on sales from competition and moderate demand, while lower pulp prices, an improved product mix, and inventory reserves provide a buffer for margins. Growth in emerging channels may partially offset weakness in traditional e-commerce, but because the company will not cut prices to gain share, the revenue recovery may be gradual; the gross margin of tissue paper will also face pressure from a high base in 2H26.

Risks

• Unfavorable raw material prices may compress margins.
• Intensifying competition from e-commerce and emerging sanitary napkin brands may further weigh on sales and market share.
• If cost pressures cannot be effectively passed on to consumers, profitability may be weaker than expected.
• If business restructuring is ineffective, operating improvement may be delayed.
• Upside risks include a turnaround in sanitary napkin sales, successful new product launches, increased tissue paper market share, a significant decline in raw material prices, and price increases sufficient to offset pulp-price pressure.

What to watch

• Whether 2H26 sales can remain stable in line with the company's target and whether the flat YoY quarter-to-date trend can continue.
• Whether the gross margin of tissue paper contracts by 2 to 3 percentage points in 2H26 as expected and stabilizes in 2027.
• Whether pulp prices remain stable or decline slightly, as well as uncertainty surrounding petrochemical feedstock prices.
• Whether the improvement in diapers following internal adjustments can continue.
• Whether growth in Pinduoduo, Douyin, Meituan Instashopping, and snack-retailer channels can offset weak performance on Tmall and JD.com.
• Whether sanitary napkin sales, new product launches, and tissue paper market share achieve the upside scenarios identified in the report.
• The stable dividend-per-share policy and potential overseas M&A opportunities.