Focus on premiumization, implement pricing initiatives to mitigate costs increases

For 1H2022, total revenue of Vinda International increased by 6.6% (growth at constant exchange rates:6.9%) to HK$9,680mn. Overall revenue in 1Q2022/2Q2022 was HK$4,566mn (+2.2%YoY) and HK$5,114mn (+10.8%YoY) respectively. Net profit declined by 34.1% to HK$638mn. Net profit for 1Q2022/2Q2022 was HK$344mn (-37.8%YoY) and HK$294mn(-29.1%YoY) respectively. The net profit margin narrowed by 4.0ppts to 6.6%. Basic EPS was 53.0 HK cents (1H2021: 80.6 HK cents), with interim dividend of 10.0 HK cents per share for the Period.

In terms of business segment, the tissue segment accounted for HK$7,963mn of revenue, an increase of 6.1% YoY or 5.9% at constant exchange rates, representing 82% of the total revenue (1H2021: 83%). Focus on premiumization strategy has contributed to an increased share of premium portfolio. This effort to drive higher category margins helped to soften the impact of rising raw material costs and promotional pressures. However, gross margin of the tissue segment was still dropped to 31.6% (1H2021: 37.8%). Revenue from the personal care business increased by 9.0% to HK$1,717mn in 1H2022, which was a 11.7% increase at constant exchange rates and represented 18% of the total revenue (1H2021: 17%). Gross margin of the personal care segment was 34.1% (1H2021: 35.3%).

In terms of sales channel, traditional channel, key accounts managed supermarkets and hypermarkets, B2B corporate clients and e-commerce platforms accounted for 26%, 23%, 10% and 41%, respectively, of the total revenue. As the dominant consumption channel, e-commerce revenue recorded an organic sales increase of 14.3%. Gross profit was down by 8.7% to HK$3,100mn. Gross profit was negatively impacted by input costs pressures such as raw material, energy and distribution costs. Vinda took decisive actions including multiple pricing initiatives in mitigating input cost pressures. Although other mechanisms such as disciplined cost management and continuous product mix improvement were also deployed, gross margin was still dropped 5.4ppts to 32.0%.

Company valuation

COVID containment measures in mainland China in response to COVID-19 resurgence has led to lower demand and logistic disruptions, Vinda's earnings were also negatively impacted by continuous rise in input (wood pulp prices at high levels) and logistic costs. However, the overall sales performance remained resilient. In addition, believed that Vinda will continue to implement pricing initiatives, and enhance cost management, to mitigate headwinds from raw material and other input costs increases, and expects that this unfavorable situation will be alleviated in the second half of the year. We expect FY2022E-FY2023E EPS to HK1.25 and HKD1.32 respectively, with TP HKD21.0, implies a FY2022E P/E of 16.8x, in line with its 5-years average. Our investment rating is “Neutral”.

Risk factors

1) Resurgence of COVID-19 in China; 2) Large fluctuations in wood pulp prices; 3) Economic recovery momentum slower than expected, consumer confidence weakens further; and 4) Industry competition is intense than expected.

Financial

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