Hengan International (1044 HK, HK$27.70, HOLD) - Fundamental solid, valuation stretched

Update.  Hengan (1044 HK) announced FY12/08A results.  Turnover increased 40.7% to HK$8,001.5m in FY12/08A. Net profit in FY12/08A increased 33.0% to HK$1,340.9m, which is in line with our expectation.  Selling prices adjustment backed by rising raw materials costs was a key reason, which accounted for ~15% of the total 40.7% growth. The remaining could be attributed to volume gains, especially in disposable diapers and tissue paper, reflecting strong momentum in these two markets.  We see strong momentum spotted for diapers and tissue products and are also expecting margin expansion in FY12/09F.

What to do with the stock? We agree that, as an operator of consumer staples, Hengan’s fundamental seems solid even during the economy slowdown. FY12/09F earnings will shot up due to current downward fluctuation of raw materials costs. Nevertheless, in a middle-term basis (3-year), we think a mid-teen growth rate should be more feasible and sustainable. We believe the counter has been fairly valued at present and, therefore, change our recommendation from BUY to HOLD. Our new target price is HK$27.9, representing 18x of FY12/09F EPS. 

Fundamental solid, valuation stretched