股

票

研 [Table_Title] Company Report: Hengan International (01044 HK) Barney Wu 吴宇扬

究 (86755) 2397 6680 EquityResearch 公司报告： 恒安国际 (01044 HK) [email protected]

11 December 2017 Amoeba[Table_Summary Sales] Reform is Heading in the Right Direction,

“Accumulate”

阿米巴销售模式改革步入正轨, “收集”

公  Hengan held a reverse road show during 5-6 December 2017. We have seen [Table_Rank] improvement in upgrades to Hengan’s automated equipment which has raised Rating: Accumulate 司 Maintained production efficiency and saved in labor costs. After Hengan was included in the

报 National Brand Campaign, its exposure rate and reputation should be raised 评级： 收集 (维持) 告 accordingly. Under the new Amoeba sales model, the Company’s Amoebas achieved better performance due to sophisticated institutional rules. According to

CompanyReport the Amoeba in Xiamen, the manager had more incentives to strive for higher 6[Table_Price-18m TP目标价] : HK$84.00 profit by boosting sales and optimizing operating expense. Revised from 原目标价: HK$70.00

 New products are expected to be the major sales growth contributor. Share price 股价: HK$79.800

Hengan launched a new series, “Spa7ce”, to target young working women, as they have become the main purchasing power of high-end sanitary napkins. Besides, the Company has a plan to expand into the female caring market under Stock performance its classic brand Space 7. Authorizing the IP of its brand image of Space 7 to 股价表现 other companies will be another trail of Hengan’s promotion. New tissue 40.025.0 % of% return of return products such as the upgraded Tea Classical series, super mini packs with 20.0 licensed images of Minions, and Bamboo π series all achieved good growth. 30.0

证 15.0

 We believe that Hengan’s innovation ability was previously underestimated, as 20.0 券 告 10.0 many of its new products have achieved success. Due to better prospects for 5.0 10.0 研 报 new products and controllable operating expense, we have revised up our

0.0

earnings forecasts for Hengan. Moreover, due to Hengan’s strong profitability 0.0 究 究 (5.0) and leading position in China’s hygiene market, we believe Hengan deserves a 报 (10.0)(10.0) 研 premium valuation. Therefore, we maintain the Company’s rating at (15.0) 告 “Accumulate” and raise TP to HK$84.00, which represents 23.2x 2017 PER, (20.0) 券 (20.0)Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 21.0x 2018 PER, and 19.6x 2019 PER.

EquityResearch Report HSI Hengan International

 证 恒安在 2017 年 12 月 5 日-6 日举办反向路演。我们看到恒安在自动化设备升级方面的进步， (25.0) [Tab Aug-16 Nov-16 Feb-17 May-17 Aug-17 其提高了生产效率和节约了劳工成本。在恒安被纳入国家品牌计划之后，其曝光率和声誉预 Change[Table_PriceChange] in Share Price 1 M 3 M 1 Y

le_I 计将相应地得到提高。在新的阿米巴销售模式之下，因为精细的制度设计，公司的阿米巴取 HSI Hengan International

股价变动 1 个月 3 个月 1 年 得了更好的表现。根据厦门阿米巴的情况，阿米巴巴长有更多的动力去通过提高销量和优化 消nfo1 Abs. % 费用争取更高的利润。 1.1 15.8 31.0 费 绝对变动 % ] Rel. % to HS Index  新品预计将成为销售的主要贡献。恒安已经推出新的 Spa7ce 系列，目标是年轻的工作女性， 2.8 13.4 5.2 行 相对恒指变动 % 因为其已经成为了高端卫生巾的主要消费群体。除此之外，公司有计划用经典的七度空间的 业 Avg. Share price(HK$) 76.8 74.7 62.7 平均股价（港币）

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Household Products Household 品牌进入女性护理市场。授权七度空间的品牌形象给其他公司将会是恒安品牌推广的另一尝 - Source: Bloomberg, Guotai Junan International. 日 试。新的纸巾产品比如说升级版的茶语系列，小黄人品牌授权的超小装纸巾和竹 π 系列都取

用 得了不错的增长。 Sector 品  我们认为恒安的创新能力原来被低估，因为其很多新品都取得了成功。因为新产品更好的前景

以及受控费用，我们上调了恒安的盈利预测。此外因为恒安强劲的盈利能力和在中国卫生品 市场领先的市场地位，我们认为恒安应得相应的估值溢价。因此，我们维持公司“收集”评 级并上调目标价至 84.00 港币，相当于 23.2 倍，21.0 倍和 19.6 倍 2017 年，2018 年和 2019 Consumer 年市盈率。

[Tab Y[Table_ear End Turnover Net Profit EPS EPS PER BPS PBR DPS Yield ROE

年结Profit ] 收入 股东净利 每股净利 每股净利变动 市盈率 每股净资产 市净率 每股股息 股息率 净资产收益率 le_I 12/31 (RMB m) (RMB m) (RMB) (△ %) (x) (RMB) (x) (RMB) (%) (%) nfo2 2015A 18,663 3,260 2.670 4.6 25.0 11.979 5.6 1.740 2.6 22.6 中] 2016A 19,277 3,597 2.970 11.2 24.1 12.140 5.9 1.950 2.7 24.4

2017F 19,948 3,705 3.075 3.5 22.1 14.324 4.7 1.999 2.9 23.2 (01044 HK) (01044 恒外 2018F 21,010 4,104 3.406 10.8 19.9 14.831 4.6 2.214 3.3 23.4 安运 2019F 22,009 4,396 3.649 7.1 18.6 16.167 4.2 2.372 3.5 23.5 国 输 [Table_BaseData]Shares in issue (m) 总股数 (m) 1,204.9 Major shareholder 大股东 Mr.Sze and Mr.Hui 39.5% 际

Market cap. (HK$ m) 市值 (HK$ m) 96,151.0 Free float (%) 自由流通比率 (%) 60.5 3 month average vol. 3 个月平均成交股数 (‘000) 3,222.8 FY17 Net gearing (%) FY17 净负债/股东资金 (%) Net Cash 52 Weeks high/low (HK$) 52 周高/低 (HK$) 82.900 / 52.800 FY17 Est. NAV (HK$) FY17 每股估值（港元） 69.3 Source: the Company, Guotai Junan International.

Hengan International See the last page for disclaimer Page 1 of 8

[Table_PageHeader]Hengan International (01044 HK)

Key Takeaways from Hengan International’s Reverse Road show

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Upgrades for automated equipment improved operating efficiency and saved in labor costs. We have seen great improvement in Hengan International’s (“Hengan” or “the Company”) two factories in Jinjiang with the installation of more automated equipment, including that of production, transportation, sorting and packaging. The Company has invested hugely in upgrading old equipment and optimizing production processes which requires new automated machines. For example, in the Company's plant of disposable sanitary products, Hengan has invested in robotic manipulators, costing RMB600,000 each,

which can automatically sort and stack finished products. One robotic manipulator, which usually depreciates within 15 years 11 December2017 (RMB40,000 per year), can replace two workers that are usually paid RMB60,000 annually. In order to avoid trouble, since half of its workers are native, Hengan has relocated extra workers to other positions instead of firing its employees and has ceased the hiring of new workers. Due to automatic upgrades in equipment and the improvement of production efficiency, the Company will have more idle capacity in old factories, which can be activated by lending to other companies.

Hengan was included in CCTV's 2018 National Brand Campaign. The National Brand Campaign, launched by CCTV, aims to strengthen the influence of Chinese brands in global competition and to advertise the brands that can represent the country's image. Although the National Brand Campaign is actually CCTV's new bidding form for advertisers, National brand Campaign still has high standards to select clients. First, the enterprises need to belong to the national pillar industries or stable industries.

Second, they must be in industry-leading positions. Third, products have to be of high quality,] with2 r thea M abilityt h tog representi R _ e l theb a T [

national image. Fourth, enterprises need to produce and sell in China and be widely accepted by Chinese consumers. According to the released data of 2017 National Brand Campaign, the lowest bidding prices for advertiser to be successfully included in the National Brand Campaign was more than RMB232 million. We guess that the advertising expense for Hengan should not be less than this number for this event. Despite the rise of new media, the position of CCTV in the advertisement market has been significantly challenged, its news and sports programs still hold strong positions in the advertisement market.

After Hengan was included in the National Brand Campaign, not only can Hengan can use CCTV's rich advertising resources, but also the Company can be recognized by ordinary customers as a national brand authorized by CCTV.

Targeting the young working female sanitary market. Hengan's sanitary napkins have achieved an absolutely dominating (01044 HK) position in the girls (15-25 years) sanitary market, as 85% of young girls choose Hengan's Space 7 (七度空间) as their first

sanitary napkin product alongside the cute image of Space 7, which wins the affection of young girls. But Hengan holds 恒安国际 relatively weak position in the young working female sanitary market (25-35 years), especially in the female white collar market due to its younger age brand image and competition from foreign brands. In order to twist the adverse situation, Hengan launched a new series called "Spa7ce"; packaging is simple and has an elegant design, which targets the young working female market. As young working women have become the main purchasing power behind sanitary napkins, Hengan have put more effort into this market. In next few years, the new Spa7ce series will be one of the most important new products for

Hengan to promote. The new Spa7ce series will be mostly distributed through modern channels and ecommerce platforms Hengan International since these are the main channels for young working women. The management expects that the new series has potential to be operated as an independent brand for working women.

Figure-1: New Space 7 Series with the Characteristics of Figure-2: New Space 7 Series with the Characteristics of

Cotton Soft Silk Soft

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Company Source: the Company, Guotai Junan International. Source: the Company, Guotai Junan International.

See the last page for disclaimer Page 2 of 8 [Table_PageHeader]Hengan International (01044 HK)

More plans on brand extension of Space 7. As Space 7 has become a renowned brand among female customers, Hengan

has a plan to fully exploit Space 7 into a comprehensive brand which provides diversified feminine] 1 r a productsM t h fromg i femaleR _ e carl ingb a T [

products to beauty makeup. Given that Space 7 has a solid customer base in feminine product markets, its brand extension in related markets should be relatively naturally and smoothly recognized by customers. Furthermore, Hengan has the intention to authorize intellectual property of the brand image of Space 7, Little 7 (小七), to film and television companies, toy makers and stationery manufacturers, in the hope of spreading its influence and creating a classic image which can be easily remembered by customers, such as Brother Haier to Haier.

11 December2017 Ecommerce B2B retail platforms are going to change the landscape of distribution systems in China. Over the last two years, ecommerce B2B retail platforms, such as Alibaba’s 1688 (零售通), JD’ New Channel (新通路) and Zhongshang Huimin (中商惠民), have shown their impact on China’s traditional channels. These ecommerce B2B retail platforms aim to become the direct bridge between brands and numerous retail terminals and increase distribution efficiency by cutting multiple distribution layers. B2B platforms can provide one-stop services for terminal stores by delivering multi-categories all at once, which can hugely improve delivery efficiency and save unnecessary labor costs. Under the new distribution form, the position of distributors is being significantly undermined, who have to consider quitting or becoming pure delivery staff for these B2B platforms. In order to guarantee the interests of its offline distributors, the prices that Hengan offers to these new ecommerce B2B platforms are usually higher than to its distributors. Generally, B2B platforms can benefit staple brands, as they can

efficiently control their distribution expense and have a transparent understanding of its customer] s2 byr analyzinga M t h g thei instantR _ e datal b a T [

feedback from B2B platforms. As for terminal stores, they can get access to diversified products and have professional guidance from these B2B platforms. Alibaba announced that they can averagely quadruple the sales of each terminal store by guiding them to optimize their product portfolio according to analyzed data. In the long term, the major job for brands will be brand building since work on channel maintenance would have been significantly reduced.

Amoeba initiative has been fully implemented. Hengan has set up a series of sophisticated rules to motivate and monitor the operations of Amoeba. At this stage of competitive bidding for the position of Amoeba manager, Hengan has set a basic bidding target (sales, profit and other KPI) for applicants based on the results of the previous three years in a certain region.

The applicants need to bid target operating results which they think they can achieve in the next year based on their ability and (01044 HK) the previous performance of the region. Hengan will choose the applicant who has the highest target. According to Hengan’s

provision, the manager of Amoeba can share 20% of target profit, 30% of 1%-25% excess profit, 40% of 26%-50% excess 恒安国际 profit, and 50% of 50% excess profit. For example, if a manager of Amoeba earns RMB100 million and the target profit is RMB100 million, he can only share RMB20 million profit. But if he achieves RMB180 million, he can share RMB52.5 million profit (20%*100+30%*25+40%*25+50%*30). These provisions stimulate the manager of Amoeba to boost sales and control expenses so as to earn the most profit. Since the Company set targets for each Amoeba based on previous performance, the managers of Amoeba have to consider the difficulty in achieving the next year’s target. As a result, they have the incentive to

control earnings growth at a reasonable pace, instead of making excess profit in one year. Under the ingenious provisions, Hengan International each manager of Amoeba has the incentive to strive for better results and Hengan can achieve sustainable growth. Furthermore, Hengan has set up 8 sharing centers to support the operations of Amoebas by providing data analysis and guidance on promotions. In turn, Amoebas need to give 2% of their profit to the sharing center which helps them. Hengan reserves the right to change managers of underperforming Amoebas every quarter, in order to keep each Amoeba in the right direction.

Multiple measures to counter the price hike of wood pulp. As more strict measures are implemented by the Chinese Government on imports of waste paper pulp, wood pulp price regained surging momentum in 4Q17. As at 9 December 2017, YTD China long fiber and short fiber pulp prices grew YoY by 24.0% and 15.1%, respectively. Due to the Hengan’s vast purchasing volume of wood pulp, the Company has strong bargaining power over purchasing wood pulp. Hengan’s contract price of wood price set this year was USD600 per ton, much lower than market price. Nevertheless, the contract price also significantly increased compared to the contract price set last year. To mitigate the impact of rising wood pulp, Hengan has lowered the frequency and discounts of promotions and moderately revised up ASP of low gross margin products since

October 2017. Due to the hike in wood pulp prices, profit within the tissue paper industry has been driven down, leading to a fall Report in the willingness and ability of Hengan and its competitors to compete head-to-head. Moreover, some small tissue paper

manufacturers have ceased production, since they cannot make a profit due to higher input costs or are shut down by the

government due to environment protection policies. The management of Hengan expects that wood pulp prices may slightly go Company down in 1H18 due to more wood pulp capacity put in production and more import of sorted waste paper pulp.

See the last page for disclaimer Page 3 of 8 [Table_PageHeader]Hengan International (01044 HK)

Figure-3: Global Pulp Prices Figure-4: Domestic Pulp Price

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1,000 NBSK (USD/Metric Tonne) BHKP (USD/Metric Tonne) USD/ton China Pulp NBSK PIX Index China Pulp BHKP PIX Index

1,000 950

900 900

850 800

800 700 750 11 December2017 600 700

650 500

600 400 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17

Source: FOEX, Guotai Junan International. Source: FOEX, Guotai Junan International.

Reluctant to attend online promotion activities to guarantee offline distributors’ interests. On the 2017 Double-Eleven festival, major household product brands, including Hengan, achieved remarkable growth. Total online sales of Hengan grew 50% YoY to around RMB250 million. As at 5 December 2017, Hengan’s total online sales recorded RMB1.7 billion, with strong

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YoY growth. However, although the results met the Company’s expectation, sales value and growth both fell behind its main competitors as Hengan selectively attended online promotion activities and raised online ASP. Previously, the huge discounts during the Double-Eleven festival left less earnings for Hengan and had extremely affected the interest of offline distributors and long-term growth of Hengan’s offline sales. Due to the rise in online ASP, the Company’s net margin for online channels increased to 13%-14% this year, in line with the net margin of modern trade, and is expected to increase to 15% in next year.

Figure-5: Hengan’s Online Sales of Tissue Paper in Figure-6: Hengan’s Online Sales of Sanitary Napkins in

Taobao and Tmall Taobao and Tmall

(01044 HK)

恒安国际 Hengan International

Source: Maijia.com. Source: Maijia.com.

Operating expenses has room to decrease. As Amoeba sales reform has just been fully implemented in 2017, most Amoeba teams are still in an exploration stage. We expect that as more Amoeba team up, alongisde supporting staff in sharing centers are getting familiar with the Amoeba sales model, the operating efficiency has more room to improve. Generally, according to the experience in Fujian province where Amoeba reform was firstly implemented, the operating expense has been effectively controlled since the manager of Amoeba is striving for higher profit. Moreover, Hengan is going to gradually bring in the Amoeba reform into R&D, marketing, finance and other supporting departments. As more management processes are being optimized, operating expenses can be continuously saved.

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Company

See the last page for disclaimer Page 4 of 8 [Table_PageHeader]Hengan International (01044 HK)

Taking Traditional Channel Amoeba into Xiamen as an Example

] 1 r a M t h g i R _ e l b a T [ Basic information of Xiamen’s traditional Amoeba channel. Although Xiamen is a developed tier-2 city in China, Hengan’s sales in the region’s traditional channel still accounts for around 50%. Last year, there were five applicants competing for the manager of traditional channel Amoeba in Xiamen. The basic bidding profit was RMB1.5 million set by Hengan according to the results of the previous three years. After 5 days of competition, the current manager won the position with a target profit of RMB2.5 million. The losers in the competition can be relocated to sharing centers or becoming a partner in Amoeba with the manager’s agreement. The manager of Xiamen’s tradition channel Amoeba has 14 staff, who are responsible for 9 distributors in Xiamen. The number of distributors decreased from 14 in 2016 to 9, due to some distributors having not followed up the new 11 December2017 reform of Hengan. Under the 9 distributors’ delivery network, there were 144 Class A retail terminals, 104 Class B retail terminals, and around 5,000 Class C and D terminal stores.

The Amoeba model achieved success in Xiamen under exquisite institutional design. Sales in Xiamen grew by 15% to around RMB90 million as at 30 November 2017, mainly contributed by sanitary napkins and tissue paper. The target sales amount in 2017 is RMB93.6 million, and the manager has confidence in achieving this according to current results. Net profit of the Amoeba is expected to record around RMB3 million with a net margin of about 3.2% (Hengan’s net margin is calculated another way). According to the manager’s statement, he has more incentive to work with his distributors to promote Hengan’s products, to visit clients more frequently and to explore more terminal stores. In order to increase sales, the Amoeba guided its

] 2 r a M t h g i R _ e l b a T [ distributors to hold more promotional activities with terminal stores, such as special offers on weekends. Generally, Amoeba and distributors share 30% and 70% of all promotion expenses. But as profit is the manger’s final target, Amoeba’s manager carefully considers the input-output ratio of promotions so as to achieve the highest profit. As a result, promotion expenses are mostly under control. Moreover, staff expenses are paid by the manager; the manager has to cut unnecessary staff and reasonably allocate manpower in order to save more expenses. As a result, the number of staff shrunk from 30 to 14 this year.

Therefore, the Amoeba in Xiamen achieved great improvement in sales and profit, while the manager earns rich rewards. Due to his impressive performance, he has much more chance to continuously hold the position as manager next year. But he also needs to negotiate again with Hengan about next year’s target based on the performance this year.

(01044 HK) Outlook for Amoeba performance next year. As Hengan has raised its online ASP, the expansion in online markets has less impact to its offline distributors. Compared to other brands’ distributors, which suffer from the outflow of customers to online

markets, interests of Hengan’s offline distributors have been guaranteed. In Xiamen’s traditional channel, Hengan’s distributors 恒安国际 can earn 15% of gross margin and 10% of net margin (including rebates from Hengan). We expect that Xiamen’s Amoeba can maintain its dominating position due to diligent work and active cooperation from distributors. New products such as Tea Classical series, Bamboo π tissue paper and the new Spa7ce series will be the major sales growth contributor, which also have high gross margins.

Hengan International

Earnings Forecast Assumptions and Revisions

Revised up our forecasts in 2017-2019. As more Amoeba sales start operating, Hengan’s operations in 2018 and 2019 are expected to fully benefit from the Amoeba reform. New products such as upgraded Tea Classical series, super mini packs with licensed images of Minions, Bamboo π series (made of bamboo pulp) and mini wet tissues are expected to drive sales of Hengan’s tissue paper sales further. As consumption upgrade keeps going in the sanitary market, the Company’s upgraded products such as ultra-long series of 420 mm and ultra-thin series will maintain growth momentum. The creative Spa7ce series is expected to become the important sales contributor to Hengan. On the other hand, the decline in Hengan’s diaper sales is expected to continuously narrow or turn positive in 2018 due to improvement in online sales and maternal and child stores. As a result, we slightly raise our revenue forecasts for Hengan in 2017, 2018 and 2019 by 0.2%, 2.2% and 2.6%. We expect that the expansion in the sales of new products, which have higher gross margin, and the decline of wood pulp prices will improve

Hengan’s gross margin. We have revised up gross margin in 2017, 2018 and 2019 by 0.4 ppt, 1.0 ppt, and 1.4 ppt, respectively.

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As Amoeba teams have more incentive and ability to control operating expense, and operations and supporting departments

are also going to implement Amoeba reform, Hengan’s operating expense is expected to continuously decline. Overall, we

have revised up Hengan’s EPS in 2017, 2018 and 2019 by 2.0%, 7.2% and 8.5%, respectively. Company

See the last page for disclaimer Page 5 of 8 [Table_PageHeader]Hengan International (01044 HK)

Table-1: Earnings Estimates Revisions

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NEW OLD CHANGE RMB million

2017F 2018F 2019F 2017F 2018F 2019F 2017F 2018F 2019F

Revenue 19,948 21,010 22,009 19,891 20,557 21,454 0.3% 2.2% 2.6% Gross profit 9,559 10,236 10,825 9,450 9,802 10,261 1.2% 4.4% 5.5% Operating profit 5,224 5,626 6,019 5,129 5,264 5,573 1.8% 6.9% 8.0% Net profit 3,705 4,104 4,396 3,634 3,827 4,054 2.0% 7.2% 8.4%

EPS 3.075 3.406 3.649 3.016 3.176 3.364 2.0% 7.2% 8.5% 11 December2017

Gross margin 47.9% 48.7% 49.2% 47.5% 47.7% 47.8% 0.4 ppt 1.0 ppt 1.4 ppt Operating margin 26.2% 26.8% 27.3% 25.8% 25.6% 26.0% 0.4 ppt 1.2 ppt 1.3 ppt Net margin 18.6% 19.5% 20.0% 18.3% 18.6% 18.9% 0.3 ppt 0.9 ppt 1.1 ppt Source: Guotai Junan International.

Maintain “Accumulate” and raise TP to HK$84.00. We believe that Hengan’s innovation ability has been underestimated previously, as many of its new products launched have achieved success. Hengan’s online sales are experiencing healthy growth on the premise of achieving enough profit and not undermining the interest of offline distributors. Due to Hengan’s strong profitability and leading position in China’s hygiene market, we believe that Hengan deserves a premium valuation for its sustainable profitability and leading position in China’s hygiene market. Although Hengan’s stock price has rose after this

] 2 r a M t h g i R _ e l b a T [

reverse roadshow, the current valuation of Hengan is still undervalued, trading at 23.2x 2017 PER and 21.0x 2018 PER, lower than its major peers’ valuation. In addition to better forecasts, we maintain the Company’s rating at “Accumulate” and raise TP to HK$84.00, which represents 23.2x 2017 PER, 21.0x 2018 PER, and 19.6x 2019 PER.

Table-2: Peers Comparison Market Gross Operating Share PER (x) PBR (x) ROE (%) Yield (%) Company Ticker $ Cap Margin (%) Margin (%) Price (HK$ mn) FY17F FY18F FY19F FY17F FY17F FY17F FY17F FY17F

HK Listed Household Products Companies (01044 HK)

Vinda 03331 HK HK$ 15.50 18,509 27.1 23.4 20.3 2.2 8.9 1.0 30.2 7.4 Hengan 01044 HK HK$ 79.80 96,150 22.1 19.9 18.6 4.7 23.2 2.9 47.9 26.2

Simple Average 24.6 21.7 19.5 3.5 16.0 2.0 39.0 16.8 恒安国际 Weighted Average 22.9 20.5 18.9 4.3 20.9 2.6 45.1 23.2

HK Listed Stable Companies Want Want China 151 HK HKD 6.090 76,010 20.9 21.2 20.2 4.8 23.7 2.2 45.3 21.1 Dali Foods 3799 HK HKD 6.150 84,219 20.7 18.2 15.9 4.8 24.4 3.3 39.0 21.2 China Mengniu Dairy 2319 HK HKD 20.350 79,920 27.6 20.5 17.3 3.0 10.7 0.9 35.1 5.7

Tingyi 322 HK HKD 12.860 72,100 36.0 29.2 25.6 3.2 9.1 1.8 30.1 5.6 Hengan International China Resources Beer 291 HK HKD 23.900 77,536 35.3 30.3 26.5 3.4 9.7 0.9 34.3 7.8 Tsingtao Brewery 168 HK HKD 33.550 47,920 27.5 25.5 23.4 2.2 8.5 1.4 41.5 5.3 Simple Average 28.0 24.1 21.5 3.6 14.4 1.8 37.5 11.1 Weighted Average 27.8 23.9 21.2 3.7 14.9 1.8 37.3 11.7

China Listed Household Products Companies Sun Paper 002078 CH CNY 8.84 27,041 12.0 9.7 8.0 2.3 20.8 1.1 24.4 14.0 C&S Paper 002511 CH CNY 14.99 13,397 32.0 24.7 19.1 3.6 13.4 0.7 36.2 10.0 Simple Average 22.0 17.2 13.5 3.0 17.1 0.9 30.3 12.0 Weighted Average 18.6 14.7 11.7 2.8 18.4 1.0 28.3 12.7

Global Listed Household Products Companies Johnson & Johnson JNJ US USD 140.59 2,949,103 19.3 17.9 16.8 5.1 27.6 2.6 69.8 32.3 Procter & Gamble PG US USD 90.37 1,790,123 15.6 21.7 20.3 4.3 19.3 3.1 50.8 22.2

Unilever Plc ULVR LN GBp 4,181.50 1,308,430 21.5 19.8 17.6 9.2 45.6 3.2 43.5 18.3

Kimberly-Clark Corp KMB US USD 120.11 329,889 19.4 18.4 17.4 107.9 380.8 3.4 36.3 18.7 Report

Kao Corp 4452 JP JPY 7,662.00 260,546 27.4 25.4 23.4 5.0 19.1 1.5 45.5 14.0 Unicharm Corp 8113 JP JPY 2,980.50 127,117 33.3 29.9 27.1 4.4 14.5 0.7 42.4 13.9

Simple Average 22.7 22.2 20.5 5.6 25.2 2.4 48.1 19.9

Weighted Average 19.3 19.8 18.4 5.7 28.6 2.8 56.6 25.2 Company Source: Bloomberg.

See the last page for disclaimer Page 6 of 8 [Table_PageHeader]Hengan International (01044 HK)

Financial Statements and Ratios

[Table_IncomeStatement] [Table_BalanceSheet] ] 1 r a M t h g i R _ e l b a T [ Income Statement Balance Sheet

Year end 31 Dec (RMB 000) 2015A 2016A 2017F 2018F 2019F Year end 31 Dec (RMB m) 2015A 2016A 2017F 2018F 2019F

Total Revenue 18,663 19,277 19,948 21,010 22,009 Property, plant and equipment 8,558 8,439 8,584 8,984 9,328

Cost of sales (9,723) (9,873) (10,388) (10,774) (11,184) Leasehold land and land use rights 859 751 713 692 671

Long-term bank deposits 850 1,760 1,848 1,940 2,037

Gross Profit 8,940 9,404 9,559 10,236 10,825 Others 1,123 1,067 1,088 1,082 1,079

Distribution costs (3,293) (3,721) (3,690) (3,950) (4,116) Total Non-current Assets 11,390 12,018 12,233 12,699 13,116 11 December2017

Administrative expenses (1,305) (1,483) (1,297) (1,345) (1,409)

Other income and other gains – net 546 543 652 684 718 Cash & Cash Equivalents 5,894 5,563 9,354 10,767 11,470 Inventories 3,296 3,195 3,522 3,444 3,788 Operating Profit 4,888 4,743 5,224 5,626 6,019 Bills receivable 2,217 2,744 2,394 2,557 2,629

Finance income, net (339) (184) (313) (258) (269) Others 10,168 10,626 10,740 10,864 11,000

Total Current Assets 21,574 22,127 26,010 27,632 28,887

Profit before Tax 4,549 4,559 4,910 5,367 5,750 Total Assets 32,964 34,145 38,242 40,331 42,003

Income Tax (1,299) (1,079) (1,203) (1,261) (1,351)

Short-term debts 9,696 11,919 11,919 12,419 12,919

Recurring Profit after Tax 3,249 3,480 3,707 4,106 4,398 Bills payable 2,278 2,079 1,906 2,108 2,059

Discontinued Profit 52 282 0 0 0 Accrued expenses and other payables 992 1,202 1,262 1,325 1,391

] 2 r a M t h g i R _ e l b a T [ Profit after Tax 3,302 3,761 3,707 4,106 4,398 Others 4,747 81 2,550 2,554 2,092

Non-controlling Interest (42) (165) (2) (2) (2) Total Current Liabilities 17,713 15,280 17,636 18,406 18,461

Shareholders' Profit / Loss 3,260 3,597 3,705 4,104 4,396

Recurring Shareholders' Profit 3,233 3,472 3,705 4,104 4,396 Current assets less current liabilities 3,861 6,847 8,373 9,226 10,426

Total assets less current liabilities 15,251 18,865 20,606 21,925 23,542

Basic EPS 2.670 2.970 3.075 3.406 3.649

Long-term debts 0 3,997 3,200 3,900 3,900

[Table_CashFlowStatement] Cash Flow Statement Others 160 106 112 117 123

Total Non-current Liabilities 160 4,104 3,312 4,017 4,023

Year end 31 Dec (RMB m) 2015A 2016A 2017F 2018F 2019F Total Liabilities 17,873 19,384 20,948 22,423 22,484

(01044 HK) Operating activities

PBT 4,549 4,559 4,910 5,367 5,750 Share capital 128 127 120 120 120

DD&A 571 626 632 650 676 Reserves 14,583 14,600 17,138 17,749 19,358

Change in working capital (520) 66 (203) 57 (534) Total Shareholders' Equity 14,711 14,727 17,259 17,869 19,479 恒安国际

Others 157 47 346 291 301 Minority Interest 381 34 36 38 40

Cash generated from operations 4,757 5,298 5,684 6,366 6,193 Total Equity 15,092 14,761 17,294 17,907 19,519

Income and interest tax paid (1,287) (1,211) (1,189) (1,257) (1,409)

Cash from Operating Activities 3,471 4,087 4,495 5,108 4,784 [Table_FinancialRatio] Financial Ratios

Investing activities 2015A 2016A 2017F 2018F 2019F Hengan International Capital expenditure (859) (901) (967) (1,050) (1,020) Revenue growth (%) 4.6 3.3 3.5 5.3 4.8 Interest income 524 370 200 246 264 Gross profit growth (%) 8.1 5.2 1.7 7.1 5.8

Others (890) (1,249) (125) (92) (97) Net profit growth (%) 4.0 10.3 3.0 10.8 7.1

Cash from Investing Activities (1,224) (1,780) (892) (896) (853) Recurring net profit growth (%) 4.8 7.4 6.7 10.8 7.1

Financing activities Gross margin (%) 47.9 48.8 47.9 48.7 49.2

Loans changes (2,352) 5,262 1,675 1,200 500 - Sanitary napkins 72.6 72.6 72.3 72.2 72.2

Early redemption of convertible bonds 0 (4,483) (7) 0 (466) - Tissue paper 35.6 37.9 35.5 37.0 37.8

Share placing 3 1 0 0 0 - Disposable diapers 49.3 50.8 49.2 49.2 49.6

Dividend paid (2,069) (2,197) (1,021) (3,493) (2,728) Operating profit margin (%) 26.2 24.6 26.2 26.8 27.3

Others (717) (973) (514) (506) (534) - Sanitary napkins 46.3 43.4 46.8 48.7 48.8

Cash from Financing Activities (5,135) (2,391) 134 (2,798) (3,228) - Tissue paper 10.5 10.9 10.3 11.1 11.6

- Disposable diapers 22.7 20.2 18.0 13.3 16.5

Net Changes in Cash (2,888) (84) 3,737 1,414 703 Net margin (%) 17.5 18.7 18.6 19.5 20.0

Foreign exchange effect and others 55 (247) 54 0 0

Cash at Beg of Year 8,727 5,894 5,563 9,354 10,767 ROE (%) 22.6 24.4 23.2 23.4 23.5 5,894 5,563 9,354 10,767 11,470 ROA (%) 9.7 10.7 10.2 10.4 10.7

Cash at End of Year Report

Cash conversion cycle 81.0 86.4 95.0 93.0 93.0

Net gearing (%) Net Cash Net Cash Net Cash Net Cash Net Cash

Payout ratio (%) 63.4 65.7 65.0 65.0 65.0 Company

Source: the Company, Guotai Junan International. See the last page for disclaimer Page 7 of 8 [Table_PageHeader]Hengan International (01044 HK)

Company[Table_CompanyRatingDefinition] Rating Definition

The Benchmark: Hong Kong Hang Seng Index ] 1 r a M t h g i R _ e l b a T [

Time Horizon: 6 to 18 months

Rating Definition Buy 买入 Relative Performance>15%; or the fundamental outlook of the company or sector is favorable. Accumulate 收集 Relative Performance is 5% to 15%; or the fundamental outlook of the company or sector is favorable.

Neutral 中性 Relative Performance is -5% to 5%; 11 December2017 or the fundamental outlook of the company or sector is neutral. Reduce 减持 Relative Performance is -5% to -15%; or the fundamental outlook of the company or sector is unfavorable.

Sell 卖出 Relative Performance <-15%; or the fundamental outlook of the company or sector is unfavorable.

Sector[Table_ RatingIndustry DefinitionRatingDefinition] The Benchmark: Hong Kong Hang Seng Index Time Horizon: 6 to 18 months Rating Definition Outperform 跑赢大市 Relative Performance>5%;

] 2 r a M t h g i R _ e l b a T [ or the fundamental outlook of the sector is favorable. Neutral 中性 Relative Performance is -5% to 5%; or the fundamental outlook of the sector is neutral. Underperform 跑输大市 Relative Performance<-5%; Or the fundamental outlook of the sector is unfavorable.

[DISCLOSURETable_DISCLOSUREOFINTERESTS OF INTERESTS ] (1) The Analysts and their associates do not serve as an officer of the issuer mentioned in this Research Report. (2) The Analysts and their associates do not have any financial interests in relation to the issuer mentioned in this Research Report.

(3) Except for GUOTAI JUNAN INTERNATIONAL (01788 HK),BINHAI INVESTMENT (02886 HK),GFI MSCI A I (03156 HK),CAM (01044 HK)

SCSMALLCAP (03157 HK),LINK HOLDINGS (08237 HK),GFI MSCI A I-R (CNY) (83156 HK),Guotai Junan and its group companies do not hold equal to or more than 1% of the market capitalization of the issuer mentioned in this Research Report. (4) Guotai Junan and its group companies have not had investment banking relationships with the issuer mentioned in this Research Report within the preceding 12 months. (5) Guotai Junan and its group companies are not making a market in the securities in respect of the issuer mentioned in this Research 恒安国际 Report. (6) Guotai Junan and its group companies have not employed an individual serving as an officer of the issuer mentioned in this Research Report. There is no officer of the issuer mentioned in this Research Report associated with Guotai Junan and its group companies.

DISCLAIMER Hengan International

This Research Report does not constitute an invitation or offer to acquire, purchase or subscribe for securities by Guotai Junan Securities (Hong Kong) Limited ("Guotai Junan"). Guotai Junan and its group companies may do business that relates to companies covered in research reports, including investment banking, investment services, etc. (for example, the placing agent, lead manager, sponsor, underwriter or invest proprietarily).

Any opinions expressed in this report may differ or be contrary to opinions or investment strategies expressed orally or in written form by sales persons, dealers and other professional executives of Guotai Junan group of companies. Any opinions expressed in this report may differ or be contrary to opinions or investment decisions made by the asset management and investment banking groups of Guotai Junan.

Though best effort has been made to ensure the accuracy of the information and data contained in this Research Report, Guotai Junan does not guarantee the accuracy and completeness of the information and data herein. This Research Report may contain some forward-looking estimates and forecasts derived from the assumptions of the future political and economic conditions with inherently unpredictable and mutable situation, so uncertainty may contain. Investors should understand and comprehend the investment objectives and its related risks, and where necessary consult their own financial advisers prior to any investment decision.

This Research Report is not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation or which would subject

Guotai Junan and its group companies to any registration or licensing requirement within such jurisdiction.

© 2017 Guotai Junan Securities (Hong Kong) Limited. All Rights Reserved. Report

27/F., Low Block, Grand Millennium Plaza, 181 Queen’s Road Central, Hong Kong. Tel.: (852) 2509-9118 Fax: (852) 2509-7793 Website: www.gtja.com.hk

Company

See the last page for disclaimer Page 8 of 8