1H22 results in line with our and market expectations
Health & Happiness International (H&H Intl) announced that its 1H22 revenue rose 9.8% YoY to Rmb5.96bn. Revenue from the baby nutrition and care (BNC) business fell 3.5% YoY; revenue from the adult nutrition and care (ANC) and pet nutrition and care (PNC) businesses rose 7.3% and 231.8% YoY in 1H22. Adjusted net profit (on a comparable basis) dropped 26.9% YoY to Rmb483mn in 1H22, mainly due to a sharp increase in financial expenses. The 1H22 results are in line with our and market expectations.
　　Trends to watch
　　BNC: Milk powder business maintained stable market share; probiotics business showed robust recovery in 2Q22. The firm’s operations of the milk powder business remained stable despite the impact of the falling birth rate in China and intensifying market competition. Revenue from the milk powder business fell 3.5% YoY in 1H22, showing a narrower decline HoH. The firm’s market share in the domestic infant milk formula (IMF) market remained largely flat YoY, while it performed impressively in the ultra-high-end market (market share up 0.7ppt YoY to 12.3%). Sales of goat milk powder products maintained sound growth, rising 7.5% YoY in 1H22. The probiotics business showed robust recovery in 2Q22, with revenue up 26.0% YoY, mainly thanks to channel expansion and coordinated operations with the milk powder business.
　　Looking ahead into 2H22, we expect the milk powder business to maintain a stable market share, and the probiotics business to sustain the strong growth in 2Q22. The firm may continue to have high expenses given the fierce competition in the milk powder industry before the implementation of new national standards for milk powder. However, a rising proportion of revenue from probiotics will likely boost the EBITDA margin of the BNC segment.
　　ANC: 1H22 revenue rose steadily; continuous recovery in the Australia and New Zealand markets. In 1H22, ANC revenue increased 14.9% YoY on a comparable basis. In particular, the continuous improvement of the ANC business in Australia and New Zealand was better than expected, with revenue in the two countries up 24.0% YoY in 1H22, mainly driven by strong recovery in purchasing agents. We expect the ANC business to maintain the growth momentum in core markets in 2H22. Amid changes in ANC prices and improving inventory management, the ANC segment’s EBITDA margin may edge up in 2022, in our view.
　　PNC: Proportion of revenue continued to rise; impressive growth in both the China and US markets. PNC revenue increased rapidly by 35.4% YoY in 1H22 on a comparable basis, and its revenue proportion rose 8.2ppt YoY to 12.2%. Revenue from the PNC business in China surged 108.6% YoY in 1H22, showing impressive growth compared with a low base. In the US, revenue from Zesty Paws and Solid Gold grew 13.6% and 26.3% YoY, mainly thanks to continuous expansion of brick-and-mortar channels. We believe with continuous improvement in supply chain and launches of new products, the PNC segment may sustain the strong growth in 2H22.
　　Financials and valuation
　　The stock now trades at 6.0x 2022e and 5.7x 2023e P/E. We maintain our 2022 and 2023 earnings forecasts largely unchanged. Considering the firm’s recovering valuation, we raise our TP 10% to HK$11, implying 6.2x 2022e and 5.9x 2023e P/E, offering 4% upside. We maintain a NEUTRAL rating.
　　Risks
　　COVID-19 resurgence; high inflation; volatile raw material costs; channel expansion and new product sales disappoint.