We view that the wave of escalating COVID-19 infections since Dec 2022 could be an inflection point for H&H, and we turn more positive on the company’s overall positioning. While surging infections could weigh on the performance of its infant products, we believe H&H could benefit from a higher demand for nutrition and supplements than ever.We expect the benefits of its past acquisition of pet nutrition business should also emerge gradually. We believe the worst is over for H&H, and expect re-rating ahead. Upgrade to BUY.
　　Key Factors for Rating
　　Surging COVID-19 infections an inflection point for H&H. Since China relaxed restrictions, there have been escalating number of COVID-19 infections.Given the sequelae of COVID-19 and side-effects of treatments, both short-term and long-term demand for nutrition products could be stimulated. In fact, H&H has recorded higher demand for its Swisse-branded products since Dec, and we expect this momentum could sustain at least till end of 2023.
　　Probiotics should offset some weakness in infant formula products.While H&H’s ANC segment benefits from this trend, we expect its BNC segment would suffer. We expect birth rate would dip even lower in 2023, as infections of COVID-19 could further delay family planning consideration. However, H&H targeted to maintain stable market share in 2023 for its infant formula products, which we see achievable. Moreover, H&H’s probiotics products achieved decent performance since 3Q22. We expect this could also be sustainable in 2023, given consumer’s higher acceptance of supplements since the pandemic. With higher GPM, we expect this would also help support H&H’s overall margins.
　　Fundamentals should gradually improve in 2023-2024. We expect the worst for H&H is over in 2022 already for the following reasons: (1) most segments should recover in 2023 with a low base in 2022; (2) finance cost, which we estimate could be more than RMB600m (or 5% of 2022 revenue), should gradually come down with its self-generating operating cash flow and NPM should also improve more notably in 2023, and (3) pet nutrition business could contribute more and become more visibly meaningful with its relatively high growth and improving margins. All these could help H&H re-rate, in our view.
　　Key Risks for Rating
　　Key downside risks include worse-than-expected competition in the market due to declining birth rate, and higher pressure from inflation.
　　Valuation
　　We raise our FY24 EPS by 8% on more bullish outlook and upgrade to BUY. Our TP is raised to HK$18.4, based on 8x 2024 P/E (previous: 5.5x 2023 P/E)