Supported by strong supplement business from Swisse, H&H reported a solid set of 1H23 results as revenue grew 17% YoY while reported net profit jumped 28% YoY, both exceeding market expectations. While the overhangs from low birth rate and keen competition remain, we believe H&H is on the right track to diversifying away from its reliance on infant products. The contribution from Swisse and pet goods would continue to increase, and we see H&H is also on the right course of deleveraging. Hence, we expect H&H would continue to record decent earnings growth as it will be on a virtuous cycle thanks to the good cash flow generated. We continue to argue that H&H should deserve a re-rating for: （1） lower contribution from infant formula, and （2） attractive dividend yield （>10%） after the recent correction.
　　Key Factors for Rating
1H23 results beat on robust supplement sales. H&H recorded a 17% YoY growth for its 1H23 revenue to RMB7.0bn, mainly supported by the ANC segment （mainly Swisse） as the segment extended strength of 1Q23 with a 31% YoY increase in segment revenue to RMB1.63bn. This reflects strong demand from Chinese consumers on supplements since the lifting of COVID-19 restrictions since 4Q23. Reported NP jumped 28% YoY to RMB608m as the ANC segment, which is more profitable in EBITDA level, also lifted the overall margins. When excluding one-off items such as FX gains and transactional items, the adj. NP was only up 6.3% YoY, but we still believe it is a beat given low expectations of the market.
Mixed 2H23 outlook but we are not that pessimistic. Despite strong 1H23, we believe the near-term outlook could be mixed with the following headwinds: （1） BNC （infant products） still facing unprecedented headwinds due to lowering birth rate and worsening market landscape, as H&H’s market share deteriorated in 1H23 amid the implementation of new GB food safety standards; （2） ANC growth in 2H23 may normalise due to normalized demand for immunity products and supplements, and （3） lower-than-expected PNC margins due to investments in channels. However, on the positive side, mgmt. raised the revenue growth target for ANC segment to be 20% YoY for 2023, which should be above market expectations. We believe H&H is on the right track to delivering high S.D. top-line growth in 2023, mainly on the strong momentum of Swisse.
Deleveraging would help earnings growth. Mgmt. reiterated its target to convert 90% of its EBITDA to operating cash flow, which could be positive for deleveraging. H&H also utilised interest rate swap and currency swap to manage its interest expenses, which we still believe the finance cost should be peaked in 2023. This will be helpful to 2024’s NP growth, in our view.
　　Key Risks for Rating
　　Key downside risks include worse-than-expected competition in the market due　to declining birth rate, lower-than-expected demand　for supplements globally,　and higher pressure from inflation.
Valuation
　　We adjust down our FY23/24 EPS by 7%/11% to reflect: （1） higher expenses dedicated to channel investments by the pet business; （2） weaker assumptions on infant products. Maintain BUY. Our TP is adjusted down to HK$15.5 accordingly, based on 8x 2024 P/E （unchanged） and a HKDRMB rate of 0.92 （previous: 0.87）。 Maintain BUY for attractive dividend yield （>10% for 2023- 2025E）。