H&H reported a 2.1% YoY revenue growth in 3Q23. While the performance of infant formula and pediatric probiotic was weaker than expected, the strong performance of Swisse and pet business has offset such impact. We reaffirm our view that H&H is on a smooth transition to diversifying away from infant products, and deleveraging is on track. We expect these two catalysts would help H&H achieve further re-rating in the near term and in 2024. Reiterate BUY.
Key Factors for Rating
Strong revenue from ANC & PNC offsets weakness of infant products.
H&H reported a 2.1% YoY revenue growth for 3Q23. While the number looks flattish, the market was pleased to see strong revenue of adult nutritional supplements (+26% YoY) and pet products (+34% YoY). Income from baby products was down 25% YoY, weaker than expected. Apart from the pressure of low birth rate, mgmt. explained that they intentionally kept the sales lower in order to keep healthy inventory level ahead of the launch of new products under the new GB standards in 4Q23. Meanwhile, the end of the pandemic also caused lower demand for immunity-related infant probiotic products.
Full-year guidance maintained as strategy pays off. In face of weaker demand from infant products, mgmt. still expected full year revenue to be up by high single digit with mid-teens EBITDA margin. The only change is that revenue from baby product segment would be down c.15% YoY, but it will be offset by stronger performance of Swisse. We believe this guidance is achievable as H&H’s strategy to push for the premiumisation of Swisse in China has paid off well. High-end products such as Swisse Plus already accounted for high single digit revenue in the regional sales already. This will also help improve the margin profile of H&H in the long run, in our view.
Long-term re-rating potential intact. Our latest forecast reflects that baby products would only account for 40%/46% of 2024 revenue/EBITDA, a drastic change when compared to 2020 (65%/78%). With healthy cash flow generated to optimise capital structure, we expect H&H could continue to re-rate as we view that the Swisse & pet goods segment could be valued at higher multiples.
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 slightly cut our FY23-24 EPS forecast by 2-5% on the assumption of higher finance cost. Our new TP is now HK$15.2 based on 8x 2024 P/E (unchanged).