1H22 attributable net loss preannounced to be HK$133mn
Blue Moon Group Holdings announced a profit alert stating that revenue would grow 22% YoY in 1H22 to about HK$2.88bn, and the attributable net loss would reach about HK$133mn, expanding from 1H21. The announcement slightly missed our expectations, mainly due to a net forex loss of about HK$142mn from depreciation of the renminbi against the US dollar. We do not believe the forex loss was from operations of the main business. The firm has converted most of its offshore renminbi to US dollars in May to reduce the impact of possible future forex fluctuations.
　　Trends to watch
　　1H22 revenue to grow 22% YoY; distributor channel continues rapid growth. The firm preannounced that 1H22 revenue would rise 22% YoY.
　　Distributor channel: We expect revenue from this channel to continue robust growth in 1H22. We believe that Blue Moon operations in end markets and channel management will keep improving as the distributor channel is optimized.
　　KA channel: We expect revenue from this channel to see high double-digit growth, partially due to incremental growth, driven by expansion of new retail channels such as supermarket-to-home services.
　　Online channel: We expect revenue from this channel to decline, due to the closure of new and retail channels in 2H21 in response to problems such as different prices for online and offline.
　　Raw material prices remain elevated; forex losses weigh on 1H22 profitability. Gross margin at Blue Moon was flat YoY at about 53% in 1H22. We believe factors such as different prices for online and offline channels weighing on 1H21 gross margin are now under control. We think 1H22 gross margin was under pressure from elevated raw material prices. Data from Wind shows that the average price of palm oil (the firm’s major raw material) rose more than 60% YoY in 1H22. We foresee profit upside once raw material prices fall and stabilize. Blue Moon preannounced the attributable net loss at about HK$133mn in 1H22, mainly due to a net forex loss of about HK$142mn due to depreciation of renminbi against the US dollar. The firm has converted most of its offshore renminbi to US dollars in May to reduce the impact of possible future forex fluctuations.
　　Operating reforms progressing steadily; watch channel optimization and new product promotion. Blue Moon continued its operating reforms, improving channel operations and accelerating new product promotion, despite delayed delivery in some regions amid a COVID-19 resurgence.
　　Channel optimization: The firm is steadily penetrating into channels in lower-tier markets, increasing the number of outlets, and refining channel management through digitalization.
　　New product iteration: The firm is accelerating development of new products with different functions in various scenarios, and it launched underwear laundry detergent in 2021. We note that the sales of these new products were strong. The firm also launched a sports laundry detergent in May. We expect the firm’s laundry detergent business to continue growing as its offline rollout of new products begins.
　　The firm is also developing personal care and household cleaning products as it tries to seize opportunities to expand various segments.
　　We expect the firm’s fundamentals to continue improve. We view the growth prospects as promising, as Blue Moon deepens its channel reforms, promotes new products, and may benefit from a decline in its raw material costs.
　　Financials and valuation
　　We cut our 2022 and 2023 EPS forecasts 17% and 16% to HK$0.18 and HK$0.21 due to forex losses in 1H22. The stock is trading at 32x 2022e and 28x 2023e P/E. We maintain OUTPERFORM. Given our earnings forecast revisions and considering the firm’s fundamentals should keep improving, we cut our target price 4% to HK$6.50 (implying 36x 2022e and 31x 2023e P/E) offering 10% upside.
　　Risks
　　Intensified industry competition; fluctuations in raw material prices; inadequate promotion of new products; product quality problems.