Chinese nappy market: end-to-end solutions （335 words）

By Lex

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David Attenborough, patron of sustainability charity Population Matters, has previously praised China’s one-child policy, if not the means used to enforce it. Chinese nappy makers and their investors, on the other hand, were delighted by the lifting of the limit to two children in early 2016.

Yet earnings have failed to receive a boost from any nascent baby boom. This week, Hong Kong-listed shares in Hengan, a Chinese producer of paper sanitary products, fell as much as one-tenth after it delivered profits that missed forecasts. Even at a discount to the five-year average, its 18 times current-year earnings multiple looks steep, though.

Hengan should benefit from multiple trends. A rising birth rate is at one end of the age spectrum. At the other is higher demand for incontinence nappies as the population ages. The Chinese baby nappy market is already the largest in the world, at more than $7bn, notes CLSA. The broker expects mid teens sales increases to compound annually between 2015 and 2020.

The problem is that new entrants are absorbing all the growth. Hengan’s top line has suffered from the rivalry of manufacturers such as Kimberly-Clark and P&G. In 2016 revenues from disposable diapers, which account for just over one-tenth of the total, fell 12 per cent. Wealthier Chinese parents favour foreign products, with some going as far as Japan to stock up on softer offerings for their babies’ bottoms.

Hengan has not only been facing pressure on its nappy sales; the company has also had to increase spending on marketing and promotions. Margins have held stable only as a result of lower raw materials costs. This cannot be relied upon to persist. A push into premium products might have helped but rivals are making a similar shift.

The situation is less dire for Hengan’s other products but overcapacity in those segments is also a problem. Sanitary napkins and tissue-paper products eked out single-digit revenue growth. There is little scope for a pull-up in Hengan’s price, so investors cannot expect much pampering.