Can Hengan (SEHK:1044)’s Dividends Continue to Grow?

Here's what you need to know about Hengan International (SEHK:1044)'s business and whether it can continue to grow its dividends.

If you ask me how to pick dividend stocks worth investing, I’d look at what people are rushing to buy.

Remember last year how everyone went crazy over toilet paper? Even in Singapore, people were hoarding rolls of toilet paper at supermarkets at the height of the Covid-19 pandemic. 

Now, that’s something worth paying attention to. 

And the fact that some company out there makes these products is worth digging deeper.

But, today I’m not talking about the big US companies like Procter & Gamble or Kimberly-Clark. Instead, I’m pointing myself to another even bigger market — China. 

Hengan International Group (SEHK:1044) is a HK$64 billion consumer giant. It’s also one of the biggest Chinese companies to make health and hygiene products, including tissue paper, sanitary napkin and diapers. 

Each of Hengan’s products hold between 10% to 22% market share in their respective segments. 

I’ll say Hengan International has an equal footing with big giants like Procter & Gamble and Kimberly Clark.

Some of Hengan’s core brands include Hearttex, Anerle and Space 7 which are highly known in the Chinese market. 

And their products all contribute to the company’s CNY22.5 billion sales achieved in 2019. Of which 70% of its sales come from selling sanitary napkins.

You see, these daily essential brands are always in demand, whether good times or bad. 

Like what I’ve mentioned earlier, people go crazy over these products when the pandemic hit last year. And whether there’s another major crisis happening or not, people always need tissue paper, diapers (if there are babies at home), and sanitary napkins. 

These products may not sound exciting at first, but they are usually reliable. 

And it’s one of the key indicators I check in big companies which can predictably grow their sales and earnings

Of course, these daily items also face intense competition from foreign brands. Even Procter & Gamble and Kimberly-Clark are making their way into the Chinese market. 

Distribution is the Key to Dividend Safety

But here’s the thing. 

Despite the foreign and local peers fighting for market share, Hengan still maintains a leading position in its product segments. In fact, in my opinion, one thing strikes me about Hengan is its strong operating efficiency. 

You see, Hengan has a very strong distribution network. Its massive sales network and aggressive move into online sales channels allow it to generate the high quality financial numbers it needs. 

For example, Hengan’s core brands — Space 7 , Hearttex and “Q+MO” all have opened online flagship stores to strengthen the company’s sales growth. 

In its diaper segment, Hengan is already increasing distribution to maternity stores. 

And these distribution strategies all contributed to Hengan’s positive first half Jun 2020 financial results. 

At the height of the Covid-19 pandemic in 2020, Hengan’s sales, earnings and dividends all grew steadily at 1.4%, 20% and 20% respectively to hit CNY11 billion, CNY1.90 per share and CNY1.20 per share respectively. 

That’s why Hengan’s can grow steadily. So far, over the past 10 years, its sales grew from CNY11.4 billion in 2010 to CNY22.5 billion in 2019. Its earnings per share grew from CNY1.70 to CNY3.29 over the same period. 

And because of Hengan’s steady business, it’s able to reward shareholders well. Hengan has paid dividends every year since 2000. 

Over the last 12 months, the company earned CNY3.60 per share and paid out CNY2.45 per share in dividends. 

That’s about 68% of earnings paid to shareholders in dividends. 

This percentage is also what the financial industry like to call a dividend payout ratio.


Why Hengan’s Dividends Can Continue to Grow

Hengan generates growing free cash flow. Since 2010, its free cash flow grew massively from CNY991 million to CNY2.5 billion in 2019. Its free cash flow is more than 10% of its 2019 sales. 

If you ask me, I think this is a “capital-efficient business”. Hengan’s average returns on equity (ROE) is around 24%, in spite of the intense competition. 

For me, Hengan’s gains should continue, given the needs for basic goods. And with greater health awareness amongst the growing Chinese middle income class, more people are demanding better quality health and hygiene products. 

Hengan is right in the middle of a huge growth opportunity. 

With the last 12 months dividends paid per share at CNY2.45 (HK$2.71 per share), that puts its current dividend yield at 5%. 

For long term investors who like buying consumer-related products, perhaps this is one company worth looking at. 

To good investing,

Willie Keng, CFA

Founder, Dividend Titan

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