How Does Hengan International Make Money?

Hengan International Group Company Ltd (SEHK: 1044) is one of the largest hygiene product manufacturers in China. It produces products such as sanitary napkins, baby & adult diapers, tissue paper & wet wipes, and others.

In this article, I’ll will explore an important aspect of the company for investors – how it generates its income.

Breakdown by segment

Source: Hengan’s 2019 Results Presentation

To start with, Hengan generated more than half of its income in 2019 from selling tissue paper, up 12.3% from 2018 thanks to the upgraded products and growth in e-commerce sales.

This was followed by sanitary and disposable diapers at 28.8% and 6.4%, respectively, of Hengan’s 2019 income.

Out of the RMB 22.5 billion (US$3.17 billion) sales revenue in 2019, 88% of that is from mainland China, 9.5% is from Hong Kong and Macau, while the remaining 2.5% is from other overseas countries.

Margin profile

Source: Hengan’s 2019 Results Presentation

Another aspect worth exploring here is that of the margin profile of each business segment.

Despite accounting for the largest share of Hengan’s revenue, the tissue paper segment has the lowest gross profit margin of 27.7%.

The highest margin product segment – sanitary napkins – is about 2.5 times more profitable than tissue paper. In other words, sanitary napkins contributed the highest profits to the group.

One positive observation from the above table is that all three major segments improved their gross margin in 2019 over 2018 thanks to lower wood pulp prices.

Foolish takeaway

Overall, Hengan has a relatively simple business model to understand. Still, by breaking down the income sources, investors can better assess the prospects of each business segment.

This can help us better evaluate the attractiveness of this company as a long-term investment.

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