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Hengan International Group Company Ltd (SEHK: 1044) is a consumer giant and the largest hygiene products producer in China, with 40 manufacturing facilities located in 15 provinces around China. The group taps into a nationwide distribution network with more than 3,000 distributors and manufactures sanitary napkins, tissue paper and diapers under a variety of brands such as “Anerle”, “Pino” and “Hearttex”.
The group has enjoyed many years of robust demand for its products as China’s middle-income class grows larger due to industrialisation. Investors have been relying on Hengan for a mix of both growth and yield, as the group also pays a dividend twice yearly.
An interim dividend of RMB 1.00 has been declared, similar to last year. On a trailing 12-month basis, the dividend yield for Hengan is around 4.6%.
Investors may be curious to know if Hengan can increase this dividend further. Let’s have a look at several aspects to determine this.
Revenue and net profit trend
The table shows that Hengan has managed to grow its revenue slightly over the years, though gross profit has been under pressure from higher materials cost. Expenses have been well controlled, though, and both operating and net profit have been rising since 2014 through to 2018.
With rising net profits, this bodes well for the ability of the business to continue increasing dividends.
Free cash flow
Hengan has a strong and consistent history of free cash flow generation, as can be seen in the table above. In fact, free cash flow has steadily increased over the years too.
Steady free cash flow generation is another plus point in considering whether the group is able to raise dividends over time, as this means the company is not heavily reliant on external borrowings to fund its operations.
Dividend history and pay-out ratio
The table shows that total dividends have been rising for the last two consecutive years, in line with higher earnings per share. The dividend payout ratio is also not excessive, at around 70% for both 2017 and 2018.
With the group reinvesting around 30% of its profits back into growing its business, I am confident the group still has room to pay a higher dividend should earnings increase in the future.
Shifting to higher-margin products
Hengan is not standing still, though. As high raw material costs are reducing the profitability of its largest division – tissue paper, the group has announced in March this year that it will launch products in the beauty industry, including facial masks and tampons.
Though these new products mean that the group will square off against the industry giants in the cosmetics sector, management explains that the shift to higher-margin products is necessary in order to arrest the decline in profitability of Hengan’s core divisions.
Assuming the group performs well with these new products, investors will enjoy higher profits and also potentially higher dividends in years to come.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Royston Yang doesn’t own shares in any companies mentioned.