The Motley Fool

Is Hengan a Quality Stock to Own for the Long Term?

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

In this article, I’ll assess whether Hengan is a good-quality stock to consider investing in for the long term.

Historical performance

The first aspect to explore is Hengan’s track record. This is important since a company that has a proven track record has a higher probability of sustaining its profitability in the future.

A sustainable or growing profitability is necessary to drive higher stock prices and dividend payments. Personally, a good track record is one that is either stable or growing over 10 years. Let’s look at some numbers.

In the last decade, Hengan grew its revenue from RMB 9.7 billion (US$1.39 billion) to RMB 22.5 billion. Similarly, net profit increased from RMB 1.9 billion to RMB 3.9 billion. The former was up by 132% while the latter improved by 105% during that period.

Overall, Hengan demonstrated a commendable performance in the past decade in growing its revenue and profit.

Return on invested capital

The next aspect that I will look into is Hengan’s return on invested capital (ROIC), which will help us understand how profitable the business is. For those who are new to this metric, I had previously written an article to explain it.

In essence, a business with a higher ROIC requires less capital to generate a profit, and it thus gives investors a higher return per dollar that is invested in the business.

Hence, a high ROIC will mean a high-quality business while a low ROIC will point to a business of low quality.

As for Hengan, it generated an ROIC of 30.4% in its fiscal year ended 31 December 2019. This means that for every RMB 1 of capital invested in the business, it earned RMB 0.304 in profit.

The company’s ROIC of 30.4% is above average, based on the ROICs of many other companies I have studied in the past. This suggests that Hengan has a high-quality business.

Foolish conclusion

In sum, Hengan has demonstrated to me that it has a high-quality business thanks to its solid track record, as well as its high ROIC.

Thus, long-term investors looking for a high-quality stock should keep the company on their radar.

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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 Lawrence Nga doesn’t own shares in any companies mentioned.