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China's big e-commerce platforms help Hengan defend its turf

Hygiene products maker's first-half profit rises 13% despite sales dip

Hengan International, which makes a variety of sanitary products, wants e-commerce to account for 10% of sales next year. (Photo by Joyce Ho)

HONG KONG -- Facing intense competition from Western brands and a slew of new market entrants, Hengan International Group on Thursday said it will further ramp up online sales to maintain its leading position in China's sanitary goods market. 

The company, which saw its first-half revenue dip 0.2% on the year to 9.56 billion yuan ($1.44 billion), is betting that a new end-to-end supply chain established nationwide in May will help lift sales through e-commerce platforms like Alibaba Group Holdings' Tmall.com and Tencent Holdings' WeChat store.

The company now has eight regional operations centers across China, with 228 autonomous sales teams -- 56 of them focused on nontraditional channels. "Going forward, we will count e-commerce among our sales tools and avenues," said Hengan CEO and Deputy Chairman Hui Lin Chit. "That is due to shoppers' changing consumption behaviors."

Hengan International CEO and Deputy Chairman Hui Lin Chit holds a press briefing in Hong Kong on Aug. 24. (Photo by Joyce Ho)

Hui said Hengan has faced a "woeful" setback from the declining popularity of traditional sales channels, such as brick-and-mortar specialty stores that carry products for mothers, infants and children. The disposable diaper segment has been hit particularly hard, suffering a 6.2% decline in revenue on the year to 1 billion yuan.

Online sales, in contrast, were up by a factor of 1.6 on the year as of June, to 840 million yuan. That represents 8.8% of total group sales, compared with 3.3% a year earlier.

Hengan wants to increase the contribution of e-commerce to 10% next year. Hui said it is working on software designed to seamlessly integrate online and offline sales operations.

"In the second half, we will continue to build an all-encompassing sales network," Hui said. "That should help ease the challenges from relatively high logistics expenses, including packaging and delivery, when selling through e-commerce channels."

The company on Thursday reported that its net profit attributable to shareholders for the six months ended in June rose 13.4% on the year, to 1.85 billion yuan. But with revenue from the tissue paper segment -- the biggest income generator -- rising just 0.1% to 4.57 billion yuan, the result was largely attributable to reductions in advertising and labor costs.

Marketing expenses as a proportion of group revenue fell 1.6 percentage points on the year, to 9.8%, while staff costs dropped 0.6 of a point to 3.3%. Distribution costs and administrative expenses altogether represented 25.8% of total revenue, down 1 percentage point on the year.

The company's earnings report noted that these efforts partially offset the negative impact of rising wood pulp prices. Hui said the prices would remain "unusually" elevated at above $600 per ton at least until the end of the year, as new capacity is yet to be released.

This does not affect sanitary napkins, which are mainly made of petrochemical raw materials such as nonwoven fabric, which has been subject to persistent price declines. The segment's gross profit margin thus rose from 71.8% a year ago to 72.1%, lifting the group's overall margin to 48.6% from 48.1%.

Compared with disposable diapers and tissue paper, sanitary napkins represent a much more "protected" market for Hengan, Hui said, noting the company's success lies in product development. Revenue from the napkin segment increased 7.2% on the year to 3.44 billion yuan in the first half.

Hengan's Hong Kong-listed shares gained 5.34% on Thursday, to 66.05 Hong Kong dollars, marking a year-to-date return of 15.98%. The benchmark Hang Seng index added 0.43% the same day, putting it 25.08% higher so far this year.

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