Lyon released a research report stating that the rating of Hengan International (01044) was downgraded from “buy” to “outperform the market”, and sales and core net profit forecasts for this year and next year were lowered by 2% to 4%, but the net profit forecast was basically maintained, and the target price was lowered from HK$35 to HK$27. The company's sales last year were slightly lower than expected, but net profit beat expectations due to improved profit margins and narrowing foreign exchange losses.
According to the report, Hengan's sales growth slowed to 1% in the second half of last year, but gross margin and net profit margin increased 3.7 and 7.9 percentage points, respectively, over the same period last year due to discount control and falling raw material prices. The bank expects weak sales to continue this year in the face of increased competition, and the high profit margin it achieved in the second half of last year will be difficult to maintain due to management's plans to increase marketing efforts to maintain market share.