Investment positives
We initiate coverage on Coco Healthcare Products (Coco Healthcare) with an OUTPERFORM rating and a target price of Rmb22.10. Coco Healthcare is a leading personal care company, with revenue from proprietary-branded incontinence products for adults, and original design manufacturing (ODM) of baby care products reaching Rmb429mn and Rmb939mn in 2020. We are upbeat on the firm’s continued market share gains backed by rapidly growing demand for adult incontinence supplies.
Why an OUTPERFORM rating?
Domestic market for absorbent sanitary products continues expanding, especially the niche market for adult incontinence products. Data from Euromonitor shows that domestic sales value of absorbent sanitary products may rise to Rmb227.7bn in 2025 from Rmb165.5bn in 2020, a CAGR of 6.6%. By subsector, the adult incontinence products market remains in its infancy in China, but the sales CAGR will likely stay at around 21% as population ageing accelerates and demand for higher-quality healthcare grows. Moreover, the national planning for elderly services during the 14th Five Year Plan (14th FYP) period (2021-2025) propose building a long-term care insurance system, and encouraging commercial insurers to develop more nursing related products. Meanwhile, competition in the baby care market is intense. Domestic brands are expanding market share by leveraging their composite core technology and effective online marketing, while high-quality ODMs remain scarce. In the female sanitary products market, product ASP has risen on consumption upgrade, while market concentration, though already relatively high, is still increasing.
Proprietary-branded adult incontinence products and baby care ODM offer dual growth drivers. Product offerings: The ODM business, secured by stable cooperation with large clients, underpins strong cash flows for Coco. Moreover, the firm’s proprietary brands for adult incontinence products have established a full presence in the low-end, mid-range and high-end markets, catering to demand for both higher-quality products driven by consumption upgrade, and value-for-money products. R&D: Coco Healthcare has a higher budget for R&D than most of its peers, and its leading pace of capacity expansion helped strengthen cost advantage. Distribution channels: Taking advantage of the e-commerce boom in China, the firm has developed strong online operating capability, and established an omni-channel presence offline.
We think major growth drivers ahead include: 1) Brand upgrades and capacity expansion: Coco Healthcare partners with Huayuhua to enhance brand awareness and educate consumers. We expect its total capacity to rise 50% compared with 2020 after the IPO-funded projects reach full capacity. 2) Channel expansion: The company was early to expand into special channels such as hospitals and pharmacy chains. Its efforts in increasing the number of brick-and-mortar stores and exploring innovative ways of online traffic acquisition helps cement the firm’s market leadership. 3) Category expansion: Coco’s launch of mid-range and high-end products for mild incontinence under its proprietary brands created a new revenue driver, while the elderly wellbeing brand Coco Eldercare boasts promising long-term growth prospect.
How do we differ from the market We think the market has underestimated the firm’s competitive advantages in adult incontinence products secured by its multi-brand, multi-category and omni-channel operations, and the potential of adult incontinence products.
Potential catalysts: Brand awareness grows; expansion into special channels accelerates; policy support for long-term nursing insurance beats expectation.
Valuation and recommendation
Our EPS forecast is Rmb0.15 for 2021, Rmb0.65 for 2022 and Rmb0.92 for 2023, a CAGR of 150.2%. The stock is trading at 28x 2022e P/E. We initiate coverage with an OUTPERFORM rating and a target price of Rmb22.1, implying 34x 2022e P/E, offering 21% upside.
Risks
Disappointing policy execution; intensifying industry competition; volatile raw material cost.
