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Toh Han Shih

Hengan International Group finds its niche as rising affluence spurs wider use of nappies, sanitary napkins and tissues

Chinese consumers are increasingly aware of the daily convenience afforded by disposable personal hygiene products such as nappies and sanitary napkins, as incomes - and life quality expectations among women, the most important consumers - continue to rise.

Use of disposable sanitary napkins among Chinese women has surpassed 50 per cent, with  annual demand of 33 billion pieces. However, this remains well below the 98 per cent acceptance rate in developed countries, according to Terry Poon Fuk-chuen, chief financial officer of Hengan International Group, a Hong Kong-listed paper hygiene product company.

Yet, despite the relatively low usage rate, demand growth has waned, with sales in rural areas barely changing. Annual sales growth of sanitary napkins has slowed to about 5 per cent from the double-digit yearly expansion  just five years ago.

'The market is saturated,' Mr Poon said.  'Chinese women in rural areas don't have the mindset to use disposable sanitary napkins.'

Sanitary napkins accounted for 47.5 per cent of Hengan's revenue last year, which totalled  $1.69 billion.

Ironically, Mr Poon  believes the best hope for kick-starting growth lies with his mainland rivals.   He believes the proliferation of many small factories throughout China will push sales of low-cost disposable sanitary napkins.

'These small local factories  stole our market share,' Mr Poon said.  'But ultimately, they can educate Chinese women to use more sanitary napkins.'

Many  such factories had sprung up  in China over the past few years, even in remote inland provinces, Mr Poon said. He estimated competitors had set up at least 100 factories  in Fujian province alone,  including many around Hengan's headquarters in the city of Jinjiang.

During the mid-1990s, Hengan  led the sanitary napkin market in China, with a 25 per cent share in volume terms. That has dropped to 16 per cent in volume terms,  or 11 per cent by  value.  The company is currently neck-and-neck with Unicharm of Japan for the No2 spot, while United States giant Procter  & Gamble (P&G) is the leader with a 13 per cent share  by value.

Hengan is banking on  nappies, which accounted for 18.8 per cent of the firm's revenue last year, for new growth. P&G is the market leader in the product segment with a 40 per cent share, followed by Hengan with 20 per cent  and Unicharm with about 10 per cent, according to a report by Credit Suisse First Boston.

'For baby diapers, quality is very important, because low quality will be very obvious when the baby cries,' Mr Poon said. 'Then the mother won't be happy.'

The mainland's disposable  nappy market is still in its infancy as the products have only been available for a few years.  Use of disposable  nappies is 3 to 5 per cent nationwide and 30 per cent in Shanghai,  compared with 80 to 90 per cent  in Hong Kong and Taiwan.

Hengan  was investing in research and development and importing high-end manufacturing equipment from Japan, he said.

'Small  diaper factories have not sprung up yet  as this is a new market and the pie is too small,' Mr Poon said.

As disposable nappies cost about 20 yuan per day  for each child, their use was still considered a luxury for many mainland families, said chief executive  Hui Chi Lin, who hopes rising  incomes will boost sales.

Last year, Hengan's nappy sales grew 20 per cent, in line with the national market.  Hengan's sales and the mainland market as a whole are expected to grow another 15 per cent this year, according to a CLSA report by Mabel Wong.

Hengan's fastest-growing business is tissue paper.  Hengan acquired its tissue paper business last year, which contributed $410 million of revenue. In the first quarter of this year, sales soared 60 per cent year on year, well above the market growth of 20 per cent, Ms Wong wrote.

China consumes about three million tonnes of tissue paper per year, of which about 70 per cent is toilet paper and the remainder facial tissue and napkins for meals.

The country's use of tissue  is growing at 15 per cent annually, according to the CLSA report, as people gradually abandon the handkerchief.

China has more than 800 tissue paper manufacturers, according to CLSA, most of which are small state-owned enterprises and co-operative unions. But the higher-end market is dominated by a handful of players, including Hengan, Asia Pulp & Paper,   Vida, Kimberly Clark and Zhong Shun.

Hengan is investing about $500 million in two new factories in Fujian and Shandong provinces over the next three years,  to triple tissue  production capacity to 180,000 tonnes.  Of Hengan's three main product segments, the gross profit margin on disposable sanitary napkins was highest at  up to 60 per cent because women were willing to pay a premium,  Mr Poon said. The  gross margin for nappies is 35 per cent and 40 per cent on tissue.

Hengan's profitability is under pressure from rising pulp prices, which account for 65 per cent of the cost of tissue  and 25 per cent of the cost of sanitary napkins and nappies.

In the past year, prices of pulp used for tissue paper have risen by 30 to 50 per cent, while prices of pulp used for nappies and sanitary napkins have risen by roughly 10 per cent. Pulp prices were, however, forecast  to drop next year, wrote CLSA's Ms Wong.



Demand for disposable  hygiene products rises