---
title: "Behind the Allegations of Financial Fraud at Hengan Group: Abnormal Sanitary Napkin Profitability, Difficult Tissue Paper Earnings, and Declining Diaper Performance"
description: "The short-selling incident targeting Hengan International continues to escalate. As the leading sanitary napkin manufacturer in China, Hengan International's brands Space 7 and Anerle both rank among the top ten sanitary napkin brands. However, in recent years, the company's sanitary napkin business has seen slowing growth and eroding market share. Additionally, the profitability of the sanitary napkin business is questionable: its terminal selling price per unit is lower than peers, yet its gross margin is nearly 30 percentage points higher, and its net margin is about four times that of peers. Meanwhile, Hengan International's tissue paper business (Xinxiangyin, Pinno) has seen declining profitability, with gross and net margins far below those of C&S Paper and Vinda International; the diaper business has also been declining, falling out of the top three in market share."
author: "陈碧婷"
publisher: "New Distribution"
email: "zhaobo258@gmail.com"
telephone: "+8615854817671"
published: "2018-12-19"
language: "en"
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# Behind the Allegations of Financial Fraud at Hengan Group: Abnormal Sanitary Napkin Profitability, Difficult Tissue Paper Earnings, and Declining Diaper Performance

> The short-selling incident targeting Hengan International continues to escalate. As the leading sanitary napkin manufacturer in China, Hengan International's brands Space 7 and Anerle both rank among the top ten sanitary napkin brands. However, in recent years, the company's sanitary napkin business has seen slowing growth and eroding market share. Additionally, the profitability of the sanitary napkin business is questionable: its terminal selling price per unit is lower than peers, yet its gross margin is nearly 30 percentage points higher, and its net margin is about four times that of peers. Meanwhile, Hengan International's tissue paper business (Xinxiangyin, Pinno) has seen declining profitability, with gross and net margins far below those of C&S Paper and Vinda International; the diaper business has also been declining, falling out of the top three in market share.

The short-selling incident targeting Hengan International continues to escalate.
As the leading sanitary napkin manufacturer in China, Hengan International's brands Space 7 and Anerle both rank among the top ten sanitary napkin brands. However, in recent years, the company's sanitary napkin business has seen slowing growth and eroding market share.
Additionally, the profitability of the sanitary napkin business is questionable: its terminal selling price per unit is lower than peers, yet its gross margin is nearly 30 percentage points higher, and its net margin is about four times that of peers.
Meanwhile, Hengan International's tissue paper business (Xinxiangyin, Pinno) has seen declining profitability, with gross and net margins far below those of C&S Paper and Vinda International; the diaper business has also been declining, falling out of the top three in market share.
On one side, international giants like P&G, Unicharm, and Kimberly-Clark are invading the Chinese market; on the other side, domestic upstarts like Guangdong Jingxing and Chongqing Baiya are rising. Can Hengan International maintain its dominant position?
**Sanitary Napkin Net Margin Four Times That of Peers,**
**How Is It Achieved?**
Among China's top ten sanitary napkin brands, Hengan International (01044.HK) holds two spots, and Space 7 is the undisputed leader in this market.
In 2016, 2017, and the first half of 2018, Hengan International's sanitary napkin segment generated revenues of 6.569 billion yuan, 6.972 billion yuan, and 3.223 billion yuan, respectively.
Starting from 2015, the company's sanitary napkin business suddenly ended several years of high growth, with growth rates falling to single digits.
Against the backdrop of a stabilizing overall market, although Hengan International remains the leader in sanitary napkins, its market share is being eroded by competitors.
Even so, the profitability of Hengan International's sanitary napkin business remains astonishingly strong.
From 2016 to the first half of 2018, the gross margins for the sanitary napkin business were 72.6%, 72.6%, and 69.3%, respectively.
In 2017, the segment profit for sanitary napkins was 3.196 billion yuan, accounting for 76.5% of the entire company. In other words, the sanitary napkin segment, contributing 35% of the company's revenue, generated 75% of the company's profits.
Short-selling institution Bonitas Research accused Hengan International of inflating net profit in the sanitary napkin segment and questioned the company's core competitiveness, causing an uproar.
Meanwhile, those reminded by Bonitas Research cannot help but ask: why does Hengan International's sanitary napkin business have such high gross and net margins?
In recent years, the gross margins for sanitary napkin businesses of Hengan International, Guangdong Jingxing, and Chongqing Baiya have been around 70%, 40%, and 50%, respectively.
However, Zebra Consumption calculated the per-unit prices of sanitary napkins from Hengan International (Space 7, Anerle), Guangdong Jingxing (ABC, FREE), and Chongqing Baiya (Free Point) based on prices on Tmall Supermarket and JD Supermarket. Overall, Hengan International has the lowest prices, while Chongqing Baiya has the highest.
When peers in the sanitary napkin industry are still striving for a 10% net margin, Hengan International's sanitary napkin segment has a pre-tax net margin close to 50%.
How is all this achieved?
**Tissue Paper Hard to Make Money,**
**Diaper Business Declines**
Under Hengan International, the largest segment is the tissue paper business, with brands including Xinxiangyin and Pinno.
From 2016 to the first half of 2018, the tissue paper business generated revenues of 9.066 billion yuan, 9.390 billion yuan, and 5.084 billion yuan, with growth rates of 4.3%, 3.6%, and 21.1%, respectively.
As one of China's largest household paper enterprises, Hengan International has a massive scale, but its profitability is too limited. Especially in recent years, rising paper prices have further compressed the profitability of the company's tissue paper segment.
In 2016 and 2017, the gross margins for the tissue paper segment were 37.9% and 32.9%, respectively, and further declined to 25.8% in the first half of 2018.
In 2017, the tissue paper business accounted for half of the company's revenue, but its segment profit was only 545 million yuan, accounting for 13.05%, and after tax, it was almost negligible.
After comparison, Zebra Consumption found that compared with C&S Paper (002511.HK) and Vinda International (03331.HK), Hengan International's tissue paper business has lower gross and net margins.
Hengan International is one of the earliest enterprises in China to enter the diaper business. However, compared with the sanitary napkin and tissue paper businesses, the company's diaper business has been weak for years.
In 2017, the diaper segment's revenue was 1.999 billion yuan, a year-on-year decrease of 7.0%; in the first half of 2018, revenue was 811 million yuan, a year-on-year decrease of 9.9%.
The gross margin for the diaper business also fell from 50.8% in 2016 to 39.9% in the first half of 2018, a decline of 10 percentage points in one and a half years.
Source: Zebra Consumption (ID: banmaxiaofei)
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