H&H’s infant formula and Swisse growth beat expectations; Morgan Stanley upgrades rating

Why did the third quarter change the bank’s assessment?

Morgan Stanley had previously expected growth to slow, but third-quarter infant formula revenue reached RMB 1.82 billion, up 48% year on year and approximately RMB 300 million above the average quarterly level in the first half. Channel inventories remained low, giving the bank greater confidence that growth can continue.
Management raised its 2026 group revenue growth guidance from the mid-to-high teens to the high teens, and its growth guidance for the Baby Nutrition and Care business (BNC) from approximately 30% to approximately 40%. Morgan Stanley forecasts full-year group growth of 23%, above management guidance.
The bank raised its adjusted earnings per share forecasts for 2026–2028 by 4%, 10% and 13%, respectively, upgraded its rating from Equal-weight to Overweight, and raised its target price from HK$20.8 to HK$30.5.

Management said inventory at mother-and-baby stores was only slightly above the 8–9 days at the end of the second quarter, below the 15-day target. Morgan Stanley believes restocking drove growth, while strong end-market sales kept inventories lean.
In the first three quarters of 2026, retail sales of Biostime stage-one and stage-two formula grew 64% and 46%, respectively; the conversion rate to stage three remained stable at approximately 40%. The expanded new-customer base could generate follow-on sales as children grow.
Over the 12 months to August, Biostime’s share of the ultra-premium infant formula market rose from 15.4% to 22.3%, while industry retail sales fell 4.4% over the same period. However, a competitor’s recall in 2026 partly raised the comparison base, and with the birth rate declining, Morgan Stanley expects BNC growth may slow in the first half of 2027.

Morgan Stanley estimates that, excluding approximately RMB 100 million of Double 11 shipments brought forward to the third quarter, third-quarter Adult Nutrition and Care (ANC) revenue was approximately RMB 2.1 billion, up 16% year on year and still above the bank’s expectations. The earlier shipments will also lower the corresponding fourth-quarter growth rate; management recommends looking at the two quarters together.
In the first half of 2026, Swisse Plus and Little Swisse sales grew 19% and 60%, respectively; management said each accounted for approximately 10% of China ANC sales. Morgan Stanley expects new products and an improved product mix to help absorb pressure from raw materials and changes in channel mix.
ANC gross margin rose from 67.5% in the first half of 2025 to 70.2% in the same period of 2026, benefiting from procurement optimization, lower provisions for slow-moving products and an improved product mix. Management prefers to continue improving operations rather than raise prices in the current consumer environment.

The Pet Nutrition and Care business remains under adjustment: mainland China revenue fell 36% in the first three quarters of 2026, and management expects another decline in the fourth quarter. Morgan Stanley expects overall Solid Gold revenue to fall 5% in 2026, then grow 2% and 7% in 2027 and 2028, respectively.
Total debt fell by more than RMB 1.3 billion in the first three quarters of 2026, and cash reserves exceeded RMB 2.1 billion at the end of September. Morgan Stanley expects full-year finance costs to fall from RMB 910 million in 2025 to RMB 640 million, and decline by a further approximately RMB 50 million–60 million in 2027.
Management proposed a dividend payout of 50%–70% of adjusted net profit. The final dividend for fiscal 2026 will be decided in March 2027, while balancing shareholder returns, debt repayment and business growth.

Morgan Stanley forecasts adjusted net profit of RMB 1.43 billion and an adjusted net margin of 8.1% in 2026; the forecast retains sales spending to support growth.
The HK$30.5 target price reflects both higher earnings forecasts and an increase in the target valuation from 8 times to 10 times estimated 2027 adjusted earnings. The bank believes improved earnings visibility supports a higher valuation, but continued investment and raw-material pressures will limit further margin expansion.