Southwest: First coverage on SOFTCARE (02698) with a "buy" rating, target price of HK$34.23.

Southwest released a research report stating that the forecasted net profit attributable to shareholders of SOFTCARE (02698) for the years 2026-2028 are $140 million, $170 million, and $190 million respectively, with corresponding PEs of 15, 13, and 11 times. Considering the company's strong position as a leader in Africa, clear growth trajectory in Latin America/Central Asia, and long-term potential for capacity expansion and category extension, a valuation of 19 times for 2026 is given, corresponding to a target price of HK$34.23, first coverage, and a "buy" rating. Key points from Southwest are as follows: Recommendation rationale 1) Africa's fundamental barriers are deep, with ample room for growth. SOFTCARE relies on local manufacturing and distribution channels to build cost advantages and channel barriers. The leading position is clear, with 20.3% and 15.6% market share for SOFTCARE baby diapers and sanitary pads by sales volume in 2024. With a high population and a high proportion of youth in Africa, the penetration rate of diapers is only 20%, leaving ample room for growth in the next 5-10 years. 2) Mature models are expected to be replicated across regions, opening a second growth curve. With the commissioning of the Peru factory in April 2026, SOFTCARE is expected to accelerate the replication of the African experience in Latin America (Peru, El Salvador), and Central Asia, seizing the development dividends of emerging markets. 3) Backed by Senford Group, enabling comprehensive development. SOFTCARE can leverage the group's mature overseas sales channels, supporting land infrastructure, integrated logistics supply chain, and localized political and business resources, with natural advantages in risk management and expansion efficiency. Deepening localization of brand awareness, continuous enrichment of product matrix The company focuses on the Softcare brand as the core, supplemented by a multi-brand matrix, achieving local adaptation and differentiated pricing of "one country, one product," balancing quality, comfort, and price advantages. In the mid-to-high-end series, the company enhances brand reputation through softer materials, elastic waistbands, SKU iteration, etc., maintaining a price advantage of about 15% compared to international brands, forming a "good but not expensive" mental anchor. Product structure upgrades, clear momentum for category expansion: Baby diaper and pull-up revenues for 2024/2025 from January to April increased by +57.3%/+94.1% and sanitary pad revenues for 2024/2025 increased by +25.5%/+27.9%. Full digital transformation to enhance quality and efficiency In Africa, the channels are mainly traditional offline, with a focus on wholesale and distribution channels. By the end of 2025, 60% of the channel structure was wholesale, 30% distribution, and about 5% key accounts, cooperating with the CRM system jointly built with IBM to digitize customer management (online ordering, visible prices and rebates, sales and inventory monitoring), enhancing coverage and turnover efficiency. In terms of channel breadth and density, by the end of April 2025, the company had established partnerships with 2800+ wholesalers/distributors/supermarket customers, reaching over 80% of the local population in core countries. In Latin America, the company adopts a rhythm of "first visibility in traditional channels, then entering supermarkets/pharmacies," and has entered several large chain supermarkets in Brazil, validating the replicability of channel strategies across regions. Continued expansion of production capacity, supply chain collaboration to support overseas expansion The company's capacity expansion follows the principle of "trade before manufacturing" and building factories nearby, with production lines increasing from 48 in 2025 to 66 in 2025 (8 factories in 8 African countries + the first Latin American factory in El Salvador). With the Peru factory expected to start production in April 2026, localized production can avoid 20%-35% of finished product duties, enjoy 0%-10% raw material duties, and benefit from short supply chains to achieve "optimal cost + rapid deployment." The company raised approximately HK$740 million for new production lines, with HK$470 million invested in Latin America/Central Asia and HK$270 million in Africa. It is estimated that 56 new production lines will be put into operation from 2026 to 2029, including 6/4/8/14 new lines in El Salvador/Peru/Kazakhstan/Mexico. After all projects are completed, the new production lines are expected to add annual design capacities of 6.28 billion pieces for baby diapers, 1.88 billion pieces for pull-ups, 3.41 billion pieces for sanitary pads, and 3.64 billion pieces for wet wipes, achieving steady expansion in the global sanitary product market. Risks: Risks include intensified international trade frictions, significant fluctuations in raw material prices, currency exchange rate fluctuations, increased industry competition, and overseas production capacity not meeting expectations.