Investment logic
The company started from tobacco flavor, with tobacco as the core, expanded to the direction of traditional flakes and new tobacco, in daily chemical and seasoning, through continuous mergers and acquisitions to achieve industrial expansion outside the tobacco territory.
HNB (heating does not burn): once the policy is liberalized, flavors and flakes are expected to grow several times. At present, HNB has not been liberalized in the domestic market, and China Tobacco borrows overseas markets to cultivate its own HNB production system.
In view of the fact that HNB consumes far more flavors and flakes than traditional cigarettes, we believe that the liberalization of HNB policy will drive the growth of flavors and flakes several times. Based on the assumption of 10% permeability of HNB products, it is expected to bring an increment of 24,000,000 yuan for flavors and flakes.
Tobacco flavor: traditional business is sound, HNB will help to recreate resplendence. After 16 years of inventory removal, the traditional cigarette industry has returned to positive growth in the past 19 years. Based on the energy of its profits and taxes on national finance, we believe that the traditional cigarette industry will maintain stability in the future, and the company will be in a leading position in traditional tobacco flavors. We believe that in terms of HNB flavor, the company will continue to maintain a competitive lead.
HNB sheet: qualification barrier + technical barrier, the company has obvious competitive advantage. Thin slice business to implement license admission system, HNB thin plates on the basis of the license, need higher technical capabilities, so the number of enterprises that can provide HNB thin plates for the China Tobacco system will be fewer, and the concentration will be higher. The company relies on the mature experience and technical capabilities accumulated in the traditional flakes, and has occupied a leading position in the research and development and manufacturing of HNB flakes in China. At the same time, the production process of flakes requires the addition of flavors, so the company's advantages in tobacco flavors objectively empower the company to develop HNB flakes business.
Compound seasoning & spices: the industrial chain of "taste" track extends, breaking through the medium-and long-term ceiling. Spice business around the bulk of raw materials + niche market layout of two lines, medium-and long-term is expected to rely on high value-added new category development to optimize the profit structure. The research and development of the compound condiment focus on the subdivision of the scene, the impact of the epidemic will be weakened from 2021, and the performance will be repaired gradually. in the future, it is expected to continue to promote the sinking of cross-regional channels on the basis of B-end.
Investment advice and valuation
Under the assumption that the HNB policy will be liberalized in 2022, the company's EPS in 2021-2023 is expected to be 0.34 per cent, 0.43 per cent, with the same ratio + 151 per cent, 29 per cent, 25 per cent, and the current share price corresponds to a multiple of PE on 36-28-22; if the impact of HNB liberalization is not taken into account, the corresponding EPS is 0.34 per cent, 0.35 per cent, 0.36 yuan, and + 151 per cent, 6 per cent, 2 per cent compared with the same period last year. Under the assumption that the HNB policy will be liberalized in 2022, the company will be valued at 38X in 2022 and given a "buy" rating corresponding to the target price of HK $20.
Risk hint
The uncertainty risk of the new tobacco HNB policy liberalization; the risk of goodwill impairment; the risk of upstream raw material price fluctuation.
