Incident On April 24, the company released its 2020 quarterly report. The company achieved operating income of 445 million yuan in 2020Q1, an increase of 0.34% over the previous year; net profit of 269 million yuan, a decrease of 8.28% over the previous year; net profit after deducting non-return to the mother was 253 million yuan, an increase of 6.80% over the previous year. The COVID-19 epidemic broke out across the country in early 2020. The company responded positively to the epidemic. It fully resumed work in mid-late February, and production and operation were normal. According to the progress of the COVID-19 pandemic, the company adjusted the procurement plan with reference to market and inventory conditions. Currently, raw material stocks are sufficient. 2020Q1 achieved revenue of 445 million yuan, up 0.34% year on year; net profit was 269 million yuan, down 8.28% year on year. The decline in net profit of Yuimu was mainly due to delays in government subsidies due to the impact of the COVID-19 pandemic. Looking at 2019, the company's performance has remained steady, and edible essences are still the company's core business. In 2019, the company's edible essence business achieved revenue of 1,979 billion yuan, accounting for 90.58%, a year-on-year decrease of 1.41%; the food ingredients business achieved revenue of 98 million yuan, accounting for 4.47%, an increase of 41.34% over the previous year; and daily essences achieved revenue of 79 million yuan, accounting for 3.60%, an increase of 16.56% over the previous year. After years of development, the company's main product, edible essence, has formed a scale advantage. Currently, it has 33 subsidiaries and production bases in Guangdong, Jiangxi, Yunnan, Fujian and other places. The company implemented group procurement management for bulk raw materials for edible flavors and food ingredients, which significantly improved the company's management efficiency. Profitability remains at a high level, expenses are properly controlled, and high dividends are given back to shareholders. In terms of profitability, the gross sales margin of 2020Q1 company was 77.74%, up 0.11pct year on year; net sales margin was 61.09%, down 6.51 pct year on year. It is expected that this is mainly due to delays in government subsidies due to the impact of the epidemic. In terms of period expenses, the period fee rate for 2020Q1 companies was 9.99%, a year-on-year decrease of 4.05 pct. Among them, the 2020Q1 sales expense ratio decreased by 4.12pct to 5.03% year on year, mainly due to the impact of the COVID-19 pandemic and a decrease in business staff travel and market development expenses; the management expenses rate fell 1.78 pct to 12.85% year on year; and the financial expenses rate increased 3.34 pct to -7.89% year on year. According to the 2019 annual report, the company plans to distribute 19.8 yuan in cash (tax included) to all shareholders for every 10 shares based on a total share capital of 616 million shares at the end of 2019. This time, the total cash dividend rate is 1,219 billion yuan, and the corresponding cash dividend rate is 98.66%. Based on the closing price on April 24, the dividend rate was 6.00%. The company continues to give back a high percentage of dividends to shareholders, demonstrating confidence in the company's long-term development. Policies drive industry upgrading, and leaders are expected to increase their share in the National Development and Reform Commission's “Guiding Catalogue for Industrial Structure Adjustment (2019 Edition)”, which lists “safe food additives” and “development and production of new technologies for natural food additives and natural flavorings” as a nationally encouraged product catalogue. The National Development and Reform Commission and the Ministry of Industry and Information Technology's “12th Five-Year Plan” suggest the development direction of the food additives and ingredients industry to accelerate industrial integration, encourage enterprises to increase industrial concentration through mergers and restructuring, change the situation of small enterprises and scattered industrial layout in the food additives and ingredients industry, and accelerate the development of the industry in the direction of scale, intensification and efficiency. Relying on technology research and development and product innovation, the company maintains strong competitive strength and is a leader in the domestic essence industry, and will further benefit from the support of national policies. Currently, the pattern of the essence industry in China is highly fragmented, and the process of industry convergence is slow. There is quite a gap between the essence industry pattern, which is highly monopolized by the international community. The introduction of top-level policies will help large leaders to further expand their markets, expand their scale, and obtain economies of scale. Investment suggestions: We expect the operating income of Huabao Co., Ltd. in 2020-2021 to be 21.95 billion yuan and 2,266 billion yuan, up 0.46% and 3.23% year on year; net profit of the mother is 1,257 billion yuan and 1,308 billion yuan respectively, up 1.70% and 4.07% year on year. The corresponding P/E is 16.1x and 15.5x, maintaining the “increased holdings” rating. Risk warning: The impact of the epidemic has exceeded expectations, tobacco policy fluctuations, increased industry competition, etc.