19-year net profit fell 4.7% compared with the same period last year: the company achieved revenue of 4.24 billion yuan in 2019, an increase of 6.5% over the same period last year, mainly due to the acquisition of seasoning business in 18 years and consolidation in 19 years. Although the gross profit margin remained stable during the period, due to the expansion of condiment business channels and the additional amortization expenses brought about by mergers and acquisitions, the company's sales expense rate and administrative expense rate increased by 1.8% and 1.7% respectively compared with the same period last year. As a result, the company's net profit in 2019 was 1.37 billion yuan, down 4.7% from the same period last year, and the profit attributable to shareholders was about 1.11 billion yuan. For the whole year, the dividend per share was HK18.8 cents, with a dividend payout rate of 47.3%.

Both incense raw materials and tobacco raw materials are weak: in 19 years, the company's incense raw material business income decreased by 12.2% to 620 million yuan compared with the same period last year, of which H1/H2 increased by 10.2% and 31.4% respectively, which was lower than our expectations, mainly due to the suspension of production and maintenance of spring bamboo in Yancheng and the surplus of maltol, the main product of Zhaoqing, Guangdong. In addition, another major business of the company, tobacco raw materials (raw tobacco flakes and new cigarette materials), also showed weakness, with revenue falling 21.0% year-on-year to 750 million yuan, mainly due to the decline in prices caused by overcapacity of burst beads and the oversupply of recycled tobacco leaves. Although the demand for popcorn tobacco is still growing rapidly, the increasing competition in the industry may reduce the existing profit space, and we expect the growth pressure on the incense raw material and tobacco raw material business to remain in the short term.

The essence business shows the mainstay: the company's essence business income during the period was 2.16 billion yuan, an increase of 0.7% over the same period last year. During the period, the sector profit reached 1.29 billion yuan, and the profit margin reached 59.5%, an increase of 2.3%. It contributed 51% of the company's overall revenue / operating profit, and increased steadily as expected during the period of sharp fluctuations in other businesses, especially under the impact of the epidemic. The company's flavor business has also achieved positive revenue / profit growth in Q1 this year (up 0.3% by 6.8% respectively), highlighting its role as a mainstay.

The condiment business has been hit hard by the epidemic: the company's 19-year seasoning business (Jiahao) achieved revenue of 700 million yuan, and we estimate that the year-on-year growth is close to 20%, and the overall performance is within the rules. Considering that Jiahao products rely almost entirely on food and beverage channel sales, we expect that factors such as the suspension of food and beverage stores and the decline in passenger flow under the background of the epidemic will have a huge negative impact on the company's condiment business, but the company's core products are relatively niche. And catering customers are relatively sticky, so it is expected that there will be a quick recovery after the end of the epidemic.

Lower the company's target price to HK $3.9 and maintain its buy rating: we believe that uncertainty in the company's non-core business has increased in the context of the epidemic. But in the long run, we believe that the HNB-related policies that are expected to be opened in the future may bring about structural changes in the whole industry, and the company has relatively leading technology reserves in tobacco flakes and filters, driving it to occupy a place in the HNB industry chain. At present, the company's dividend is stable, waiting for policy catalysis, so we finally lowered the company's target price to HK $3.9 to maintain buying.

Important risks: we believe that the following are some more important risks: 1) the inventory clearance progress of the tobacco industry is not as expected, 2) the competition in the bead industry is intensified, 3) the policy risk of the industry and 4) the effect of M & An is not as expected.