Event: the company issued a mid-term performance forecast for 2020. 2020H1's revenue is expected to decrease by 50-60% compared with the same period last year, and its net profit is expected to decrease by 50-60% compared with the same period last year, mainly due to the seasonal fluctuation of imported tobacco products from Brazil. In addition, due to the impact of COVID-19 's epidemic, the number of people entering and leaving China and related regions has decreased significantly, resulting in a substantial decline in duty-free cigarette sales in the above regions and a significant reduction in the company's current cigarette export business income.
Affected by seasonal fluctuations and the epidemic situation of COVID-19, tobacco import business and cigarette export business declined greatly.
As the COVID-19 epidemic has gradually spread around the world since January this year, various countries have introduced strict "immigration control measures" to prevent and control the epidemic, which has greatly affected the number of tourists and tourism around the world. For example, according to Lianshang.com, the turnover of duty-free shops in South Korea decreased by 80% from March 1 to 15 compared with the same period last year because the epidemic affected many duty-free shops to close or adjust their business hours.
The company is the exclusive operating entity of the international business development platform and related trade business designated by the China National Tobacco Corporation, so it may be affected by the epidemic that the company's cigarette export business income has declined to a large extent.
In addition, as the planting season of tobacco varies with different places of origin, for example, the planting season of tobacco in Brazil is usually sown in May and harvested around February of the following year, and the company generally purchases and sells tobacco products after harvest and processing, therefore, the company's current tobacco import business income has a significant decline due to the seasonal impact of tobacco planting.
The company's business model has outstanding advantages and strong scarcity.
Scarcity advantage: China Tobacco Hong Kong has the exclusive right to operate the relevant tobacco international business. According to document No. 60 of China National Tobacco Corporation, China Tobacco Hong Kong is the exclusive operating entity designated by China National Tobacco Corporation to engage in international business development platform and related trading business. We believe that this "exclusive status" is relatively rare and may continue to benefit from overseas expansion and equity mergers and acquisitions of China Tobacco in the future.
Business model advantages: steady cash flow, strong bargaining power. The company relies on China Tobacco Group, and its income has increased steadily in recent years; at the same time, due to the existing pricing policy, the gross profit margin of each business is less volatile and has higher anti-risk ability; business model and license advantages determine that the company has stronger bargaining power and better cash flow; overseas tobacco brands and channels may be acquired in the future to enhance competitiveness.
With the help of the new type of tobacco, China Tobacco Hong Kong may open a new chapter in its development.
International tobacco giants have begun to focus their research and development on the new field of tobacco, and the market scale has increased rapidly in recent years. PMI's new tobacco sector earned US $5.693 billion in 2019, accounting for 18.7% of revenue. The volume of IQOS smoke cartridges shipped reached 596.52 billion units (1.19 million cartons), an increase of 44.2% over the same period last year. At present, there are relatively few types of heated non-combustible products in China, and the domestic market is not yet open, but the development momentum is strong. At present, large and medium-sized tobacco companies accelerate the research and development of layout technology, and the products are only for overseas export; at the same time, the unique "Chinese-style flue-cured tobacco" flavor modulation technology of Chinese tobacco will also lay a good foundation for meeting the unique preferences of consumers at home and abroad.
Profit forecast and valuation
We believe that the company relies on China Tobacco Group and has significant advantages in barriers, which is the only international business platform under the flag of China Tobacco at present, and is expected to be the direct beneficiary of the development and reform of China's tobacco industry. Affected by the epidemic, we estimate that the company's annual revenue in 20-21-22 will be HK $10.46 billion (the previous value is 108.2), with a year-on-year growth rate of-27.67%, 29.93%, 23.97%, and net profit of HK $2.32, 335, 449 million (the previous value is 434, 536, 630 million), with a year-on-year growth rate of-27.24%, 44.19%, 34.08%. The company is the only international business platform in the tobacco system, giving a "buy" rating.
Risk hints: policy change risk, sales below expectations, new tobacco development less than expected, M & An integration risk