Main points of investment

Investment suggestion

The company is the leader in the flavor industry in China, and we believe that the uncertainty of the company's future performance and dividends is expected to decline faster than expected, while the decline in HNB policy uncertainty is expected to exceed market expectations, opening up double the growth space. It is estimated that the net profit of homing from 2020 to 2022 will be 1.371 billion yuan 1.455 billion yuan, corresponding to 17.6 times the valuation of 16.7 yuan on July 01 (market capitalization 22.9 billion).

China's flavor industry leader, deep ploughing industry for 24 years.

1) the company is the leader in the flavor industry in China, with the first market share for 6 consecutive years, mainly engaged in the research, production and marketing of flavors and food ingredients (the revenue of tobacco flavors / food flavors accounted for 84.55% and 8.37% of the revenue for 17 years); the actual control is Ms. Zhu Linyao, controlling a total of 81.18%. 2) the company was founded in 1996 and listed on the Shenzhen Stock Exchange in 2018. In 2019, the company had revenue of 2.185 billion yuan, of which the revenue of edible flavor / food ingredient / daily flavor was 1.98 million yuan (accounting for 90.6%), compared with-1.4% of the same period last year. + 5.09%, + 5.09% 2020Q1, the company's revenue was 445 million yuan, + 0.34% compared with the same period last year, and the non-return net profit was 252 million yuan, + 6.80% compared with the same period last year.

We believe that the uncertainty of the company's future performance and dividends has declined and is expected to exceed market expectations.

1) the company has a stable position in the domestic market, the market share is expected to increase, and the uncertainty of future performance and dividends is expected to exceed market expectations (the market evaluates the uncertainty of performance and dividends slightly higher). In 2018, the market size of Chinese flavors and fragrances is 40.32 billion yuan (CAGR 9.1% in 10-18 years). With the upgrading of consumption and the expansion of domestic demand, the domestic flavor market is developing rapidly. Warburg, which has the largest domestic market share (about 5.4% in 2018), has local advantages and rich customer resources, and is expected to seize the opportunity to further increase its market share.

2) the company's high dividend rate and high dividend yield are attractive. Benefiting from a strong market position, the company has a substantial dividend yield (210% and 99% in 18 / 19), an attractive high dividend yield (5.33% at the closing price on 07 / 01), and a 2.47pct premium to the 10-year Treasury yield of 2.86%, providing good medium-and long-term returns.

We believe that the uncertainty of HNB policy is reduced, which is expected to exceed market expectations and open up double the growth space.

1) domestic policies continue to promote the development of new types of tobacco, and the policy uncertainty of HNB tobacco products decreases, which is expected to exceed market expectations (the market has a high evaluation of policy uncertainty). In April 2019, the United States FDA formally approved the application for entry into the market through IQOS, and IQOS became the first HNB tobacco product that can be listed in the United States. In October 2019, the Yunnan provincial government issued a number of policies and measures to support the development of high-quality tobacco products in Yunnan Province, clearly proposing to support the development of new tobacco products and the establishment of Yunnan New Tobacco products Company. As the local government and China Tobacco Company actively deploy the market of new tobacco products such as HNB, we think that the domestic HNB license is expected to be speeded up.

2) HNB tobacco products have a large demand for flavors, which is expected to double the growth space of the company. In 2019, Philip Morris International (the world's largest tobacco company) / Japan Tobacco (Japan's largest tobacco monopoly company) HNB tobacco products accounted for 18.7% of revenue. 11.0% of the new IQOS tobacco products penetration rate in Japan is about 17%. With regard to the penetration rate of overseas markets, the penetration rate of domestic HNB tobacco products is expected to reach 25%. At the same time, the demand for flavors of HNB tobacco products may be many times that of traditional tobacco. As the leader of domestic tobacco flavors, the company has benefited most and is expected to double its revenue.

We believe that the company's food flavor and ingredients business extension direction is clear, is expected to exceed market expectations.

The company is expanding its food flavor and ingredient business at the same time. At present, the company has an annual production capacity of 15600 tons, of which the annual production capacity of edible flavors / food ingredients / daily flavors is 1.2710 million tons. In the future, the planned annual production capacity is about 33000 tons (including 22300 tons of food ingredients, 7700 tons of food flavors and 3000 tons of special medical food). The extension direction of the company's food flavor and ingredients business is clear, and is expected to exceed market expectations (the market has a high evaluation of the uncertainty of the company's extension direction).

Catalyst: the company's high dividend rate continues to be realized; HNB tobacco product licensing policy is introduced; the company's performance exceeds expectations

Risk hint: major adjustment risk of dividend policy; risk of landing schedule of HNB licensing policy