Event: the company released its mid-term results in 2020, with revenue of 1.716 billion yuan during the reporting period, down 17.09% from the same period last year. Affected by the loss of 495 million yuan in goodwill in the condiment sector, the company realized a net profit of-45 million yuan. Without considering the impairment of goodwill, the net profit was 450 million yuan, down 6.29% from the same period last year, with a gross profit margin of 63.45%, an increase of 0.13pct over the same period last year, and a net interest rate of 26.23%, an increase of 3.02pct over the same period last year.

1. Tobacco raw materials: the attention and demand of HNB raw materials continue to rise, keep up with the trend and prepare the company. At present, the revenue of this sector is still contributed by two major categories of tobacco products: recycled tobacco leaves and new cigarette materials. During the reporting period, the sector realized revenue of 303 million yuan, down 17.13% from the same period last year, accounting for 17.68% of the total revenue, making it the company's second largest source of revenue; the operating profit was 115 million yuan, down 12.82% from the same period last year, and the operating profit margin was 37.95%, an increase of 1.88pct over the same period last year. Among them: 1) in terms of recycled tobacco, the tobacco industry continues to consume tobacco inventory vigorously, resulting in weak demand for recycled tobacco; 2) cigarette new material products are mainly cigarette capsules (burst beads). In response to the pressure of slowing demand growth and falling prices in the cigarette market, the company is currently opening up new growth points by selling to overseas customers and promoting products to food manufacturers 3) it is worth noting that during the reporting period, HNB products were welcomed by consumers in overseas markets and approved by regulators for "harm reduction", which increased the market's attention and demand for raw materials for HNB. The company's R & D and marketing team are conducting in-depth research and analysis on relevant market size, application, composition, process and regulatory policies. The company is the first private-funded enterprise in the industry to master the technology of recycled tobacco, has a number of technology and patent reserves in the field of HNB tobacco flakes, and cooperates with Guangdong China Tobacco. We believe that the company will benefit from the accumulation of tobacco sheet technology for traditional cigarettes and may have a first-mover advantage in areas related to raw materials for HNB.

2. Essence: affected by the epidemic, the performance declined slightly in the first half of the year. During the reporting period, the revenue of the sector was 931 million yuan, down 3.75% from the same period last year, accounting for 54.27% of the total revenue, still the company's largest source of revenue. Operating profit was 582 million yuan, down 0.14% from the same period last year, and the operating profit margin was 62.49%, an increase of 2.43pct over the same period last year. Huabao is the main platform for the company to operate this plate to cope with the impact of the epidemic, and the company actively promotes the adjustment of product structure: 1) in the aspect of edible flavor, it focuses on the research and development of meat flavor, which enhances the research and production capacity of salty flavor. In line with the concept of natural and healthy consumption, the research on plant extraction technology has been carried out to provide more natural and functional products. 2) Daily flavors, due to the impact of the epidemic, incense eliminate virus, washing products, personal care income of three types of products are increased, while also research and sales of different aromas of laundry bead with flavors; 3) it is worth paying attention to, the company as a leader of tobacco flavors in China, in the traditional tobacco flavor stable development at the same time, the company has also for HNB special flavor research and development layout, HNB flavor than traditional cigarette use higher technical requirements. We believe that in the HNB era, the company's flavor business may continue to supply the China Tobacco Industry Corporation with a layout in HNB, link up with overseas markets, and is expected to share the rapid development dividend of the new global tobacco industry.

3. Incense raw materials: during the reporting period of the epidemic superimposed trade conflicts between China and the United States, stable prices and opportunities, the sector achieved revenue of 302 million yuan, down 15.91% from the same period last year, accounting for 17.62% of the total revenue, making it the company's third largest source of revenue; the operating profit was 39 million yuan, down 38.94% from the same period last year, and the operating profit margin was 12.84%, down 4.84 pct from the same period last year. Among them: 1) Guangdong Zhaoqing maintains a stable price level by virtue of brand accumulation and high-quality and stable customer relations; 2) Jiangxi Xianghai Phase I and Phase II projects have been put into production and pay close attention to the market and industry trends under the insufficient utilization of production capacity.

4. Condiments: during the reporting period, the catering industry was greatly affected by the epidemic. During the reporting period, the revenue of the sector reached 177 million yuan, down 52.85% from the same period last year, accounting for 10.34% of the total revenue. The company continued to optimize its product structure and deepen its brand image during the epidemic, which we believe may lay a solid foundation for the stabilization and rebound of demand for seasonings in the catering industry after the epidemic.

Profit forecast and investment advice. As a leading enterprise of domestic flavors and fragrances, the advantages of barriers are becoming more and more prominent, and the company is expected to maintain a steady increase in revenue and profitability. At the same time, with the landing of domestic HNB policy, the company is expected to be the first to benefit from its flavor and chip business because of its leading R & D advantages and excellent product power. It is estimated that in 20-22 years, the company's revenue will be 43.86 billion yuan. Affected by the impairment of goodwill in the condiment sector, the net profit will be 1.562 billion yuan. Excluding the loss of impairment of goodwill, the net profit will be 13.55 billion yuan 14.58 / 1.562 billion yuan. The corresponding EPS is 0.31, 0.47 and 0.50 yuan respectively. Considering the company's advantages as a leader of domestic flavors and fragrances, and is expected to benefit from the landing opportunity of domestic HNB, the company is given 25 times PE in 21 years, maintaining a "buy" rating. Risk Tip: policy & International Trade risk, Market Development\ New Tobacco sector Business is not as expected