The current situation of the company

Recently, the company announced the restructuring at the controlling shareholder level. The direct controlling shareholder, China Tobacco International Group, has become a direct wholly-owned subsidiary of the China National Tobacco Corporation. At present, the China National Tobacco Corporation continues to hold 72.29% of the company through the China Tobacco International Group.

Comment

1. Affected by the epidemic this year, the company's performance declined in the first half of the year, and with the gradual landing of overseas vaccines next year, we expect the company's business performance to pick up. 1) Export of new tobacco products: covered by the rapid expansion of the overseas heating and non-burning market and the company's plus layout, we expect the sales of the company's heating and non-burning brands to maintain a momentum of rapid growth. The business revenue has doubled in the first half of the fiscal year. 2) cigarette export business: there was a large decline in the first half of the year affected by the epidemic, and the company continued to deepen communication and cooperation with duty-free operators in the second half of the year, making differentiated boost plans according to different regions of operation. We expect the business to gradually recover next year. 3) Tobacco export business: it remained stable in the first half of the year, and in the second half of the year, the company further tapped the market demand in Southeast Asia and worked closely with key customers. We expect this business to maintain steady growth in the future. 4) Tobacco import business: in the first half of the fiscal year, it was mainly affected by factors such as obstruction of the international supply chain and delays in product delivery. throughout the year, exchange rate fluctuations led to a decline in the supply price of flue-cured tobacco in Brazil, and the company's supply price was based on the cost addition method. We expect that the business will still be adversely affected by the epidemic. 2. The new tobacco business is worth looking forward to, in the context of global tobacco control and the rise of smokers' health awareness. With the rapid growth of the global new tobacco market, lQOS has successively passed the PMTA.MRTP certification of FDA in the United States, which will further enhance the penetration of heated non-combustible products and e-cigarette products in the tobacco market. The company continues to make efforts in this field, continuously improve the basic management system of new tobacco products, expand new target markets, promote product renewal iterations, and enhance the revenue and profit share of emerging tobacco business. 3. After the restructuring at the level of controlling shareholders, China Tobacco International has become a direct wholly-owned subsidiary of China National Tobacco Corp., the importance of listed companies has increased, and the uniqueness of the company license has been reaffirmed. The follow-up group asset integration and extension mergers and acquisitions are worthy of attention. From the perspective of competition barriers, under China's tobacco monopoly system, the company has exclusive management rights in the four major business areas and has a leading market position. From the perspective of profit model, the company's product sales are priced with a fixed ratio cost plus price, and give the upstream and downstream almost the same account period, bringing better profitability and cash flow. we believe that these two aspects will ensure the robustness and sustainability of the company's business development in the medium to long term. In addition, according to the prospectus, the company will not rule out including more similar businesses of China Tobacco Company in the future. Some of the IPO funds raised by the company will be used to acquire tobacco product suppliers, cigarette brands and new tobacco product brands, which we believe will help the company to further increase its market share.

Valuation proposal

Taking into account the impact of the global epidemic on the company's business, we downgrade our earnings per share forecast for 2020 / 2021 by 8% to HK $0.31 / HK $0.49. The current stock price corresponds to 49.7 times / 31.3 times earnings in 2020 / 2021, maintains a neutral rating, and reduces the target price by 2% to 16.46 Hong Kong dollars based on earnings forecast adjustments, corresponding to 53.1 times 2020 price-to-earnings ratio and 33.6 times 2021 price-to-earnings ratio. 7% of the current stock price upside risk trade friction, exchange rate change risk; tobacco consumption downside risk; the impact of the epidemic exceeded expectations.