Event: the company released its mid-2022 report that the company realized HK $3.869 billion in revenue in the first half of 2022, an increase of 1.5% over the same period last year, and its net profit was HK $278 million, up 36.9% from the same period when excluding the proceeds from the sale of the joint venture. The net profit attributable to the equity holders of the Company was HK $219 million, an increase of 4.2 per cent over the net profit attributable to equity holders of the company for the same period excluding the proceeds from the sale of the joint venture.
Profitability is gradually rising, complete the Brazilian business and enhance the company's overall competitiveness, 2022H1 tobacco export business achieved revenue of 1.003 billion Hong Kong dollars, a decrease of 6.7% compared with the same period last year, revenue accounted for 25.9%, gross profit margin was 2.6%, mainly due to the downturn in cigarette market sales in Southeast Asia and cigarette tax increases, restraining cigarette manufacturers' demand for tobacco leaves, and reducing the supply of marketable tobacco leaves in China. The revenue of tobacco import business reached HK $2.606 billion, an increase of 1.5% over the same period last year. This sector accounted for 67.4% of revenue, 14.3% gross profit margin, and an increase of 8.7pct over the same period last year, mainly due to the vertical integration of the supply chain after the acquisition of China Tobacco Brazil and its non-wholly owned subsidiary CBT, and the expansion of cigar leaf imports to jointly improve profitability. The revenue of cigarette export business reached 18 million Hong Kong dollars, down 36.3% from the same period last year, mainly due to the continuous epidemic of COVID-19 and the decline in duty-free cigarette sales and income. This sector accounted for 0.5% of revenue and 17.5% gross profit margin, an increase in 11.2pct compared with the same period last year, mainly due to the improvement of the company's brand, sales channels and terminal demand structure. The export business of new tobacco products achieved revenue of HK $27 million, an increase of 12.5% over the same period last year, mainly due to the company's further development of emerging markets such as the Middle East, Western Europe and Eastern Europe, which accounted for 0.7% of revenue and 2.3% gross profit margin. Brazilian business revenue of 216 million Hong Kong dollars, an increase of 81.0% year-on-year, revenue accounted for 5.6%, gross profit margin of 23.1%.
We believe that the company is the international business development platform designated by China National Tobacco Corporation and the exclusive operating entity of related trade business, and as the epidemic is gradually brought under control, all business segments of the company are expected to continue to achieve steady and high-quality growth; at the same time, the company completed the acquisition of China Tobacco Brazil in November 21, further expanding and deepening the layout of the industrial chain and enhancing the overall bargaining power and profitability. The company is expected to continue to explore integration opportunities related to the industrial chain in the future, including the acquisition of overseas tobacco products operating entities, upstream tobacco products production and processing entities, etc.
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.
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. As a result of the completion of the consolidation of the main body of the Brazilian business, we expect the company's annual revenue in 22-23-24 to be HK $114,577,11,19,795 million and its net profit to be HK $496 million. The company is the only international business platform in the tobacco system and is given a "buy" rating.
Risk hints: policy change risk, sales below expectations, new tobacco development less than expected, M & An integration risk