2023 results are in line with market expectations
The company announced its 2023 results, with revenue of HK$11.84 billion, an increase of 42.2%, and net profit to mother of HK$600 million, an increase of 59.7%, in line with market expectations. The company announced a dividend of HK$0.32 per share in 2023, an increase of 60.0%, and announced the payment of an interim dividend starting in 2024. 1H/2H23 revenue was +100.1%/-8.1%, respectively, and net profit to mother was +108.7%/-9%, respectively. We expect that the short-term pressure on 2H23's performance is mainly due to delays in the arrival of some tobacco leaves in Hong Kong and the high purchase price of raw Brazilian tobacco; with the restoration of overseas duty-free passenger flow, the successive arrival of tobacco leaves in Hong Kong, and the increase in the penetration rate of new types of tobacco, etc., the 24-year performance is expected to continue to grow.
Development trends
1. 2H23 cigarette exports, HNB exports, etc. continued to increase rapidly, and tobacco imports were under pressure in the short term. 2H23 revenue side by business: 1) Tobacco leaf imports: revenue/import volume decreased by 42.1%/43.5% respectively. We expect some tobacco leaves to arrive in Hong Kong one after another in the second half of the year due to crop harvest time; 2) Cigarette exports: revenue/sales increased by 811.2%/604% respectively, mainly due to the continued recovery of passenger traffic from overseas duty-free channels. The company is also actively expanding its business scope, enriching the product portfolio such as cigar cigarettes, and continuing to increase its share of its own business; 3) New tobacco exports: revenue/sales volume increased 15.1.2%/31.2%, respectively 7%, the company continues to expand Overseas markets enhance product competitiveness and optimize business structure; 4) Tobacco exports: revenue/sales volume fell by 19.1%/29.7%, mainly due to increased cigarette taxes and strengthened tobacco control policies in export regions, putting pressure on demand; 5) Brazilian business: revenue/sales increased by 50.1%/1.9%, respectively. We expect factors such as climate change to increase the acquisition cost of raw tobacco in Brazil, putting pressure on revenue and profitability in the short term, which is expected to gradually improve in 24 years.
2. 2H23 Apart from the short-term decline in the profitability of the Brazilian business, the profitability of other business sectors has been steadily increasing. Follow up on the trend of recovering the profitability of the Brazilian business. 2H23's gross margin reached 8.4%, down 0.7 ppt. By business, tobacco imports/cigarette exports/new tobacco exports/Brazilian business gross margins were +6.4ppt, +3.8pp/+1.5pp/ -0.03pp/ -9.8ppt; on the cost side, management/financial expenses were -1 ppt/+1.1 ppt, respectively; on the cost side, the net margin of return was 3.5%, down 0.03ppt.
3. I am optimistic that the export business of cigarettes and new types of tobacco will continue to grow rapidly in 24 years. The Brazilian business is gradually recovering, and we can expect medium- to long-term “epitone+endogenous” two-round collaborative development. We expect that 1) endogenous aspects: tobacco imports, the company is expected to seize the growing demand for domestic cigar tobacco leaves, and lead the increase in sales volume and profitability; in the Brazilian business, the company is expected to strengthen CBT pricing capabilities, expand overseas sales channels, and build a product traceability system; for new types of tobacco, the company is expected to continue to promote iterative product development and brand cultivation and expand sales channels; cigarette exports, the company is expected to actively explore taxable models, expand the scale of its own business and lead the increase in profitability; 2) Outreach: The company is expected to fully utilize China Tobacco's exclusive overseas ownership book The value of the operating platform continues to explore high-quality targets that match the Group's strategic goals.
Profit forecasting and valuation
Considering the short-term pressure on the profitability of the Brazilian business, the 2024 net profit forecast was lowered by 33% to HK$670 million. For the first time, the 2025 net profit forecast of HK$740 million was introduced. The current stock price corresponds to 10/9 times P/E for 2024/25. Maintaining a neutral rating, the target price was lowered by 15% to HK$12.8 based on profit forecast adjustments and valuation switching, corresponding to 13/12 times P/E in 2024/25, with 32% upside.
risks
Risk of trade friction and exchange rate changes; risk of declining tobacco consumption.