Incident: The company announced its 2023 annual results. In 2023, it achieved revenue of HK$11.836 billion, +42.19% year over year; realized gross profit of HK$1,088 million, +34.96% year over year; realized net profit attributable to the company's equity holders of HK$599 million, a significant increase of 59.72% year over year, higher than the previous profit forecast.
1. Imports of tobacco products, exports of cigarettes and new types of tobacco, and Brazilian business continue to grow!
Tobacco leaf products export business: Achieved revenue of HK$1,652 billion in 2023, a year-on-year decrease of 22%, accounting for 14.0% of revenue. Mainly due to a decrease in the current supply of marketable tobacco leaves and the continued increase in cigarette taxes and stricter tobacco control measures in major export regions, the procurement demand for tobacco leaves decreased; gross margin was 2.7%, +0.1 pct year on year.
Tobacco leaf product import business: Achieved revenue of HK$8.079 billion in 2023, up 49% year on year, accounting for 68.3% of revenue, mainly due to the delay in shipment of tobacco leaves in 2023 due to the epidemic and the increase in the sales unit price of tobacco leaf products compared to 2022; gross margin was 9.1%, -2.4 pct year on year.
Cigarette export business: In 2023, the company achieved revenue of HK$1,299 billion, a sharp increase of 876% over the previous year, accounting for 10.2% of revenue, and a gross margin of 13.6%, +3.1 pct year over year. The main reason was the increase in duty-free shopping traffic in the company's business area after the pandemic, driving a significant increase in sales. At the same time, the company actively introduced new distributors, continued to enrich its product portfolio, and increase the proportion of its own business.
Export business of new tobacco products: Achieved revenue of HK$130 million in 2023, up 18% year on year, accounting for 1.1% of revenue, gross margin of 4.4%, +1.5pct year on year. It mainly benefits from the company's efforts to expand international market channels and customers, seize development opportunities in emerging markets and the depth of key market expansion, increase order demand, strengthen production, supply and marketing collaboration, and continue to enrich the product portfolio.
Brazilian business: Achieved revenue of HK$766 million in 2023, up 41% year on year, accounting for 6.5% of revenue. Sales of tobacco leaf by-products with high gross margin increased sharply year on year, mainly due to the impact of the pace of goods delivery, achieving a gross profit margin of 18.4%, or 2.5 pct year on year.
Furthermore, the company plans to pay a final dividend of HK$0.32 per share for the year ending December 31, 2023, an increase of 60% over the previous year, and has decided to pay an interim dividend starting in 2024.
We believe that the company is an international business development platform designated by China Tobacco Corporation and the sole operating entity for related trade business. As overseas duty-free passenger flow continues to resume and the new tobacco business continues to develop, the company's various business segments are expected to continue to achieve steady, moderate and positive high-quality growth. In the future, the company is expected to continue to strengthen pricing capabilities, grasp the growing demand for domestic cigar tobacco leaves, actively explore taxable cigarette business development models, accelerate the introduction of new product regulations, accelerate the development of new types of tobacco, and continue to improve profitability.
2. The advantages of the company's business model are prominent, and the scarcity is strong
Scarce advantage: China Tobacco Hong Kong has exclusive rights to operate related tobacco international businesses. According to China Tobacco Corporation Document No. 60, China Tobacco Hong Kong is the exclusive operating entity designated by China Tobacco Corporation to engage in international business development platforms and related trade business. We believe that this “exclusive position” is rare and may continue to benefit from China Tobacco's overseas expansion and equity mergers and acquisitions in the future.
Business model advantages: stable cash flow and strong bargaining power. The company is backed by China Tobacco Group and has seen a steady increase in revenue in recent years; at the same time, due to current pricing policies, gross margin fluctuations in various businesses are low and risk resistance is high; the business model and license advantages determine the company's strong bargaining power and good cash flow; in the future, it may acquire overseas tobacco brands and channels to enhance competitiveness.
Profit forecasting and valuation: We believe that the company relies on China Tobacco Group and has significant barriers. It is currently the only international business platform under China Tobacco. It is scarce, and is expected to be a direct beneficiary of the development and transformation of China's tobacco industry. As the company's export business is expected to continue to grow, we expect revenue of HK$136.36/152.77/HK$17.197 billion in 24/25/26 (HK$152.64/17.445 billion before 24/25); net profit of HK$695/7.78/ HK$913 million (HK$1,024/1.121 billion before 24/25); the company is the only international business platform for the China Tobacco System and maintains a “buy” rating.
Risk warning: risk of policy changes, sales falling short of expectations, new tobacco development falling short of expectations