Core views:
The decline in 23Q4 performance narrowed month-on-month. 2023 revenue of $11.168 billion (YoY -8.0%), comprehensive comprehensive income of $1,566 billion (YoY -37.2%). 23Q4 revenue was $3.166 billion (YoY -3.5%) and comprehensive comprehensive income of $372 million (YoY -8.4%). The decline was narrower than 23Q3.
The domestic market is under pressure, and overseas operations are stable. (1) By business, in 2023, APV business revenue was +26% year over year, and OEM business revenue was -13% year over year, of which disposable e-cigarette revenue was +75% year over year (23H2 +16% year over year). APV channel rollout, product iteration, and steady growth.
Single-use cigarettes followed the trend of high growth, but H2 growth was relatively limited based on product prices and strict compliance. (2) By region, China's revenue was -93% YoY (H2 -82% YoY), US Revenue +8% YoY (H2 -6% YoY), and European Revenue +9% YoY (H2 -5% YoY). Domestically, after the implementation of the new e-cigarette regulations, pure tobacco flavor influenced consumer choices, and is currently picking up; overseas, e-cigarettes are being squeezed out of disposable e-cigarettes with low prices and a wide range of channels, and the industry structure has changed. Although closed bomb exchange products maintain the largest market share in the US market, the US FDA has not yet implemented enforcement in 23, and European regulations have only recently become stricter. Therefore, even if there are policy preferences for downstream British and American tobacco, etc., the fundamentals are currently lackluster.
23H2 gross margin rebounded, and management expenses were clearly controlled. The gross margin fell 4.5 pct to 38.8% in '23, with H2 rebounding 1.7 pct to 41.0%, and the gross margin of secondary products increased steadily due to scale effects. The sales/management/R&D cost ratio increased by 1.5/-1.7/2.0pct year-on-year in 23. Internal operating efficiency improved significantly, investment in overseas markets and brands increased, and investment in medical atomization research and development increased.
Profit forecasting and investment advice. It is expected to be stable overseas and stable domestically in 24 years, and net interest rates will be manageable.
The estimated net profit for 24-26 is $18/21/2.4 billion, with a 24-year PE valuation of 25 times, corresponding to a reasonable value of HK$8.20 per share (HKD exchange rate 0.91), maintaining the “gain” rating.
Risk warning. Policy uncertainty; new business falling short of expectations; exchange rate fluctuations; increased competition, etc.