China Tobacco Hong Kong is a designated overseas platform for China's tobacco industry responsible for capital operation and international business development, and plays an important role in China's tobacco “high-quality development” strategy. We believe that the company's endogenous and epitaxial growth are both interesting. ① Endogenous: Domestic cigarette consumption upgrades drive the increase in demand for imported tobacco leaves, and demand in the Southeast Asian market is still expected to drive up tobacco export revenue. Cigarette exports will experience marginal improvements with the resumption of outbound travel and business expansion outside the exclusive business area, and the broad space for new types of tobacco to go overseas contributed the strongest growth elasticity; ② Outreach:

The acquisition of China Tobacco Brazil in '21 took the first step in international mergers and acquisitions, launching a signal for physical transformation, and also brought an important source of revenue to the company. In the future, diversified capital operations around the upstream and downstream of the industrial chain can be expected, and we are committed to building an integrated tobacco industry platform with global competitiveness.

As China Tobacco International Group's designated overseas platform for overseas capital market operations and international business development, China Tobacco Hong Kong has become the sole operating entity for related businesses, carrying the strategic mission of high-quality international business development. China Tobacco Hong Kong carries China Tobacco's strategic mission of “high-quality development”. Currently, China Tobacco's overseas influence is insufficient, and the domestic cigarette market has become a stock market. At the same time, the big wave of new types of tobacco brings huge opportunities for changes in the industry pattern. Whether in terms of seeking business development or increasing international popularity, China Tobacco will firmly “go global” at a strategic level, and China Tobacco will become an important carrier for this strategy. The company's performance in the previous period fluctuated due to the impact of the epidemic. Currently, the growth rate has stabilized. For the full year of '23, revenue increased 42% to 11.836 billion yuan, and gross profit increased 29% to 1.09 billion yuan. By business segment, the tobacco import and export business is still the company's main revenue force, accounting for 82% in total. The cigarette export business has rebounded sharply with the resumption of outbound travel. The growth rate of the new tobacco business is steady, and the Brazilian business is growing at an impressive rate under a low base.

Endogenous: Domestic consumption upgrades drive an increase in demand for imported tobacco leaves. Southeast Asian tobacco exports are also relatively stable. There is plenty of room for new types of tobacco to go overseas. Cigarette exports have seen marginal improvements with the resumption of outbound travel and business expansion outside the exclusive business area. 1) Judging from the company's main tobacco leaf import and export business, the flavor of tobacco leaves is greatly affected by geographical location. Domestic high-end cigarettes depend on the high product quality and variety of flavors brought by imported tobacco leaves. Under the general trend of domestic cigarette consumption upgrading, it is expected to continue to drive the increase in demand for imported tobacco leaves.

Consumption levels in Southeast Asia are low, there is demand for medium and low imported tobacco leaves, and demand for tobacco leaf export business is stable. 2) New tobacco products around the world are growing rapidly, the HNB tobacco replacement harm reduction logic works smoothly, and space can be expected as penetration increases. The four major international tobacco companies were the first to enter the global HNB circuit. The company grasped the period of loosening of the global tobacco product pattern and actively laid out a new tobacco track. As a designated platform for China Tobacco HNB to go overseas, it directly benefited from the growth of the industry and the dividends of China Tobacco's brand share increase. 3) The resumption of outbound travel is driving business back to normal. The development of high-margin product regulations and the expansion of business regions are expected to bring another impetus for growth after the signing of the framework agreement.

Outreach: The acquisition of China Tobacco Brazil has begun, and diversified capital operations can be expected in the future. Using history as a guide, the history of the growth of global multinational tobacco giants is a history of investment mergers and acquisitions. China Tobacco's “high-quality development” strategy has a long way to go. Capital operations and global mergers and acquisitions are one of the important paths. China Tobacco Hong Kong is an important implementing entity. On the one hand, China Tobacco's acquisition of Brazil in '21 helped improve supply chain stability through vertical integration of the industrial chain, while also reducing costs and improving business diversification to enhance profitability. In 23 years, Brazil's operations have achieved revenue of HK$770 million (yoy +41%) and gross profit of HK$141 million (yoy +15%); on the other hand, it was the first step in international mergers and acquisitions after the company's listing, and began the materialization of its import and export trade The transformed signal gun is expected to invest and acquire multiple links in the upstream and downstream tobacco supply chain, cigarette brands, new tobacco products, or sales channels in the future, and is committed to building an integrated tobacco industry platform with global competitiveness.

Profit forecast and investment advice: China Tobacco Hong Kong is positioned as China Tobacco's designated platform for capital operation and international business development. It currently has five main businesses. Performance volatility due to the pandemic and mergers and acquisitions is expected to abate, and it is expected to enter a steady growth range in the future. The company's revenue from 2024 to 2026 is expected to be HK$133.17/146.93/16.023 billion, respectively. The net profit to mother is $6.91/788/88/888 million, respectively HKD, +15%/14%/11% year over year, corresponding to a 24-year PE of 10.1x, was given a “Highly Recommended” investment rating for the first time.

Risk warning: policy regulation risk, seasonal risk, trade restriction risk