1. China Tobacco Hong Kong: China Tobacco's exclusive international business platform. The endogenous epitaxial two-wheel drive China Tobacco Hong Kong is the exclusive operating entity designated by China Tobacco Corporation (CNTC) to engage in international business development platforms and related trade business. The controlling shareholders are China Tobacco Corporation and China Tobacco International Group Co., Ltd. The company exclusively operates the import and export of tobacco products, the export of cigarettes to duty-free shops in the two countries, duty-free shops in mainland China, and the export of new tobacco products. Through the acquisition of China Tobacco Brazil, the company began operations in Brazil, further expanding and deepening the layout of the industrial chain and enhancing profitability. In 2023, the company achieved operating income of HK$11.836 billion, an increase of 42% over the previous year, and realized a net profit of HK$599 million, a significant increase of 60% over the previous year. In addition, 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 decided to pay an interim dividend starting 2024.
2. China Tobacco Hong Kong has taken the lead in solidifying China's tobacco “going global” strategy. China's tobacco production and trade volume are unequal, and there is still plenty of potential room for tobacco international trade. In 2020-2022, China's exports of tobacco and its products account for only about 10% of total production, which does not match China's status as a major tobacco producer. In April 2015, China began promoting the “Belt and Road” initiative. It is the longest economic cooperation belt in the world with great potential for development. It also brings promising development opportunities to China's tobacco international trade. The company is expected to benefit from the continuous development of China's tobacco international trade.
International tobacco giants led the transformation, and new types of tobacco became the mainstream development trend. According to Euromonitor International data, the global market for new tobacco products is estimated to be US$124.29 billion in 2025, with a CAGR of 17.4% in 2018-2025. Major Chinese tobacco companies have seen initial results in deploying HNB, and exports of HNB products are growing rapidly. China's export sales volume of heated non-combustible tobacco products in 2023 was 616.99 tons, up 22.02% year on year, and sales revenue was 105 million yuan, up 15.38% year on year. The company is an exclusive operating entity designated by China Tobacco Corporation to operate the export business of new tobacco products overseas, and the sales scale of new tobacco products is expected to continue to expand.
Other Mountain Stone: The company may become the Chinese version of Japanese Tobacco (JT). Looking at the development history of global multinational tobacco companies, it can be seen that increasing brand and market share through mergers, acquisitions and restructuring is a common development characteristic of the four major tobacco companies. 1) After the 80s of the last century, Japan Tobacco (JT) began a large-scale history of cross-border mergers and acquisitions under the double pressure of weak domestic demand and pressure from overseas giants, thereby breaking the original trade and policy restrictions, while gaining access to local supply chains and sales networks. Overseas markets became JT's core source of performance in 2019, and the overseas tobacco sector accounted for 60% of revenue. 2) Accelerate the deployment of new types of tobacco: In 2023, Japanese tobacco achieved sales of 5.5 billion heated non-combustible smoke bombs, including PloomX, an increase of 47.8% over the previous year.
3. Company competitive advantage: Significant barriers to exclusive operating entities, strong epitaxial expansion momentum 1. Institutional advantage: Under China's tobacco monopoly system, China Tobacco Hong Kong is an exclusive operating entity designated by China Tobacco Corporation to engage in international business development platforms and related trade business. “Exclusive status” is rare, and it may continue to benefit from China Tobacco's overseas expansion and equity mergers and acquisitions in the future.
2. Advantages of the business model: steady cash flow and strong bargaining power. The company is backed by China Tobacco Group, and its revenue has increased steadily in recent years. At the same time, due to existing pricing policies, the gross margin of various businesses fluctuates less and is more resilient to risk; the company's business model and license advantages determine that the company has strong bargaining power and good cash flow.
3. Accelerated expansion of overseas business: Since 2018, the company has successively launched a new type of tobacco export business, Brazil business, and expanded the cigarette export business beyond the company's exclusive business area, and has carried out long-term strategic cooperation with Sichuan Tobacco since April 2024 to jointly promote domestic “Great Wall” cigars in overseas markets. Profitability is expected to continue to grow.
Profit prediction and valuation: We believe that the company relies on China Tobacco Group and has significant barriers. It is currently China Tobacco's exclusive international business platform. It is scarce, and is expected to be a direct beneficiary of the development and transformation of China's tobacco industry. We expect the company's 24/25/26 revenue to be HK$136.36/152.77/HK$17.197 billion, and net profit of HK$6.95/77/HK$913 million. The company is an exclusive international business platform for the China Tobacco System. We give the company a price-earnings ratio of 15 times 2025, corresponding to a market capitalization of HK$11.9 billion and a target price of HK$17.2 billion, and a “buy” rating.
Risk warning: Risk of policy changes, sales falling short of expectations, development of new tobacco falling short of expectations, risk of exchange rate fluctuations, risk of changes in counterparties' regular plans, estimating subjective risk.