According to the research report released by AXIN International, for the first time covering CTIHK (06055), a "buy" rating is given, and it is expected that the company's revenue in 2024/2025/2026 will reach HKD 13.1/14.4/15.8 billion, with net income of HKD 904/973/1.086 billion and a target price of HKD 20.2. Overall, the bank believes that the franchise operation provides a solid foundation for the company's performance, and the rising price of tobacco leaves and the recovery-driven growth of cigarette exports have brought growth momentum to the company. The expansion of new tobacco business in the future, as well as possible mergers and acquisitions, will become potential growth engines.

Anxin International's main points are as follows:

The company has achieved continuous performance growth in recent years.

The company's 23-year performance has reached a new historical high with revenues of HKD 11.8 billion, a year-on-year growth of 42%, and net profit of HKD 690 million, a year-on-year growth of 49%. The company has released a profit forecast, expecting revenue growth of no less than 10% and net profit growth of no less than 30% in the first half of the year. The main driving factors for performance growth include: 1) the continued recovery of cigarette exports, which has brought significant growth in revenue and gross profit; 2) the volume and price of imported tobacco leaves increased together; 3) revenue and gross profit of tobacco leaf exports have increased. The company's overall development this year is good, and performance growth is strong.

The bank believes that China Tobacco Hong Kong's core competitiveness comes from its unique franchise:

The company operates the exclusive business of importing tobacco into China. The company has exclusive operation for the export of domestic cigarette brands to Southeast Asia, Hong Kong, Macao, and outside of China. The company has exclusive operation for the export of new domestic tobacco brands worldwide. Benefiting from its exclusive operation status, the company's agreements with customers and suppliers often adopt back-to-back arrangements, without bearing transportation, insurance and other expenses, and relative low exchange rate risk. Under the condition of stable demand and supply, the company's profitability has a very solid base. In 2021, the company purchased the Pakistan Tobacco Company through external expansion, further expanding its business footprint.

For the tobacco import and export industry, global tobacco production continues to decline, and tobacco prices fluctuate in cycles, which are currently in an upswing. Taking Brazil, a major tobacco exporting country, as an example, its tobacco export price has fallen from USD 5.25/kg in 2014 to USD 3.15/kg in 2021, but rebounded to USD 4.19/kg in 2022. Affected by the El Nino climate, the tobacco production in 2023 continues to decline, resulting in a continuous rise in tobacco prices.

The competitive barrier for the tobacco trade industry is high, and the market is relatively mature and trade is stable. China Tobacco Group and the four major tobacco companies occupy 83% of the global market share. For major tobacco traders, the number of customers is limited, and long-term partnerships have been established. Moreover, traders usually require larger capital investments to control tobacco planting.

For the cigarette export business, the increase in passenger flow after the epidemic has driven sales to rebound.

From the overall trend, global tobacco sales have been declining year by year, but due to the impact of the epidemic in 2020, the consumption of tobacco has actually been in a stage of recovery in recent years. China Tobacco Hong Kong's cigarette export volume quickly rebounded after 20 years, which is positively correlated with the number of outbound Chinese tourists. At present, sales have not fully recovered to the level of 2019 and there is still room for growth. For the export of new tobacco, the HNB market is growing rapidly and has promising development prospects. The HNB market is expected to reach USD 34.1 billion in 2023, a year-on-year increase of 11.6%. The overall market size of the global cigarette market is USD 927.4 billion, and the HNB market accounts for only 3.6%, indicating great development potential.