Incident: The company announced its 2020 annual results. It achieved revenue of HK$3.481 million during the reporting period, a decrease of 61.2% over the previous year, and realized net profit attributable to the owners of the Company of HK$95 million, a decrease of 70.2% over the previous year.

Affected by the COVID-19 pandemic, tobacco leaf import business and cigarette export business declined in large segments. The tobacco leaf export business achieved revenue of HK$1,934 million during the reporting period, a decrease of 10.4% over the previous year, accounting for 55.6%, gross margin of 2.37%, a decrease of 0.13 pct over the previous year; the tobacco leaf import business achieved revenue of 1,351 billion yuan, a decrease of 70.8% over the previous year. Mainly due to the impact of the COVID-19 pandemic, the tobacco production progress of some tobacco products was delayed. The supply chain of some tobacco products was blocked in the second half of last year, causing product delivery to be delayed in the second half of last year, causing product delivery later than previous years, and the cycle of revenue in this sector was extended. The proportion is 38.8%, gross margin was 5.46%, and gross margin remained stable; the cigarette export business achieved revenue of 158 million yuan, a year-on-year decrease of 92.7%. Mainly due to the impact of the COVID-19 pandemic, sales in the global duty-free cigarette market declined sharply. Duty-free shops within the company's operating area suspended or shortened their business hours, causing sales to drop sharply. Since the second half of last year, duty-free shop traffic and consumption in Macau have gradually picked up. The sector's revenue share was 4.54%, gross margin was 10.85%, up 6.02pct year on year, and profitability increased significantly; exports of new tobacco products increased significantly; exports of new tobacco products increased significantly; exports of new tobacco products increased significantly; exports of new tobacco products increased significantly; exports of new tobacco products increased significantly; exports of new tobacco products increased significantly; exports of new tobacco products increased significantly; exports of new tobacco products increased significantly; exports of new tobacco products increased significantly; exports of new tobacco products increased significantly; exports of new tobacco products increased significantly; exports of new tobacco products increased significantly; exports of new tobacco products increased significantly; exports of new tobacco products increased significantly; exports of new tobacco products The business achieved revenue of 38 million yuan, an increase of 42.8% over the previous year, mainly benefiting from the continuous launch and expansion of new products and new markets. In 2020, new tobacco products covered 27 countries (regions), including 18 new Chinese tobacco product brands such as CTOM, COO, MC, and Jiaozi (Kuanzuo). The sector's revenue share was 1.1%, gross margin was 2.74%, a year-on-year decrease of 0.42 pct, and profitability remained stable. We believe that the pandemic has had a negative impact on the company's short-term business, but the company has responded positively to the negative impact of the pandemic and continuously strengthened its business innovation and market development capabilities. At the same time, the company will also continue to vigorously promote the development of existing business segments and select potential mergers and acquisitions opportunities. With the recovery of global trade and consumption, we believe that the company's various business segments are expected to continue to achieve steady, moderate and positive growth.

The advantages of the company's business model are prominent, and scarcity is strong

Scarcity 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 status” is rare, and it 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.

With the help of new types of tobacco, China Tobacco Hong Kong may open a new chapter of development

International tobacco giants have begun to focus their research and development on the field of new types of tobacco, and the market size has risen rapidly in recent years. Fimo International's new tobacco segment earned US$6.8 billion in 2020, accounting for 23.8% of revenue; the number of IQOS cigarettes released reached 76.1 billion sticks (about 1.52 million large boxes), an increase of 27.6% over the previous year. At present, the market for heated non-combustible products in China has not yet been opened, but the development momentum is strong. Currently, major Chinese tobacco companies are speeding up technology research and development work, and the products are only exported overseas. At the same time, the “Chinese flue-cured tobacco” flavor preparation technology unique to Chinese tobacco will also lay a good foundation for satisfying the unique preferences of domestic and foreign consumers.

Profit forecasting and valuation

We believe that the company relies on China Tobacco Group and has significant barrier advantages. 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. Affected by the epidemic, we adjusted the company's revenue for 21/22/23 to HK$61.0/75.64/94.1 (84.37/104.6 before 21/22) of HK$61.0/75.64/94.1 (value before 21/22 was 84.37/104.6) of HK$2.11/2.95/3.86 (value before 21/22 was 3.35/449) of HK$2.11/2.95/3.86 (value before 21/22 was 3.35/449) of HK$100,000,000; the company is the only international business platform for China Tobacco Systems, which allows “buying”

ratings.

Risk warning: risk of policy changes, sales falling short of expectations, development of new types of tobacco falling short of expectations, risk of mergers and acquisitions