Results came in above expectation The company announced 1HFY14 results: net profit increased 13.8% yoy to HKD893m, backed by 15.3% yoy growth in sales to HKD1.94bn from rapid gains in RTL. Both the top line and the bottom line exceeded our expectations; sales and net profit accounted for 47.7% and 49.7% of our f ull year forecasts, respectively (1HFY13: 46.2% and 45.7%, respectively). The positive surprise came mainly from higher-than-expected RTL sales, an improved GP margin and FX gain (HK$20m). The company declared an interim dividend of HKD8.68 cents per share and a special dividend of HKD2.88 cents per share, representing a total dividend payo ut ratio of 40% (same as 1HFY13). RTL continued growth momentum and GP margin improved The GPM improved 0.5ppt to 68.6% in 1HFY14, EBITM increased 0.4 ppt yoy to 53.7%. By segment, 1) the flavor business (73.5% of total sales) posted only a 2% yoy increase in sales, mainly due to a slight decline in production output of the tobacco industry. EBIT increased 2.9% yoy. EBITM was flat at 60.8%; 2) the RTL business (24.4%) rose 141% yoy to HKD473m in revenue terms due to contributions from the second phase of Guangdong Jinye, commenced from Nov 2012, and a higher ASP. Operating profit increased 200% yoy and EBITM improved by 7.5 ppts yoy to 38.3%.; 3) the fragrance business (2.1%) dropped a significant 56% yoy to HKD40.7m in revenue terms, as the company had disposed all the equity interest in Yunnan Huaxiangyuan in July 2013. Segment EBIT declined 31% yoy, while the EBIT margin improved by 3.5 ppts to 9.8%. ETR increased by 2.8 ppts yoy to 14.9%, due to the expiration of preferential tax periods. Share repurchase. The company repurchased 4.2m shares in 1HFY14 for a consideration of HK$14m, vs. 54.3m shares repurchased for HK$199m in FY13. Net cash rose by 46% to HKD2.6bn (HKD0.83/share) , compared to 1HFY13. Inventory increased by 16% yoy while the inventory turnover period decreased slightly,by 6 days, as compared with 1HFY13, du e to improved inventory management and optimized inventory structure. Change of director The company announced that Mr. Lam Ka Yu was appointed as a non-executive director from Nov 2013. Mr. Xiong Qing will cease to act as an executive director from January 2014. Mr . Xiong will continue to serve as the vice president of the company. The company will hold an analyst briefing on 27 Nov. We will have more updates after the meeting. The authors of this report wish to acknowledge the contribution made by Richard Huang, an employee of Evalueserve, a third-party provider to Deutsche Bank of offshore research support services.