The company disclosed the 2022H1 performance forecast, which was slightly lower than we expected. The company expects 2022H1-adjusted (Non-GAAP) net profit to be 13.75-1.606 billion yuan, down 53.8% and 46.0% year-on-year, while central office is 1.49 billion yuan, down 49.9% from the same period last year. Among them, the adjusted net profit of 2022Q2 was 8.21-1.053 billion yuan, down 53.0% and 39.8% compared with the same period last year, and that of central office was 937 million yuan, down 46.4% from the same period last year.

The high base and high cost of 2022Q2 put pressure on the performance. 1) 2021Q2 domestic brand stock in advance brings a high base: 2021Q2 is affected by the expected launch of the policy, domestic brands adjust the pace of pick-up, and 2021Q2's domestic revenue increases 4 times year-on-year to bring a higher base. 2) the investment of high R & D cost affects the release of short-term performance. The company plans to invest 1.68 billion yuan in R & D expenditure in 2022, an increase of 1.01 billion yuan over 2021, which is a drag on 2022Q2 profit growth of 15-20pp. Under the high R & D investment, short-term performance is under pressure, but it can effectively consolidate the company's technological advantages and enhance its medium-and long-term competitiveness. 3) the gross profit margin decreased. It is mainly due to the structural changes of different gross profit margin products. 4) there is a large increase in administrative expenses and sales expenses.

Domestic demand is disturbed in the short term, but the policy direction is gradually clear and the risk factors are gradually eliminated. The "E-cigarette Management measures" will be formally implemented on 2022-10-1. Under the seasoning ban, e-cigarette brands gradually stop producing flavor products, which may disturb the growth of the industry and the company's domestic orders. In addition, with the successive issuance of licenses at the production end, brand end and channel end, the regulatory policy direction of China's e-cigarette industry has gradually become clear, and the main context of the development of private enterprises' deep participation, market-oriented competition and increased concentration remains unchanged. In the medium and long term, we believe that the penetration rate of domestic e-cigarettes will continue to increase steadily.

PMTA in the United States is accelerating, and the share of Vuse is expected to continue to increase. Three products of the Vuse brand of British American Tobacco PLC, the company's largest customer, have passed PMTA, and the core product Alto is still under review due to the late submission of applications, but we think it is more likely to pass. Both Nippon Tobacco and NJOY have successfully passed PMTA for their OEM products, which to a certain extent indicates that the company's manufacturing capacity has been recognized by FDA. In terms of disposable products, as the FDA strengthens the supervision of synthetic nicotine and disposable products, the proportion of bullet-changing products is expected to increase. At the same time, the head brand has not made efforts in the one-time track before, and the share of head brand disposable products is expected to increase rapidly after tighter supervision. Vuse go, a disposable product manufactured by the company, has been listed in the non-US market in 2022Q2. We expect that the disposable product will bring a stronger driving force to the repair of the company's 2022H2 export revenue growth. Profit forecast and investment rating: the global e-cigarette industry continues to move towards legalization, and the medium-and long-term penetration rate of e-cigarettes under harm reduction attribute will continue to increase, but domestic demand will be disturbed by policy landing. Based on the company's 2022H1 performance forecast, profits will be reduced. We estimate that the homing net profit from 2022 to 2024 will be 35.4,50.2 and 5.74 billion yuan respectively (the original profit forecast is 44.0 pound 59.5 pound 70.5), the corresponding EPS is 0.59 pound 0.84 pound 0.96 yuan, and the corresponding PE is 30-21-18 times. Maintain a "buy" rating.

Risk tips: uncertainty of industry policy, change of PMTA audit standards, intensification of industry competition, etc.