The company expects the adjusted net profit of Q2 to be-53% and 40% compared with the same period last year, which is slightly lower than we expected. Suppressed by regulatory factors at home and abroad, the performance is expected to continue to bottom out in the short term, and the performance inflection point still needs to wait, but the establishment of the expected inflection point of overseas operations caused by the refusal of JUUL to submit PMTA should be paid attention to and the "buy" rating should be maintained.

2022Q2 performance expectations are low, fundamentals continue to bottom out. The company disclosed the 2022H1 performance forecast that the total profit and comprehensive income of 2022H1 is expected to be 1.322 billion yuan to 1.554 billion yuan, 46.0% compared with the same period last year, and the adjusted net profit is 1.375 billion yuan to 1.606 billion yuan, which is 46.0% higher than that of the same period last year. The performance forecast corresponds to 2022Q2's total profit and comprehensive income of RMB 796-1.028 billion, which is-53.2% and 39.5% compared with the same period last year. The adjusted net profit is RMB 821 million and 39.8% compared with the same period last year, which is slightly lower than our expectation.

Domestic business: multiple factors disturb expectations, Q4 is expected to usher in the expected inflection point. It is estimated that the domestic income of Q2 is about 1.2 billion yuan, year-on-year-29%, month-on-month + 167%. The main reasons are: 1) although the taste regulation has become more stringent, the demand for hoarding has surged during the transition period, and Q2 has improved significantly; 2) there is uncertainty in license approval and product review, and brands and channels continue to remove inventory; 3) 2021Q2 shipments have a high base. For the whole year, there is still great uncertainty about the current performance under multiple factors, and we cautiously expect domestic income to decline by about 43% for the whole year. With the listing of Q4 new products and the clear target of annual sales, the logic of domestic valuation is initially clear, and the expected inflection point is gradually established.

Overseas business: the expected inflection point has been established and the pattern has been unprecedentedly optimized. Affected by the PMTA approval process, demand in the first half of the year is slightly lower than expected, and H1 overseas revenue is estimated to be + 11% year-on-year, of which Q2 overseas revenue is about 56% year-on-year / month-on-month + 25% Universe. We judge that the expected inflection point of overseas operations has been established, and overseas revenue is expected to be nearly + 30% CAGR in the next three years. 1) after JUUL's application for PMTA was rejected, the three major brands reviewed by PMTA are all Si Moore customers, and in the medium and long term, Simore's American cigarette market share has doubled, and the negative impact of forbidden menthol taste; 2) based on FDA's recognition of the safety of VUSE brand and ceramic atomization technology, VUSEalto PMTA has strong certainty. 3) the incremental contribution of new products such as slope climbing and FELM Air of disposable small tobacco is significant.

Domestic income declines & cost inputs increase and short-term profit margins are under pressure. The sharp decline in domestic business income has reduced capacity utilization and gross profit margin, dragging down the overall gross profit margin for the whole year, but the negative impact weakens quarter by quarter as the proportion of domestic income decreases. Based on the planning at the beginning of the year, the company continues to increase R & D investment. It is estimated that 2022H1 R & D expenditure is about 8-1 billion yuan, covering basic research, applied research, health care and other new areas of research, and strengthen management, sales system construction. The upfront cost investment is expected to support the company to continue to consolidate its competitive advantage, but it affects short-term profits, and we lower our full-year adjusted net interest rate forecast to about 26%.

Risk factors: VUSE alto and menthol flavors failed to replace the PMTA; subversive atomization technology path; the industry was more regulated than expected; and new tobacco products were in the tax increase channel.

Investment advice: in view of the slightly lower expectations of overseas markets under the policy disturbance in the first half of the year, and the tightening regulation of taste tobacco is expected to bring demand in the next three years to decline first and then recover, we downgrade our 2023 operating income forecast to 14.8 billion (original forecast: 16.2 billion). Downgrade the adjusted net profit forecast for 2022-2023 to 3.5 billion / 4.33 billion (original forecast: 3.91 billion / 4.67 billion) However, taking into account whether JUUL will double its US market share and continue to repair market demand, the operating income forecast for 2024 will be raised to 20.2 billion yuan (original forecast of 19.9 billion yuan), and the adjusted net profit will be forecast to 5.99 billion yuan (original forecast: 5.59 billion yuan); corresponding to 2022-2024 EPS0.58/0.72/1.00 yuan (original forecast: 0.65 shock 0.78 EPS0.58/0.72/1.00 0.93 yuan). The company takes the lead in technology and customer resources, and its valuation is expected to be repaired to 30xPE to match overseas business growth and pattern optimization, lowering its target price to HK $27 (original: HK $29), corresponding to 30xPE in 2023, maintaining a "buy" rating.