Favor business. In LCY, the tobacco business' sales growth was roughly6% for 1HFY13 vs industry growth for tobacco cigarettes of 2.8%. For foodfavors, it was about 5-6% and most of the growth was volume growth.
However, management expects food favors to achieve growth in the midteens in 2HFY13 with the market recovery while the tobacco side shouldbe stable with a growth rate similar to that of 1HFY13. The tobaccoconsolidation is almost done with 20 key players in the market. Thesetobacco companies will focus more on gaining shares through winning endusers rather than company consolidation. Huaobao's role in the future is tooffer a one-stop shop/services platform for tobacco companies to win theseend user shares with new products.
For RTL, the sales increase was mainly from ASP increase in 1HFY13. Asmentioned during the 1HFY13 analyst meeting, management expectsFY13 sales from RTL to reach HK$600m. We believe that in 2HFY13, halfof the sales (i.e. roughly HK$200m) will come from the new production line.
As the quality will be better, GPM should be better than the first line as well.
Management hopes that by FY14, sales of RTL can reach HKD1bn (vsHKD850m in our forecast). Thus, if sales from RTL are higher than overallsales growth, overall GPM might continue to trend lower, assuming allother things being equal.
Capex breakdown for FY13. Of the HKD700m capex for FY13, HKD100mwill be for the new office in Shanghai and maintenance; HKD500m for RTLand HKD100m for investment in new materials (of which HKD50m is for theJV in Korea).