Tobacco industry's long-term growth driver
This report marks the transfer of coverage from Anne Ling to Winnie Mak. Webelieve the recent weakness in China's tobacco market will help drive astructural change, with tobacco companies vying for product mix improvementto achieve sustainable growth. Huabao has focused on the R&D of new flavorsand materials, as well as RTL for tobacco companies, and it serves as asolution provider for the latter's future growth. We maintain our Buy rating andtrim our target price from HKD5.07 to HKD4.72 (8.2x FY14E P/E and 4.9%dividend yield).
FY13 results in line with Deutsche Bank estimates
Net profit fell 1.9% yoy, to HKD1.7bn in FY13, on the back of 10.1% yoy salesgrowth to HKD3.6bn. Net profit was 1% below our forecast, while salesrevenue was 5% below our estimate, mainly on lower-than-expected fragranceand RTL sales. The total dividend payout ratio was 41% vs. 39% in FY12.
FY14 likely a tough year
Management targets double-digit sales growth in FY14, mainly driven by newRTL capacity. Management guided for RMB900m sales for FY14 (up 86% yoy).Tobacco F&F is suffering as a result of the standstill in consolidation, weakconsumer sentiment and frugality measures. For the food F&F segment,management will continue to restructure its product mix for better profitability.
FY14 capex of HKD500m is planned on RTL and new cigarette materials.Target price cut to HKD4.72, maintaining Buy
We cut our FY14-15E NPAT by c.11% on the change in product mix, and thehigher SG&A ratio and ETR; accordingly we reduce our target price to HKD4.72(from HKD5.07), which is derived by assigning a 40% discount to the DCFvaluation (9.32% WACC and 1% TG) and is equivalent to 8.2x FY14E P/E and a4.9% dividend yield. Key risks: input cost volatility, regulatory changes.