Ci g arette producer's low-tar and cost-savin g solution
Huabao has focused on the R&D of new cigarette materials and technology, to answer the government’s requirement for a tar reduction and clients' urge for cost cutting. While its RTL investment has started to bear fruit, we are looking forward to more new product(s), to fuel sustainable growth (eg. expanded tobacco stem). Maintaining Buy.
1HFY14 results above expectation
Net profit increased 13.8% yoy to HKD893m, on the back of 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, and surprises came from higher-than-expected RTL sales, improved GP margin and FX gain (1HFY13: loss). The total interim dividend payout ratio remains unchanged at 40%.
FY14 guidance revised up
Management has revised up FY14 guidance, with sales to grow 13-14% yoy (old guidance: 12%), with RTL contribu ting HKD1bn revenue (old: HKD900m). The tobacco F&F segment will continue suffering from weak cigarette industry output growth, due to a weak economy and the government’s frugality campaign.
Target price revised to HKD4.81, maintaining Buy
We increase our FY14-16E net profit by 2-6%, primarily on stronger-than-expected RTL sales and higher GP margin, on better raw material management and the disposal of the low GP margin business (Yunnan Huaxiangyuan). Accordingly, we revise up our target price to HKD4.81 (from HKD4.72), which is derived by assigning a 40% discount to the DCF valuation (9.82% WACC and 1% TG), equivalent to 7.9x FY14E P/E and a 5.1% dividend yield. Key risks: input cost volatility, regulatory changes.