The transformation continues
Huabao’s transformation is taking shape: from an upstream raw material supplier in a sunset industry (tobacco), to a product mix improvement/cost-cutting solution provider, or the survival kit for Chinese cigarette producers. While its reconstituted tobacco leaf (RTL) investment has started to bear fruit, we are looking forward to more new products/services, to fuel sustainable growth (e.g. expanded tobacco stem). Maintaining Buy.
FY14 results slightly ahead of expectations
The company reported a 15% yoy increase in NPAT to HKD1,977m for FY14. Revenue rose 16% yoy to HKD4,237m – mainly due to 121% yoy growth in RTL sales (25% of FY14 revenue) – and revenue from tobacco flavors (73% of FY14 revenue) grew only by 3% yoy. NP and sales were 2.7%/3.6% above our estimation. The company declared a total dividend of HKD29.05 cents, representing a total dividend payout ratio of 46% (FY13: 40%).
Management expects double-digit revenue growth for FY15, driven mainly by 20% yoy growth in RTL sales on higher utilization and ASP. It also expects new products to contribute 2-3% of revenue, including 1) e-cigarettes; and 2) modified RTL and advanced-stem-processing technology, probably through financial leasing.
Target price revised up to HKD5, maintaining Buy
We increase our FY15-16E NPAT forecast by 3%, primarily on stronger-than expected RTL sales and contribution from new products/services. Accordingly, we revise up our target price to HKD5 (from HKD4.81), which is derived by assigning a 40% discount to our DCF valuation (10.62% WACC and 1% TG), equivalent to 7.2x FY15E P/E and a 5.6% dividend yield. We maintain a Buy rating on Huabao, which now trades at 6.3x FY15E PE and with a 6.4% dividend yield. Key risks: input cost volatility, regulatory changes.