Sinolink: Initiate coverage of CTIHK (06055) with a "buy" rating and a target price of HKD 32.2.

Sinolink released a research report, covering CTIHK (06055) for the first time, giving it a "buy" rating, and forecasting the company's EPS for 2024-26 to be 1.15/1.40/1.66 Hong Kong dollars with a target price of 32.2 Hong Kong dollars. The company's revenue and net profit attributable to shareholders in 2023 reached 11.84 billion and 600 million Hong Kong dollars respectively, with a CAGR of 7.2% and 17.0% from 2019-2023. In 24H1, the company's revenue and net profit increased by 12.4% and 40.8% respectively, with ROE maintained at over 20% for several years. The company's franchise rights laid the foundation for its performance, highlighting its scarcity and certainty attributes. Sinolink's main points are as follows: Tobacco import and export business: The volume and price of imports are expected to rise, with the expansion of export regions providing incremental growth. The company is responsible for the exclusive operation of tobacco imports (excluding sanctioned countries and regions) and the export of tobacco products to certain regions. This business is the core business of the company, with tobacco import/export revenue in 24H1 increasing by 5.5% and 23.0% respectively to 6.80 billion and 920 million Hong Kong dollars, accounting for 78.2% and 10.5% respectively. According to Euromonitor, the CAGR of cigarette retail sales in China is expected to be 0.3% from 2024-2028, and considering the increasing demand for cigars in China and the significant increase in high-end tobacco imports, the tobacco import business is expected to see a slight increase in volume and price. On the export side, since 2022, the tobacco planting area in China has stabilized, alleviating supply pressure. From the demand side, the expansion in Europe is expected to further drive the growth of the tobacco export business. Cigarette export business: Sales volume growth has dual drivers, with profit elasticity expected. The company is responsible for selling cigarettes from China National Tobacco Corporation to global markets. Due to the recovery of inbound and outbound travel, the revenue of this business in 2023 increased by 875.8% to 1.21 billion Hong Kong dollars, accounting for 10.2%, and the revenue of this business in 24H1 increased by 128.0%. Looking ahead, with the further recovery of inbound and outbound travel (reaching 91% of 2019 levels in 2024) and the expansion of the company's regional and channel coverage (such as duty-free markets), the company's cigarette export volume is expected to increase. In terms of profitability, the trend of optimizing product mix and increasing direct/own-operated ratio has emerged. Profit improvement is certain, and there is potential for elasticity. New tobacco business: HNB products are in a period of development dividends, with product strength enhancement and regional expansion accelerating development. The revenue share of this business in 2023 was 1.1%, with a CAGR of 48% from 2019-2023, and a 28% increase in revenue in 24H1. According to Euromonitor, the global scale of HNB reached 34.1 billion US dollars in 2023, with a projected CAGR of 13.5% from 2023-2027, indicating that the industry is in a period of development dividends. Currently, China National Tobacco's HNB brand market share is still low, but with product strength enhancement (such as natural smoke technology) and continuous regional expansion, market share is expected to increase rapidly. Capital operation platform positioning, M&A potential worth looking forward to. The company is positioned as a capital operation platform within the China National Tobacco system. The acquisition of China National Tobacco Brazil has provided a good model for future M&A expansion, with revenue growth of 41% and 43% for the Brazil business in 2023 and 24H1, respectively. As an important external expansion platform for the China National Tobacco system, it will help with the internationalization of China National Tobacco and the company's growth potential is worth looking forward to. Risk warning Risk of exchange rate fluctuations, risk of natural disasters, channel and new product expansion below expectations.