Faster Q2 revenue growth, steady core business growth, active expansion in e-cigarette business

The mid-year report performance fully met expectations, with a rebound in revenue growth in the second quarter. The company achieved revenue of 1.195 billion yuan in the first half of the year, a year-on-year increase of 7.5%; total profit of 388 million yuan, a year-on-year increase of 23.7%; net profit attributable to shareholders of the listed company was 322 million yuan, a year-on-year increase of 24.1%; with an EPS of 0.49 yuan, fully in line with our forecast (0.49 yuan, 25%) (all diluted by the latest share capital). In the second quarter alone, revenue reached 533 million yuan, a year-on-year increase of 11.0%; net profit was 128 million yuan, a year-on-year increase of 23.8%; revenue growth significantly accelerated compared to Q1 (Q1 revenue increased by 4.8% year-on-year, net profit increased by 24.3%). The company expects net profit for the first three quarters of 2014 to be between 351 million and 457 million yuan, a year-on-year increase of 0-30%.
     The core business of cigarette labels is solidified, with active layouts in external expansion and transformation driving continuous performance growth. 1) The management structure is refined, and executive interests are aligned, enhancing profitability in the core cigarette label business. In the first half of 2014, the company launched a restricted stock incentive plan (14.65 million shares, with a grant price of 9.3 yuan, with profit growth of no less than 20%, 40%, and 60% from 2014 to 2016 compared to 2013). After streamlining the equity mechanism and executive incentives, the company effectively stimulates internal growth potential. The domestic cigarette label business maintains steady growth, relying on key provinces such as Anhui, Guizhou, and Yunnan; internal management efficiency has improved, with a 4.0% increase in revenue from the core cigarette label business and a 1.8 percentage point increase in gross profit margin. 2) Continuation of external acquisition expansion. In recent years, the company has expanded its market share in key regions and brands through continuous external expansion. In the second half of 2013, the company acquired the remaining 40% equity of Zhongfeng Tian Guangdian, which contributed to the performance in the first half of 2014. 3) Gradual expansion into non-cigarette packaging. In the first half of 2014, laser packaging materials achieved revenue of 221 million yuan, a year-on-year increase of 130.8%; of which overseas revenue was 22.25 million yuan, a year-on-year increase of 235%, due to the recognition of the company's products by customers in the United States, the United Kingdom, France, Turkey, Malaysia, and other countries, leading to a significant increase in orders. In terms of social products, the company actively expands into consumer packaging fields such as wine labels and pharmaceutical labels, with a joint venture with the Guizhou Salt Group establishing a subsidiary for salt packaging, achieving sales revenue of 23.34 million yuan and a net profit of 5.04 million yuan.
     The e-cigarette business has successfully established a presence in the first half of 2014, with expectations for substantial progress in the second half. In February 2014, the company established a joint venture with Shenzhen Heyuan to enter the e-cigarette field. In the export market, the establishment of industry standards and the strengthening of regulatory measures will help the long-term standardized development of the industry. In the future, advantageous manufacturers will steadily increase their market share, and the company will accelerate its layout in the overseas e-cigarette export market through multiple channels. In the domestic market, Jinjia actively participates in cooperative research and development samples, leveraging its existing downstream channels in the tobacco industry. The e-cigarette business is expected to transition from layout planning to performance contribution in the second half of 2014.
     Internal management efficiency has improved, and continued external acquisitions provide expansion momentum. The e-cigarette business is expected to make substantial progress, and we recommend increasing holdings! We maintain the profit forecast for the company at 0.93 yuan and 1.19 yuan EPS for 2014-2015, with the current stock price (14.57 yuan) corresponding to PE ratios of 16 times and 12 times for 2014-2015. The company's traditional business growth is steady, providing a safe margin for valuation; once the performance of new businesses such as e-cigarettes materializes, it will provide upward elasticity for the stock price, and we recommend increasing holdings!