Jinjia Shares: Leading Cigarette-Packaging Company Transforming Toward Integrated Packaging and Vapi

The company has completed top-down strategic planning and management incentives. With strong partners brought together, its e-cigarette business is worth watching. As it transforms into an integrated packaging enterprise, its growth potential is opening up. We initiate coverage with a Buy rating and a target price of RMB 27.75.

Key points supporting the rating

The cigarette packaging label business benefits from industry consolidation, providing solid earnings support. Growth in the downstream cigarette industry remains stable (below 3%), while the product mix is shifting toward mid-to-high-end products, driving the cigarette packaging label industry toward higher-end concentration as well. The company is one of the leading players in the cigarette packaging label industry and will benefit from this trend. Through product mix adjustment as well as mergers and acquisitions, the company achieved a net profit CAGR of 17.77% from 2009 to 2013. With the acquisition of the remaining equity interests in subsidiaries such as Jiangsu and Chongqing, together with earnings growth and integrated development across the industry chain, the likelihood of net profit growth exceeding 20% over the next two years is high.

The company has completed top-down strategic planning and management incentives. Last year, the company’s second-largest shareholder fully exited, and the company established its transformation direction. In terms of product transformation, it is shifting toward premium packaging and electronic packaging; in terms of industrial transformation, it is moving into e-cigarettes. On May 20, 2014, the company’s executives used their own funds to participate in an equity incentive plan, with net profit targets for 2014, 2015, and 2016 set at 20%, 40%, and 60% growth respectively versus 2013. Shareholders are aligned at the ownership level, management has strong motivation to improve performance, and the company is expected to benefit from management-driven gains.

With a strong team assembled, the e-cigarette business is worth watching. The company established a joint-venture subsidiary with Huayuan Technology to develop e-cigarette products, cooperates with China Tobacco on R&D and distribution channels, and works with H&T Intelligent Control to develop a health management data platform. The company’s overseas e-cigarette business operates through the OEM model, and as policy risks in the U.S. market ease and destocking comes to an end, its overseas business is set to enter a phase of rapid growth. Domestically, the company’s smart smoking devices are not a substitute for cigarettes and therefore do not affect the interests of cigarette manufacturers. In addition, smart smoking devices are not tobacco products, allowing them to avoid some policy restrictions. On April 9, 2015, the company will launch e-cigarette devices domestically for the first time.

As it transforms into an integrated packaging enterprise, its growth potential is opening up. The company is shifting toward premium packaging and electronic packaging, and the launch of these new businesses is creating more room for development. The company’s advantages in expanding large-scale packaging include: 1) its large revenue scale gives it strong bargaining power in paper procurement; 2) its strong printing technology, especially anti-counterfeiting technology, helps it expand into high-value-added premium packaging and electronic packaging.

Main risks to the rating

Policy risk.

Valuation