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IPO Briefing | China Tobacco International (6055 HK)

Established in 2004 and headquartered in Hong Kong, we are the designated offshore platform of China Tobacco International (6055 HK) for capital markets operation and international business expansion. China Tobacco International (6055 HK) is a wholly-owned subsidiary of CNTC and is in charge of the management and operation of the international businesses of CNTC by organizing the trade of tobacco products and overseeing the operation of the offshore subsidiaries and foreign investments of CNTC. CNTC Group are the only entities under the State Monopoly Regime to engage in the production, sale, and import and export businesses of tobacco monopoly commodities in the PRC. To the extent that a change in the State Monopoly Regime leads to allowing other entities to also engage in the import and export of tobacco products as we currently conduct, we would be subject to competition with those entities.

Tobacco Leaf Products Import Business
China Tobacco International (6055 HK) exclusively operate the Tobacco Leaf Products Import Business according to the No.60 Notice. China Tobacco International (6055 HK) mainly procure tobacco leaf products from origin countries or regions around the world, such as Brazil, United States, Argentina, Canada, Zambia and others, and sell the imported tobacco leaf products to China Tobacco International for onward sales to the PRC
cigarette manufacturers to meet their demand of overseas tobacco leaf products. China Tobacco International (6055 HK) did not and will not procure tobacco leaf products from sanctioned countries. Additionally, China Tobacco International (6055 HK) have not procured any tobacco leaf products from the United States after the trade restriction imposed by the PRC government in July 2018.

Tobacco Leaf Products Export Business
China Tobacco International (6055 HK) is the exclusive operating entity for all entities under CNTC in respect of the Tobacco Leaf Products Export Business in Southeast Asia, Taiwan, Hong Kong and Macau. China Tobacco International (6055 HK) procure from the Import-Export Companies or Industrial Companies for sales to: (i) overseas cigarette manufacturers, and (ii) authorized purchasing agents of certain cigarette manufacturers. China Tobacco International (6055 HK) additionally acts as an agent of certain sales of tobacco leaf products to overseas customers in specified areas. According to the Frost & Sullivan Report, during the Track Record Period, we ranked the fifth in terms of sales value in 2018 with a market share of approximately 7.5% in the market of Southeast Asia, Hong Kong, Macau and Taiwan.

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Competitive Strengths
China Tobacco International (6055 HK) believe that the following competitive strengths of China Tobacco Int. (6055 HK) have contributed to our success to date and will enable us to develop on our growth strategies:
• the exclusive operating entity with respect to our current business;
• China Tobacco Int. (6055 HK) believes their business will continue to benefit from opportunities arising from the sustainable development prospects of China’s tobacco industry as well as the stable growth potential of tobacco markets in Southeast Asia and other international markets;
• well-established business model as well as the long-standing relationships with their business partners laid a solid foundation for our further global expansion in other markets;
• China Tobacco Int. (6055 HK) has a strong bargaining power with our suppliers and customers and maintain abundant cash flows;
• Benefiting from the strong growth potential of the new tobacco product market, China Tobacco Int. (6055 HK) is well-positioned to further expand our export and sales business of new tobacco product, as China Tobacco Int. (6055 HK) is the only entity authorized to operate such business overseas; and
• led by an experienced management team.

Business Strategies
In order to achieve our overall strategic goal and improve competitiveness as well as operation efficiency, China Tobacco Int. (6055 HK) intend to pursue the following strategies:
• Expand our sources of supply of tobacco leaf products in the Tobacco Leaf Products Import Business;
• Deepen business relationship and achieve higher market share in the Tobacco Leaf Products Export Business;
• Increase the market share of our duty-free cigarettes by strategically expanding our sales channels, optimizing their product portfolio and expanding our geographical coverage; and
• Enhance the quality of our new tobacco products and increase market share in the new tobacco products market.

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Risk Factors
Some of the major risks China Tobacco Int. (6055 HK) face include:
• Heavily rely on the State Monopoly Regime and any material changes in or the abolition of the State Monopoly Regime would have a material adverse impact on their business operations;
• Dependent on the Framework Agreements and the Non-Compete Undertaking;
• Business performance may be materially and adversely affected by global tobacco-control campaigns and consumers’ increased health concerns;
• Tighter import and export controls and additional trade restrictions could materially and adversely affect our business, financial condition and results of operation;
• Revenue is subject to seasonality fluctuations;
• Generate a substantial portion of their revenues from a limited number of customers, any adverse change in their business relationships with such customers or in the operations or financial conditions of such customers may materially and adversely affect their business, results of operations and financial conditions;
• Risks and uncertainties associated with doing business in Southeast Asia may materially and adversely affect China Tobacco Int. (6055 HK) business and prospects;
• Business performance may be materially and adversely affected by changes in consumer preferences and spending habits;
• Historical Financial Information included in this prospectus may not be indicative of our future performance; and
• Any change in the tobacco regulatory laws, regulations and rules in the PRC, Hong Kong or any other countries or regions where they do business may have a material and adverse impact on their business operations.

Statements Of Profit Or Loss And Other Comprehensive Income
(Expressed in Hong Kong dollars)

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The accompanying notes form part of the Historical Financial Information.

Cash Flow

Notes:
i. Increase in time deposits represents certain time deposits with maturities over three months made by one of the Operating Entities as defined in note 1 which are considered to be attributable to the Relevant Businesses.
Upon the completion of the Reorganisation, time deposits that had not reached maturity were included in the net assets distributed in connection with the Reorganisation and not transferred to the Company as detailed in note 1.
ii. Deemed cash (distribution to)/contribution from the CNTC Group represents the reconciliation between the cash flows and the changes in cash and cash equivalents that are attributable to the Relevant Businesses during the Relevant Periods. Further details of the basis of preparation of the Historical Financial Information are set out in note 1.

The accompanying notes form part of the Historical Financial Information.

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