BYD has reached out to the electronic cigarette industry.

At present, BYD Electronics, a listed subsidiary of BYD Co., Ltd., issued a document today that BYD Precision Manufacturing Co., Ltd., a wholly-owned subsidiary of the company, was awarded the "Tobacco Monopoly Production Enterprise License (Electronic Cigarette Processing Enterprise)".

Some netizens joked: "In the future, I will drive a BYD car and smoke BYD cigarettes again."

So, why did BYD on the throne of new energy suddenly take a fancy to the e-cigarette business? Under strict supervision, can e-cigarettes still be considered a good business?

01 BYD who "doesn't work properly"

Compared with other new energy car companies, BYD can be said to be the most "non-business".

Throughout the development of BYD, we will find that the company has been innovating across borders almost all the time.

In 1995, BYD Company was established, starting with the production of rechargeable batteries; in 2002, it entered the semiconductor industry; in 2003, it acquired Qinchuan Automobile and entered the automobile industry; in 2019, the company entered the mask and disinfectant...

Today, BYD's business has gradually expanded to various fields such as batteries, semiconductors, electronic equipment R&D and manufacturing, automobiles, photovoltaics, and rail transit.

For the electronic cigarette industry, BYD is not a temporary initiative.

In fact, as early as 2019, BYD Electronics has completed the market analysis and product design of electronic cigarettes, and the product has taken initial shape. At the beginning of 2021, BYD Co., Ltd. launched the ceramic atomization technology brand and planning technology brand logo "BEEM CORE".

BYD Electronics introduced the original spherical granulation process into the production process of the electronic atomizing core. The porosity of the atomizing core is about 60%, which is ahead of the general industry standard. The penetration rate of e-liquid is higher than that of conventional ceramics.

According to Tianyancha, the "BEEM CORE" trademark has been applied for by BYD Precision Manufacturing Co., Ltd., and the current status is "registered trademark", and the registration announcement date is March 7 this year.

By the second quarter of 2020, BYD Electronics has completed the proofing of atomizing cigarettes, ceramic cores, and pods. With the successful development of ceramic atomizing cores and pod systems, the company has begun patent layout.

Recently, BYD Electronics has expanded its layout, claiming to have completed the patent layout of a full range of electronic atomization products and the construction of automated production lines, fully integrating its own research and development of new materials, precision molds, product design and development, and intelligent manufacturing, etc. All-round capability.

So, what is the calculus behind BYD's electronic switch to electronic cigarettes?

02What is the hidden meaning of BYD?

The author believes that the most important reason for BYD Electronics to switch to electronic cigarettes is to avoid risks.

In the early years, BYD Electronics was spun off from BYD, and its main business was OEM production of smartphones.

But unfortunately, the phone is no longer available for sale. According to data from CINNO Research, in the first half of 2022, China's smartphone SoC terminal shipments were about 134 million, a year-on-year decrease of about 16.9%. At the same time, global smartphone shipments continued to decline.

This is very unfavorable for BYD, whose main business is OEM production of smartphones, and in the new energy market, although BYD has a leading sales volume, it is also accompanied by spontaneous combustion accidents and the hidden worry of declining net profit for many consecutive years.

In the first half of this year, there were many spontaneous combustion incidents of BYD's new energy vehicles, which once made consumers worry.

On May 31, a BYD Tang car owner in Shanghai reported on Weibo that the car spontaneously ignited in a stationary state; on June 6, a BYD Tang new energy vehicle caught fire on the road in Guigang, Guangxi; on June 12, Yinxia, Zhuhai City, Guangzhou In the square, a suspected BYD Song Pro DM-i caught fire...

On third-party platforms such as Black Cat Complaint, consumers are also complaining that BYD vehicles have potential safety hazards such as power stalls and limited power in rainy days.

Recently, BYD filed a recall plan with the State Administration for Market Regulation and decided to recall some Tang DM electric vehicles produced from April 5, 2021 to April 18, 2022, with a total of 53,928 vehicles starting from July 29, 2022.

This is also the expansion of the recall plan at the end of April this year. The number of two recalls exceeded 60,000 vehicles. The successive spontaneous combustion accidents and the official recall plan inevitably dampened consumers' trust in BYD's products.

In addition, BYD still has a big hidden danger, that is, its net profit has declined for many years. Taking 2021 as an example, BYD sold 730,000 vehicles, but the profit was only 3.045 billion yuan, while Tesla's global sales were 936,000 vehicles, and the net profit for the year was 5.524 billion US dollars (about 37.132 billion yuan).

This has a lot to do with the stagnant mid-to-low-end positioning of BYD's electric vehicles. The average price of BYD's bicycles is more than 100,000 yuan, and its gross profit margin has always been lower than the industry level.

What's more, in the battle with "Wei Xiaoli", BYD also has obvious shortcomings. Wang Chuanfu once said, "The first half of new energy vehicles is electrification, and the second half is intelligent."

Intelligence is gradually becoming a competitive point in the next era of the automotive industry. However, in terms of key technologies required in the era of smart cars such as smart cockpits and autonomous driving, BYD is far from new car-making forces such as "Weixiaoli". And now Apple, Google, Xiaomi, Huawei and other Internet giants are also participating in car building, and their strength should not be underestimated.

It is worth mentioning that due to "lack of cores and less electricity", delays in delivery and reduced distribution of new energy vehicle companies are not uncommon. BYD's new energy road is far from being as easy as it seems.

There is an old saying, "The troops and horses are not moved, the food and grass go first", and the same is true for doing business. The smartphone business has suffered setbacks and new energy has a long way to go, which makes it urgent for BYD to find a second growth curve.

03What is the development prospect of e-cigarette business?

According to Euromonitor statistics, in 2021, the market size of my country's atomized electronic cigarettes will be 19.637 billion yuan, a year-on-year increase of 38.33%, the penetration rate will reach 4.17%, and the per capita consumption will be 1641.29 yuan, a year-on-year increase of 31.58%.

The data of the "Blue Book of Electronic Cigarette Industry Exports in 2022" also shows that in 2022, the global electronic cigarette market will exceed 108 billion US dollars, and the overseas electronic cigarette market is expected to maintain a growth rate of 35%. The growth rate of China's e-cigarette market is still very high, and the current penetration rate is still lower than that of developed countries such as Europe, America and Japan, and there is a lot of room for growth.

The e-cigarette industry is a lucrative industry. Taking the industry leader Fossil Technology as an example, its gross profit margin will be 43.1% in 2021. Even under the influence of various negative factors, in the first quarter of 2022, Fog Core Technology's gross profit margin was 38.3%.

Rapid growth and high profit margins are the biggest features of the e-cigarette industry, which is no wonder BYD is so excited.

On the other hand, the strong supervision of e-cigarettes has also put the industry on the right track, while giving BYD a chance to overtake in a corner.

Since the beginning of this year, the regulatory authorities have successively promulgated the "Measures for the Administration of Electronic Cigarettes" and the national standards of "E-cigarettes", prohibiting the production and sales of electronic cigarette products other than tobacco flavors, and requiring electronic cigarette production and sales enterprises to obtain relevant licenses. Engaged in e-cigarette-related business; in June, the State Tobacco Administration launched a unified transaction management platform for e-cigarettes, and all e-cigarette exports, wholesale and retail circulation can be seen at a glance.

At this point, the "rough" era of e-cigarettes is over, non-compliant companies will be eliminated, and the era of orderly and full competition for compliant e-cigarette companies is coming.

After the implementation of the new regulations, the competitive dimension of e-cigarettes has also changed. In the past, e-cigarettes mostly focused on the selling point of "taste", and paid little attention to other selling points such as "smoking cessation", "health" and "personality". However, due to the ban on the sale of sweet e-cigarettes, e-cigarette companies need to master Differentiating the competitive password. In the future, popularity, price, products and technology will all be the key factors influencing consumers' choice.

For example, "health" may be the focus of competition in the second half of the e-cigarette industry. In 2021, the International Electronic Cigarette Industry Summit Forum emphasized that health physiotherapy products such as herbal atomization may become a new track for electronic cigarettes.

The combination of electronic cigarettes and big health does have ample imagination. In recent years, many e-cigarette brands have launched nicotine-free herbal vaping products. For example, Laimi, an electronic cigarette brand under Wuye Shen Group, and "Valley of Grass and Trees" launched by RELX.

It is reported that the herbal atomizing stick is similar in shape to the electronic cigarette, and the raw materials in the cartridge are Chinese herbal medicine, which does not contain nicotine and has the effect of health preservation.

All in all, it is good when all the good is gone. Compared with the turbulence in March and April, today's e-cigarette industry is becoming calmer, industry standards are becoming more and more standardized, and the e-cigarette industry is constantly developing in the direction of specialization and refinement.

In the field of electronic cigarette OEM, Smol International (06969.HK) is currently the absolute leader. According to Sullivan's report, in 2021, Small's global market share will continue to expand to 22.8%, surpassing the sum of the second to fifth places, and will continue to maintain its position as the world's largest electronic atomization equipment manufacturer.

There is no doubt that in the future, Smol International will be BYD's biggest competitor.

In addition, A-share listed companies Jinjia Co., Ltd., Shunhao Co., Ltd., Jincheng Pharmaceutical, Boten Co., Ltd., and Huabao Co., Ltd. have successively obtained production qualifications. So far, more than 130 companies have been licensed.

At present, BYD Electronics has completed the patent layout of a full range of electronic atomization products and the investment and construction of automated production lines, and the institutional view is more optimistic. Among them, Guotai Junan gave BYD Electronics a "buy" rating with a target price of HK$24.97 per share.