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E-cigarettes: the future depends on policy evolution

E-cigarettes: the future depends on policy evolution

2022-09-16

The recently released "2022 Electronic Cigarette Industry Export Blue Book" (hereinafter referred to as "Blue Book") shows that China's electronic cigarette exports will reach 138.3 billion yuan in 2021, an increase of 180% year-on-year, and the growth rate far exceeds the total export volume of goods. In 2022, the total export value of e-cigarettes will reach 186.7 billion yuan, a growth rate of 35%.


Among the more than 1,500 domestic e-cigarette companies, more than 70% are export-oriented companies. After the policy is exhausted, the stock price of e-cigarette companies may be able to usher in a reversal.


The performance of major companies continued to decline


In recent years, many companies have focused their development on overseas markets, but the growing overseas markets are still unable to reverse the current decline in performance.


On August 24, the leading e-cigarette OEM, Smol International, disclosed its operating results for the first half of 2022. According to the financial report, in the first half of 2022, the operating income of Smol International was 5.653 billion yuan, a year-on-year decrease of 18.7%; the adjusted net profit was 1.436 billion yuan, a year-on-year decrease of 51.7%.


According to Small International, the main reasons for the decline in net profit in the first half of the year include slowdown in sales to corporate customers, decline in gross profit margin and growth in sales, management and research and development expenses. According to the financial report, in the first half of 2022, Smol International’s revenue from sales to corporate customers was 5.093 billion yuan, down 21.6% from the same period last year; the gross profit margin dropped from 54.9% in the same period last year to 47.9% in the reporting period; at the same time , Smol International's R&D investment was 604 million yuan, an increase of 156% over the same period of the previous year. The decline in sales, the decline in gross profit margin and the increase in R&D investment led to a sharp decline in the net profit of Smol International.


Compared with Smol International, the performance of another e-cigarette company is relatively stable. China Bolton achieved revenue of RMB 1.199 billion in the first half of 2022, a year-on-year increase of 10.86%; profit attributable to company owners was 96.31 million yuan, a year-on-year decrease of 6.7%.


China's leading e-cigarette brand Fog Core Technology's net revenue in the first quarter of 2022 was 1.71 billion yuan, a year-on-year decrease of 28.5%; under non-GAAP, the adjusted net profit in the first quarter was 360 million yuan, compared with 360 million yuan in the same period last year. 611 million yuan.



Judging from the latest disclosed performance, the major e-cigarette companies have still failed to achieve a performance reversal and are still in decline.



Overseas markets are worth looking forward to

Under the tightening of domestic policies, exporting overseas has become an important development strategy for many e-cigarette companies. According to the "Blue Book", there are currently more than 1,500 e-cigarette manufacturers and brand enterprises in China, of which more than 70% mainly export their products overseas; %. Exporting to overseas markets has become the most important growth point for e-cigarette companies.


In the export market, the most important countries and regions are the United States, the European Union, Russia, and the United Kingdom. In 2021, China's total e-cigarette exports will be 138.3 billion yuan, of which 53% of e-cigarettes are exported to the United States. The exports of the European Union, Russia, and the United Kingdom account for 15%, 9%, and 7%, respectively. With the promotion of e-cigarettes, The penetration rate of e-cigarettes in the European Union, the United Kingdom and other regions is expected to further deepen.


According to the Blue Book, the global e-cigarette market will exceed US$108 billion in 2022, and it is expected that the overseas e-cigarette market will maintain a growth rate of 35% in 2022.


From a global perspective, the market size of electronic cigarettes is huge and maintains rapid growth, and the export of domestic electronic cigarettes is also growing rapidly.


Data shows that in 2021, China's e-cigarette industry exports about 138.3 billion yuan, a year-on-year increase of 180%; it is expected that this export scale will continue to grow, and the export value will reach 340.2 billion yuan by 2024.


The rapid growth of the global market and the rapid growth of domestic exports may become the most important growth points for domestic e-cigarette companies in the future.


China's market space is huge

The number of Chinese smokers is roughly 350 million. Over the years, China Tobacco has maintained a number of "world firsts": the first tobacco leaf planting area, the first tobacco leaf purchase, the first cigarette production, the first cigarette consumption, and the number of smokers. No. 1 in the world, No. 1 in tobacco profits and taxes.


As a big tobacco country, the scale of China's e-cigarettes is relatively small, but the growth rate is very fast.

Data shows that in 2021, the retail sales of e-cigarettes in China will be about 19.7 billion yuan, a year-on-year increase of 36%.


According to the "Blue Book of Electronic Cigarette Industry in 2021", as of the end of 2021, there are more than 1,500 electronic cigarette manufacturing and brand-related enterprises in China, including more than 1,200 manufacturers, more than 200 electronic cigarette brand enterprises and about 120 cigarette manufacturers. oil companies. There are nearly 190,000 electronic cigarette retail formats in China, including 138,000 authorized stores, 47,000 specialty stores, and 5,000-7,000 collection stores. Among them, Chengdu is currently the city with the most e-cigarette retail stores in China, followed by Beijing, Shanghai, Shenzhen, and Chongqing.


More than 95% of the world's electronic cigarette production and products come from China, 70% of China comes from Shenzhen, and more than 95% of Shenzhen comes from Bao'an. China is gradually transforming from the world's largest e-cigarette manufacturer to the world's largest exporter of e-cigarette brands.


China is not only a big tobacco country, but also a big manufacturer of electronic cigarettes.

But from the perspective of penetration rate, China is far behind other developed countries. According to data from Zhiyan Consulting, in 2021, the market penetration rate of e-cigarettes in the United States is 38%, the market penetration rate of e-cigarettes in Japan is 30.3%, and the market penetration rate of e-cigarettes in the United Kingdom is 20.9%. Compared with these countries, China's e-cigarette market penetration rate is only 1.5%. From a penetration perspective, e-cigarettes in China are still in their infancy. With the increase in penetration rate in the future, the Chinese market has huge room for growth.


Can e-cigarette companies usher in new machines?


Over the years, a major factor that determines the development of e-cigarettes is the policy level, but countries have different attitudes towards e-cigarettes at the policy level.


In 2016, the US FDA (Food and Drug Administration) issued a statement saying that electronic cigarettes are tobacco products, which means that electronic cigarettes will be subject to stricter supervision in production, sales, product promotion, etc., like conventional tobacco in the US market. , the export of electronic cigarettes to the United States requires FDA certification.


At the same time, the FDA requires all retailers not to sell e-cigarettes or similar products to customers under the age of 18, and customers need to show proof of age when purchasing. In January 2020, the U.S. Food and Drug Administration (FDA) officially issued a new U.S. e-cigarette policy, banning the use of most fruit- and mint-flavored nicotine vaping products to curb the surge in teenage use.


In terms of e-cigarette policy, the United States tends to allow limited permission, but policies vary from state to state.


In the UK market, the policy level is more open. On October 29, 2021, the official website of the British government released information that the British National Health Service (NHS) will use e-cigarettes as prescription drugs to help smokers quit smoking. This is the British Minister of Health and Social Security Sajid Javid in regulating e-cigarettes The major changes led by China are also the first country in the world to license e-cigarettes as medical products.


E-cigarettes in Germany are also subject to the same laws as tobacco products, which prohibit sale to persons under the age of 18. Germany regulates e-cigarettes as tobacco products and plans to fully implement a ban on tobacco advertising from 2022, and a ban on smoking and advertising of e-cigarette products from 2024.


Looking at European countries, the sales of electronic cigarettes are basically allowed to a limited extent, but compared with European countries, Southeast Asian countries are more conservative. In Southeast Asian countries and the Middle East, most countries tend to adopt e-cigarette bans, which directly prohibit the import and sale of e-cigarettes, and curb the sale of e-cigarettes from the source.


At the policy level, China is also open to a limited extent.


In the past two years, with the rapid development of China's electronic cigarette market, the policy supervision of electronic cigarettes has also been gradually strengthened, especially in the protection of minors, a series of supervision and prevention policies have been introduced.


On February 2, 2021, the State Tobacco Monopoly Administration issued the "Administrative Measures for Electronic Cigarettes (Draft for Comment)", which clarified the regulatory policies for the production, wholesale, retail, import and export of electronic cigarettes (excluding heated cigarettes). In November 2021, new types of tobacco such as e-cigarettes will be officially included in the regulation of the tobacco system. Since then, the e-cigarette industry has ushered in a period of intensive policy release.


On November 26, 2021, the State Council issued an amendment to the Regulations on the Implementation of the Tobacco Monopoly Law of the People's Republic of China, and electronic cigarettes were officially included in the regulation of traditional tobacco; On March 11, 2022, the State Tobacco Monopoly Administration issued the "Measures for the Administration of Electronic Cigarettes", which clarified that from May 1, 2022, the sale of flavorings other than tobacco flavors will be prohibited. Electronic cigarettes and electronic cigarettes that can add their own vaping substances. On May 1, 2022, the "Administrative Measures for Electronic Cigarettes" was officially implemented; on June 15, 2022, the national unified electronic cigarette transaction management platform was officially launched; on October 1, 2022, the "mandatory national standards for electronic cigarettes" also Will be implemented soon. So far, the electronic cigarette industry has ushered in a new development stage of "laws to follow and standards to follow".


From the current policy level, the supervision of the e-cigarette industry has moved from the policy formulation stage to the policy implementation stage.


From the company's point of view, the main domestic listed companies in the electronic cigarette industry include Fog Core Technology, Huabao International, Smol International, Jinjia Co., Ltd., Yingqu Technology, etc. Since 2021, the stock prices of the above-mentioned related companies have fallen by 50%-90%.


Under the background of the continuous release of negative policies and the continuous growth of overseas markets, will the stock prices of related companies usher in new opportunities?


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