Event: on November 30, 2021, the national standard for electronic cigarette (Draft for comments) was released, and mandatory specifications were formulated in terms of electronic cigarette sets, aerosols, releases, product marks, etc. As of January 29, 2022, the national standard will be officially implemented 3-5 months after its release.
The formulation of national standards is conducive to the standardized operation of the industry and improve the public’s recognition of e-cigarettes. We believe that the penetration of e-cigarettes as a harm reduction substitute for traditional tobacco is a long-term trend. However, in the process of industry development, the absence of regulatory standards for a long time has led to mixed products on the market, and the safety of e-cigarettes has triggered social discussion.
As the public’s concern about the health risks of e-cigarettes gradually deepens, the sustainability of e-cigarette consumption growth is also affected. After the implementation of the draft national standard for comments, it will help to maintain public health, establish the image of e-cigarette safety and harm reduction, and improve the penetration rate of e-cigarette for a long time.
China’s industry development will be more orderly, and the industry concentration is expected to increase. Since 2019, the e-cigarette industry has shown explosive growth with low industry threshold, attracting a large number of market participants. Different brands attract consumers through various product innovations. However, at the same time, extensive development and competition also increase the risk of minors using e-cigarettes and expanding smoking addiction groups. The draft raised the industry threshold by formulating product standards, and restricted the products from the aspects of nicotine source, nicotine concentration, product flavor, anti filling and so on.
We believe that the development of e-cigarette market will be more orderly in the future, and the industry concentration is expected to increase.
Nicotine source: nicotine extracted from tobacco should be used. It is considered that synthetic nicotine has no long-term inhalation history and lacks safety basis. Considering that the nicotine extraction raw materials are controlled by the tobacco bureau, the possible disorderly expansion of the industry will be limited from the nicotine supply side, the expansion of small and medium-sized enterprises and new entrants in the industry will be more difficult, and the market share of leading enterprises is expected to be consolidated.
Nicotine concentration: the nicotine concentration in the atomized material shall not be higher than 20mg / g (the corresponding nicotine release shall not be higher than 0.2mg/puff), which is close to the standard of EU tobacco products directive and lower than the current nicotine level of mainstream products in China. The decrease of nicotine concentration may reduce the addiction of products, but with reference to the good development of European e-cigarette market, it is expected that it will have a limited impact on the popularity of e-cigarettes in China. Strong head enterprises may rely on technological innovation to make up for the impact of nicotine concentration decline on user experience to a certain extent.
Flavor restriction: the temporary additives of aerosol additives include citral, rose alcohol, coffee extract and other flavor substances, which means that compared with the American flavor ban, the GB draft allows more kinds of flavor, which is beneficial for smokers to choose electronic cigarettes. However, under the restriction of the temporary license list, it is more difficult for enterprises to attract consumers through innovative flavor. At the same time, the exposure draft requires that the product flavor should not be inductive to minors. Limited flavor innovation may help head enterprises highlight their advantages in taste and so on.
Anti filling: the exposure draft requires that electronic cigarette sets and cartridges using liquid smoke should have a closed structure, which means that open or other oilable electronic cigarettes will withdraw from the market.
Investment suggestion: we recommend SIMORE international, a leader with technical and manufacturing advantages in the field of electronic smog core.
Considering the steady progress of the new tobacco regulatory policy, it is suggested to pay attention to the relevant companies laying out the HNB industrial chain, such as Huabao international, Anhui Genuine New Materials Co.Ltd(603429) and Shenzhen Jinjia Group Co.Ltd(002191) .
Risk tip: there are extreme situations in the follow-up regulatory policies, and the change of new tobacco technology exceeds expectations.
（ Dongxing Securities Corporation Limited(601198) ）
