Comments on emerging industries: the State Tobacco Monopoly Administration issued the measures for the administration of e-cigarettes, and the supervision boots are on the ground!

Event: on the afternoon of March 11, the State Tobacco Monopoly Administration issued the measures for the administration of electronic cigarettes, which will come into force on May 1, 2022. The core supervision contents include:

\u3000\u30001. Production side: license system management. The establishment of electronic cigarette production enterprises (including product production, OEM, brand holding enterprises, etc.), atomization production enterprises and nicotine production enterprises for electronic cigarettes must be approved by the competent department of tobacco monopoly administration under the State Council and obtain the license of tobacco monopoly production enterprises. 2. Sales side: 1) enterprises that have obtained the license of tobacco monopoly wholesale enterprises shall be approved by the Department of tobacco monopoly administration under the State Council and change the scope of the license before they can engage in the wholesale business of electronic cigarette products. 2) Those engaged in e-cigarette retail business shall apply to the competent department of tobacco monopoly administration for a tobacco monopoly retail license or change the scope of the license according to law. 3) The Department of tobacco monopoly administration under the State Council shall establish a national unified e-cigarette trading management platform. 4) Enterprises or individuals that have obtained tobacco monopoly and retail licenses and are qualified to engage in e-cigarette retail business shall purchase e-cigarette products from local e-cigarette wholesale enterprises, and shall not exclusively operate e-cigarette products sold on the market. 5) It is prohibited to sell flavored e-cigarettes other than tobacco flavor and e-cigarettes that can add atomization by themselves. 3. Import and export trade: the imported e-cigarette products, aerosols and nicotine for e-cigarette shall be sold to e-cigarette wholesale enterprises, e-cigarette product manufacturers and e-cigarette brand holding enterprises through the e-cigarette trading management platform specified in these measures.

Comments:

\u3000\u30001. E-cigarette Supervision: since the release of the management measures (Exposure Draft) in December last year, the rapid implementation of supervision shows the country’s determination to accelerate the standardized development of atomized e-cigarette industry. Since May 1 this year, China’s e-cigarette sales have officially entered the stage of compliance development.

\u3000\u30002. The entry threshold of the production end has been greatly improved: the production end (OEM, brand, atomization, nicotine enterprises, etc.) must be approved by the competent department of tobacco monopoly administration under the State Council. This supervision method will benefit China’s compliant upstream and downstream enterprises. The “small, scattered and poor” enterprises will gradually withdraw from the market, and the industry concentration rate will continue to increase in the future!

\u3000\u30003. Cancel the exclusive store at the sales end and turn to the collection store! Referring to the traditional cigarette license management mode, it is sold wholesale through the national unified e-cigarette trading management platform. This will further curb and crack down on China’s existing illegal sales behaviors such as general distribution, wechat merchants, collusion and disorderly prices, which is conducive to the healthy development of formal brands, products and channels. At the same time, the Administrative Measures stipulate that retail enterprises or individuals shall not exclusively operate e-cigarette products sold on the market, and retail stores will operate and sell multi brand products in the future.

\u3000\u30004. It is expected that the future flavor will be dominated by mixed flavor products with tobacco as the characteristic flavor. In the updated national standard (second exposure draft), the number of substances licensed for atomization additives is adjusted to 101 (122 in the previous exposure draft), which still contains taste components such as cocoa extract, vanilla bean tincture, peppermint oil and lemon oil. We believe that mixed tobacco flavor products with tobacco characteristic flavor may be sold in the later stage.

\u3000\u30005. It is expected that the subsequent e-cigarettes will be subject to tax collection and payment through the transaction management platform. Referring to overseas, at present, most countries in the world only levy consumption tax (value-added tax) on atomization equipment; The tobacco oil (including nicotine) in atomized cigarette bombs is mainly taxed according to the ML sold (specific tax). We expect that China may also adopt the method of specific tax + ad valorem compound tax in the future, so as to make a positive contribution to the national fiscal revenue.

6. After the atomized e-cigarette is included in the supervision, China Tobacco suppliers may speed up the layout. Previously, due to concerns about compliance, the leader of China Tobacco suppliers was only a tentative layout. We believe that subsequent Chinese tobacco suppliers may give full play to their channel advantages and enter the relevant industrial chains of atomized e-cigarettes, such as cigarette oil, atomization OEM, etc.

To sum up, we believe that the release of the draft management measures initially defines the production, sales and supervision direction of atomized e-cigarettes. The implementation of supervision will effectively push up the industry threshold, and the concentration may continue to improve, which is beneficial to the upstream and downstream leading enterprises of the industry.

Investment suggestions: 1) China tobacco supply chain: key recommendations – Shenzhen Jinjia Group Co.Ltd(002191) (China Tobacco standard leader, active card layout, new tobacco); It is suggested to pay attention to: China Tobacco Hong Kong, Huabao international, China Bolton, Anhui Genuine New Materials Co.Ltd(603429) , Shanghai Shunho New Materials Technology Co.Ltd(002565) , Shantou Dongfeng Printing Co.Ltd(601515) . 2) Atomization industry chain: key recommendation – smore International (leading global atomization equipment manufacturer); Suggested attention: fog core technology

Risk tip: the risk of new tobacco policy changes, the risk of sales / enterprise development falling short of expectations and intensified market competition

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