Key investment points
Event: on March 12, 2022, the state tobacco administration issued the measures for the administration of e-cigarettes and the national standard for e-cigarettes (second exposure draft), of which the measures for the administration of e-cigarettes will be officially implemented on May 1, 2022.
Sorting out key differences: 1) it is clearly prohibited to sell flavored e-cigarettes other than tobacco flavor, and the types of flavoring agents allowed to be added are reduced; 2) New requirements: no exclusive operation of electronic cigarette products on the market; 3) Explicitly prohibit the holding of e-cigarette exhibitions, forums, etc; 4) The listing of e-cigarette enterprises shall be examined and approved by the state tobacco administration; 5) The state tobacco administration will issue purchase and sales plans for tobacco monopoly products such as tobacco leaves, redried tobacco leaves and cut tobacco; 6) Delete the requirements on the examination of foreign investment, the expression on taxation and the relevant expression on tax-free e-cigarettes.
Seasoning ban: there is disturbance in the short term, but it is still optimistic about the improvement of permeability under the attribute of tobacco substitution in the medium and long term. Two core factors deserve attention: 1) the richness and experience of tobacco taste will continue to improve. For example, Yueke has launched yixiyun series containing eight tobacco flavors, which can restore a variety of traditional cigarette flavors. 2) Harm reduction attribute is the core advantage of e-cigarette. From the perspective of incremental users, the continuous enrichment of tobacco taste plays a more positive role in transforming old smokers. From the perspective of stock users, the core demand is nicotine intake, and fruit taste is the icing on the cake. When there is no choice of fruit taste for traditional cigarettes and other products, we think stock users will have a high retention rate. After the U.S. taste ban, from August 2019 to may 2020, the sales proportion of menthol in cartridge change e-cigarettes increased from 10.7% to 61.8%, and the taste of tobacco increased from 22.8% to 37.1%. The overall sales volume of e-cigarettes decreased by a limited margin, from 22 million per month in August 2019 to 17.1 million in May 2020.
Channel side: the layout of existing specialty stores may be affected, but the total number of channels may increase significantly, and the head brand is expected to continue its advantages. It is clearly not allowed to operate exclusively. In the future, e-cigarette stores may exist in the form of collection stores, e-cigarettes + traditional cigarettes. In addition, e-cigarette does not have a separate monopoly license, but is incorporated into the scope of tobacco monopoly license, which means that: 1) a large number of traditional cigarette channels are expected to be transformed into e-cigarette channels. Traditional cigarette channels with tobacco monopoly license can apply for increasing e-cigarette sales, and consumers can buy e-cigarette products more conveniently, which may play a positive role in cultivating use habits and improving penetration. 2) Existing e-cigarette stores may face a large number of closures. E-cigarette stores need to meet the location restrictions of traditional cigarettes (such as shopping malls, schools, etc.) and distance restrictions. We expect that a large number of stores will be closed or relocated. The existing channel layout of the head brand may be affected, but it is expected to cover more traditional tobacco retail channels by virtue of the number of user groups and brand advantages. In addition, it emphasizes the positive role of formal measures in intellectual property management.
Other key points: 1) tax: delete relevant expressions and wait for the follow-up rules. We believe that the taxation of e-cigarettes is the general trend, but it will take some time to amend the law. 2) Whether zero nicotine products are regulated remains to be clarified. The definition of electronic cigarette in the national standard (second draft) is “electronic transmission system for generating aerosol for human suction” (originally expressed as “nicotine electronic transmission system for generating aerosol containing nicotine for human suction”); However, it is also stated that “the atomized material shall contain nicotine”. 3) Nicotine: continue the provision that only nicotine can be extracted, and make it clear that tobacco and other raw materials implement the purchase and sales plan system, but the expression of import is revised from “review and approval” to “reporting demand”.
Investment suggestion: the industry will be legalized and standardized. The short-term market scale may be disturbed by the implementation of policies, but the medium and long-term penetration rate is expected to continue to increase. Recommend [SIMORE international] with outstanding valuation cost performance after correction; It is suggested to pay attention to [ Shenzhen Jinjia Group Co.Ltd(002191) ] with a wide range of industrial chain layout; Fog core [Chinese leading brand].
Risk tips: policy control is stronger than expected, PMTA audit standards change, industry competition intensifies, product quality risk, etc.
