Emerging industries: the US Federal industrial marijuana legalization bill will be submitted to the house of representatives for voting, and the giants will accelerate the layout

Concerns this week: the house rules committee said it would hold a hearing on the marijuana opportunity, reinvestment and decriminalization act next Monday (March 28), and the vote could be held as soon as next week Guilin Layn Natural Ingredients Corp(002166) industrial marijuana project is advancing steadily, and the second growth curve of CBD has been opened; British American tobacco increased its stake in cannabis producers and initially focused on the layout of CBD.

1. The US Federal industrial marijuana legalization bill will be submitted to the house of representatives for voting, and the legalization process will be accelerated

The more bill, drafted by Jerry Nadler (Democrat of New York), chairman of the Judiciary Committee of the US House of Representatives, aims to remove cannabis from the US list of federally controlled substances, eliminate criminal penalties related to it, and promote social equity in the industry. The specific contents include: 1) remove cannabis from the list of controlled substances in the controlled substances act and cancel the criminal punishment for individuals who manufacture, distribute or own cannabis; 2) Impose consumption tax on cannabis products produced or imported into the United States, and impose employment tax on the production facilities and export warehouses of the products; 3) Provide small business loan services to legal enterprises or service providers related to cannabis; 4) Establish a trust fund to provide various project support to individuals and enterprises affected by the war on drugs. The hearing is the last step before the bill is voted on in the house of Representatives, and the vote will be held as soon as next week. At present, 37 states, 4 territories and the District of Columbia in the United States have legalized medical cannabis, of which 18 states, 2 territories and the capital have also legalized non-medical cannabis.

We believe that the bill has a high probability of passing the house of Representatives. At present, the house of Representatives is dominated by Democrats (the Democratic Party has always supported the legality of cannabis, with a support rate of 83% in 2020). At the same time, the house of Representatives has passed the bill once in December 2020. The legalization of federal industrial marijuana in the United States may accelerate, and the market is expected to expand rapidly, which is conducive to the layout of enterprises related to the industrial chain, In particular, OEM and brand enterprises with large-scale production capacity may usher in rapid development opportunities.

2. Guilin Layn Natural Ingredients Corp(002166) : establish the world’s largest industrial cannabis extraction plant, and the second growth curve of CBD has been opened

The company officially laid out industrial marijuana in 2019. As of 2021q3, it has invested US $80 million to build “industrial marijuana extraction and application engineering construction project” in the United States. It is expected that the project will reach formal mass production before June 30, 2022. It is currently the world’s largest industrial marijuana extraction plant, which has been listed as a demonstration project by the Indiana state government. It is expected to process 5000 tons of raw materials per year, and the gross profit margin of the project can reach 50%; At the same time, it has signed an agreement on entrusted processing intention with a mainstream enterprise of global industrial marijuana, and it is expected that there will be more orders in the future. In the future, the company is expected to reuse its channel, customer and brand advantages in the field of plant extraction, quickly open the CBD international market and enjoy the rapid growth dividend of the industry.

3. British American Tobacco: increase its shareholding in cannabis producers and initially focus on the layout of CBD

Recently, British American Tobacco announced the acquisition of organgram 19, Canada’s leading cannabis licensed manufacturer 9% of the shares, becoming its largest shareholder, will focus on the research and development of the next generation of cannabis products for adults, and the initial layout will focus on cannabiol (CBD). The partnership strengthens bat’s consumer centric multi category business strategy, with the pilot launch of VuseCBDZone in Manchester at the beginning of this year. Organgram has advantages in consumer led innovation and high-quality research and development of adult entertainment and medical cannabis products. By using its experience, the company will deepen its understanding of this rapidly expanding and developing field, continue to expand product categories and seize market share.

Investment suggestion: Industrial marijuana sector: key recommendation: Guilin Layn Natural Ingredients Corp(002166) (Global CBD extraction leader); Suggested attention: Shanghai Shunho New Materials Technology Co.Ltd(002565) , Meirui Health International.

Risk warning: the market development is not as expected; Policy risk; Strictly distinguish between industrial marijuana and intermediate marijuana, recreational marijuana and drugs, and resolutely oppose the legalization of recreational marijuana; Business development is less than expected; Cross market valuation risk; At present, China has never approved industrial marijuana for medical use and food addition.

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