Event: on April 13, 2022, the relevant departments of the State Administration of market supervision and the state tobacco monopoly administration answered questions related to the supervision of e-cigarettes, and made clear responses to questions such as the scope of industry supervision, transition period, license application and trading platform.
Summary of key contents: 1) it is clearly required that “atomized materials should contain nicotine”, that is, electronic cigarette products without nicotine shall not be sold on the market; 2) Set a 5-month transition period for policy implementation (2022 / 5 / 1-2022 / 9 / 30), during which the existing production and operation entities can normally carry out production and operation activities; 3) From May 5, 2022, the production enterprises and brands related to the e-cigarette industry chain with stock (registration and information declaration shall be completed before November 10, 2021) can submit the intention of applying for production license; 4) From June 1, 2022, e-cigarette retail outlets with stock (complete registration and information declaration before November 10, 2021) can apply for tobacco monopoly retail license; 5) During the transition period, it is not allowed to invest in new e-cigarette production and operation enterprises; It is not allowed to build new electronic cigarette production entities or expand the electronic cigarette production capacity temporarily; 6) From June 15, 2022, we will gradually start to build a national unified e-cigarette trading management platform for trading; 7) Supporting regulatory policies and implementation rules related to e-cigarettes will be introduced one after another.
Banning the sales of zero nicotine products in China has limited impact on the expected growth trajectory of the industry. The policy interpretation clearly stated that “e-cigarettes without nicotine will be included in the definition of e-cigarettes” and shall not be sold on the market. We believe that the core advantage of e-cigarette lies in its harm reduction attribute and the substitution of traditional cigarettes brought by nicotine, and the medium and long-term penetration rate is expected to continue to increase. Due to the gradual recognition of its harm reduction effect and smoke replacement attribute, the new tobacco market represented by e-cigarette and heating non combustion continues to expand. According to Sullivan’s prediction, the sales scale of the global e-cigarette market will increase by CAGR 25.3% from 2022 to 2026. International tobacco giants accelerate the layout of new tobacco tracks: Philip Morris International is expected to stop cigarette sales by 2050 and sell all new tobacco; Bat expects to contribute £ 5 billion in new tobacco revenue in 2025 and 50 million new tobacco users in 2030. However, the zero nicotine product has limited appeal to traditional smokers because it looks like an electronic cigarette, does not contain nicotine and presents a variety of flavors such as fruit flavor. Banning the listing and sales of zero Ni products is conducive to unified supervision in the short term, and has limited expected impact on the growth trajectory of the industry. With the continuous maturity of product R & D and atomization technology, we believe that zero nicotine products are expected to achieve further breakthroughs in the medical field.
With the extension of the transition period, the industry is expected to achieve a smooth transition, and the head enterprises of the stock license application system may benefit. 1) It is clear that the policy transition period is five months. The tobacco monopoly administration department of the State Council will soon publish the follow-up relevant policy documents of e-cigarettes, successively issue supporting policies and implementation rules, and establish and improve the supporting policy system. Compared with May 1 previously expected by the industry, the transition period is extended to September 30, which is expected to protect the interests of all parties in the e-cigarette industry chain and realize the smooth transition of the e-cigarette industry. 2) Channel side: the issuance of the first batch of e-cigarette retail licenses will focus on the registered e-cigarette stock stores. We believe that as a product with high repurchase rate, the reduction of short-term terminal channels will not lead to the simultaneous reduction of demand. During the transition period, restrictions on the expansion of production capacity of new e-cigarette production enterprises and stock production enterprises may benefit China’s excellent brands and leading enterprises with large existing production capacity.
Investment suggestion: the industry has ushered in legalized and standardized development. The short-term market scale may be disturbed by the implementation of policies, but the medium and long-term penetration is expected to continue to increase. Recommend [SIMORE international] with outstanding valuation cost performance after correction; It is suggested to pay attention to [fog core technology] whose advantages in brand and user volume are expected to continue; [ Shenzhen Jinjia Group Co.Ltd(002191) ] with extensive industrial chain layout.
Risk tips: uncertainty of industrial policies, change of PMTA audit standards, intensification of industrial competition, etc
