China Tobacco Hong Kong Shares Surge as Vape Financing Heats Up

Relying on more than 300 million smokers in China, a near-monopoly business, and strong bargaining power over upstream and downstream may be the key.

China Tobacco Hong Kong has an issue price of HK$4.88 per share and a net raise of approximately HK$735 million. According to media reports, at the listing ceremony, Zhao Jianmin, general manager of China Tobacco Hong Kong, expressed his gratitude to all investors for their recognition of the company's value and their favor of its shares. Listing means that China Tobacco has taken a solid step towards overseas development and opened up more financing channels.

According to public information, China Tobacco Hong Kong is China Tobacco International's designated overseas platform responsible for capital market operations and international business expansion. China Tobacco International is a wholly-owned subsidiary of China Tobacco Corporation and is responsible for the management and operation of China Tobacco Corporation's international business. China Tobacco Corporation (CNTC) Group is the only entity in China engaged in the production, sales, import and export of tobacco monopoly products in accordance with the national tobacco monopoly system.

According to the prospectus, as of the end of 2018, China Tobacco Hong Kong had only 28 employees in China Hong Kong, including 5 senior managers. The total employee cost is approximately 25.914 million Hong Kong dollars, and the average annual salary is nearly one million Hong Kong dollars. Based on operating income of HK$7.033 billion, per capita operating income exceeds HK$250 million.

When talking about competitive advantages in the prospectus, China Tobacco Hong Kong said: We are the exclusive operating entity in the current business field. rdquo; We have strong bargaining power with suppliers and customers, and have sufficient cash flow.& rdquo;

The prospectus shows that China Tobacco Hong Kong's exclusive business includes the import of tobacco leaf products: we mainly purchase tobacco leaf products from countries or regions of origin around the world (such as Brazil, the United States, Argentina, Canada, Zambia, etc.) and sell imported tobacco products to China Tobacco International for resale to Chinese cigarette production companies. rdquo;

“In terms of tobacco leaf product export business: We are the exclusive operating entity for tobacco leaf product export business in Southeast Asia, China Taiwan, Hong Kong and Macao.& rdquo; Including the business of exporting cigarette products to duty-free shops such as Thailand and Singapore, and the business of exporting new tobacco products to global overseas markets.

From 2016 to 2018, China Tobacco Hong Kong's revenue was approximately HK$6.31 billion, HK$7.807 billion and HK$7.033 billion respectively, and profits attributable to equity holders of the company were approximately HK$335 million, HK$344 million and HK$259 million respectively; Net cash from operating activities was HK$53.9 million, HK$359 million and HK$758 million respectively; Returns on equity were 21.1%, 15.9% and 18.2%.

Essence International analyst Li Yunyi said that the global tobacco market is currently dominated by traditional tobacco products such as cigarettes, pipe tobacco and cigars, and emerging tobacco products such as electronic eyes and unheated burning tobacco products are becoming increasingly popular around the world. In recent years, the global tobacco control campaign has become increasingly intense, putting pressure on the consumption of tobacco products. China has the largest number of smokers in the world, with 306 million in 2018, and cigarette sales of 1.4405 billion yuan, accounting for 44.6% of global cigarette consumption. As residents 'disposable income continues to increase, the consumption of tobacco products in China is upgraded and the structure of the tobacco market is optimized, and the consumption of high-end tobacco products continues to grow.

China-Thailand International stated that due to the national tobacco monopoly system, only China Tobacco Corporation and its affiliated companies are currently qualified to monopolize tobacco sales in China. Although various parts of the world have strengthened tobacco control campaigns in recent years, there are sufficient number of smokers and there is a strong demand in China. Moreover, their monopoly position is solid and market competition is not visible in the short term.

However, as China Tobacco's listing in Hong Kong has driven the rise of some companies with tobacco-related businesses, e-cigarettes may become its most powerful competitor and have therefore attracted special attention. On the one hand, these concerns come from the suppression of various mainstream media, with this year's March 15 incident being the most representative. Major media that responded to the wind ignored the research conclusions drawn by the British Department of Health and developed countries such as Japan that e-cigarettes reduce harm compared to cigarettes.Without systematic data demonstration,They all aimed their guns at e-cigarettes. Lu Xun once said: I have always been afraid to speculate on the people of China with the worst malice, but I never expected and didn't believe that they would be so cruel. rdquo;

On the other hand, compared with the malice of the media, Capital with an international perspective sees the future more calmly. Since the beginning of this year, many e-cigarette companies have announced the completion of financing, and the investment and financing popularity of the e-cigarette industry has increased significantly.

Multiple financing completed

According to IT Orange data, as of June 2019, 14 domestic e-cigarette company financing cases have been completed, with a total financing amount of approximately 574 million yuan, which is higher than the investment amount for the whole year of last year. Among them, FLOW E-cigarettes are one of the companies that attracts more attention. On May 24, the company announced that it had completed two rounds of angel and Pre-A financing, with a cumulative amount of US$10.89 million. It is reported that the FLOW E-cigarette brand was founded by Zhu Xiaomu, former vice president of hammer technology products. Its founding team members come from hammer technology, Motorola, Huawei, Ogilvy and Mather and Mather.

Data from another institution, Qianxin. com, shows that Shenzhen Meizhonglian Technology Co., Ltd., which focuses on the technology manufacturing industry in the field of e-cigarettes, received Shunhao Pre-A Series of financing in June 2019, with an amount of tens of millions of yuan. Meizhonglian Technology Co., Ltd. is committed to providing solutions for small cigarette categories. Its predecessor was Shenzhen Meizhonglian International Trading Co., Ltd., a Sino-US joint venture. In addition, on the evening of June 3, Vico Technology announced that in order to find new profit growth points, the company plans to purchase a 10% stake in e-cigarette supply chain company Shenzhen Zhuolineng Electronics Co., Ltd. from natural person Zuo Hong for 100 million yuan. equity.

penetration rate is low

The "China Tobacco Products Industry Market Demand Forecast and Investment Strategic Planning Analysis Report" released by the Prospective Industry Research Institute shows that China is the world's largest e-cigarette production center but not the largest consumer. The current size of China's e-cigarette market is about 4 billion yuan. The penetration rate of e-cigarettes in China is extremely low, and the consumption scale is less than 15% of the size of the U.S. market, the largest consumer of e-cigarettes. Although China's e-cigarette penetration rate is low and the market size is small. But as the world's largest e-cigarette production center. The development of the global e-cigarette market has also provided huge development opportunities for China's e-cigarette production and manufacturing. The report also shows that it is estimated that the number of global e-cigarette consumers reached 35 million in 2017, and e-cigarette sales were approximately US$12 billion, a 13-fold increase from 2010, with a compound annual growth rate of approximately 45%. The global e-cigarette market is developing rapidly. Among them, the United States is the largest e-cigarette consumer market. In 2017, e-cigarette sales in the United States were around US$4.63 billion, far ahead of other countries.

Some institutions believe that national standards for e-cigarette manufacturing and supervision are expected to be implemented this year, and small and medium-sized brands whose production and manufacturing standards are not up to standard will be eliminated, benefiting leading enterprises with R & D technology and production standardization. In addition, domestic e-cigarette manufacturing companies are still mainly export-oriented. For export-oriented enterprises, the introduction of domestic manufacturing standards will increase the production costs of enterprises, and simply manufacturing exports may lose competitiveness in the future. Improving the brand power of e-cigarettes may become the way out for the development of domestic e-cigarette companies in the future, creating independent brands, increasing the added value of products to hedge standardized costs, and improving the international competitiveness of domestic products.