Tobacco Taxes and Profits Hit Record High: Can Vaping Gain Momentum in 2020?

Recently, the National Tobacco Monopoly Administration released a set of data showing that the total tax revenue and profits of the tobacco industry in 2019 reached a record high. Among them, the total industrial and commercial tax revenue was 1,205.6 billion yuan, a year-on-year increase of 4.3%; the total revenue to the treasury was 1,177 billion yuan, a year-on-year increase of 17.7%. This has attracted market attention and reflects the recent development trend of the industry.

As we all know, the proportion of smokers worldwide is significant, accounting for about one-quarter of the global population. In contrast to the international market dominated by the four major tobacco companies (Philip Morris International, British American Tobacco, Japan Tobacco, and Imperial Brands), China implements a monopoly operation in the tobacco industry, which has developed relatively stably under strict regulatory policies, mainly dominated by China National Tobacco Corporation. It can be said that under strong policy control, the industry has developed in a relatively stable and orderly manner, contributing positively to national and local fiscal revenue and economic development, which is the main reason for the record high tax revenue and profits in the tobacco industry.

At the same time, it must be said that the rise of the new tobacco industry, led by electronic cigarettes, has also revitalized the entire tobacco market to some extent. It may replace traditional tobacco to meet the diversified demands in the current market. From the market perspective, the global new tobacco market has grown from $9.4 billion in 2013 to $32.3 billion in 2018, with a compound annual growth rate of 27.9%. It is expected that by 2023, the global new tobacco market size may reach $173.4 billion. In 2018, China's electronic cigarette market size is expected to reach $744 million, and by 2019, it is expected to exceed $800 million. Additionally, in 2017, China's electronic cigarette production increased to 1.651 billion units, and it is expected that by 2022, China's electronic cigarette production will reach 4.753 billion units.
 
Based on this, the previous year's boom in the electronic cigarette sector and the influx of capital were expected. In the first three quarters of 2019, a total of 35 electronic cigarette brands in China received financing, with total financing exceeding 1 billion yuan.

However, it is important to note that although electronic cigarettes have reduced the harmful burden on human health to some extent, the rise of this product has also led to a sharp increase in the number of young smokers, prompting many countries, including China, to strengthen regulations on electronic cigarettes and other new tobacco products. For example, in November last year, the National Tobacco Monopoly Administration and the State Administration for Market Regulation issued a notice on further protecting minors from electronic cigarette harm, issuing three "heavy blows" to electronic cigarettes: prohibiting sales to minors, prohibiting online sales, and prohibiting online advertising for electronic cigarettes. Meanwhile, due to the popularity of electronic cigarettes among young people, on February 28, the U.S. House of Representatives approved a bill banning the sale of flavored electronic cigarettes and other flavored tobacco products. This bill will impose new restrictions on the sale of electronic cigarettes and ban flavors in tobacco products, including menthol cigarettes, and will also impose new consumption taxes on nicotine. As a result of these policies, the development of electronic cigarettes has been somewhat curtailed, and the industry is currently undergoing a period of adjustment and reshuffling.
 
It is also worth noting that the negative impact of the COVID-19 pandemic has naturally affected the electronic cigarette segment, potentially adding to the challenges faced by existing electronic cigarette businesses. Due to the pandemic, production of electronic cigarettes has not fully resumed, and with the cancellation of online retail channels and reduced foot traffic offline, related enterprises in the supply chain have also been adversely affected, leading to a downturn in the industry.

However, as the pandemic is gradually brought under control, and with companies returning to normal operations, along with policy requirements to deepen reforms in key areas such as tobacco, relevant companies may continue to focus on high-quality development as a strategic priority. Under effective market regulation, they will continue to operate in a standardized manner and meet consumer demands through technology and brand cultivation, keeping pace with market development. According to relevant brokerage reports, the following stocks may be worth watching:

Related stocks in the tobacco sector

China Tobacco Hong Kong (6055.HK): The company mainly engages in the import and export of tobacco products, holding exclusive rights to operate tobacco international business. In 2019, it achieved revenue of HKD 8.977 billion, a year-on-year increase of 27.64%; net profit was HKD 319 million, a year-on-year increase of 23.17%. Among them, the growth rates of revenue from tobacco leaf products, cigarette exports, and new tobacco products were rapid, at 83.16%, 44.26%, and 59.76%, respectively; while the growth of tobacco leaf imports was only 6.75%. Meanwhile, in the export of new tobacco products, thanks to actively expanding overseas markets, the revenue of this business in the second half of 2019 was approximately HKD 25.1 million, a year-on-year increase of 48.52%. Currently, the company's new tobacco product export business has covered 15 countries and regions, an increase of 11 compared to the previous year, with the number of brands sold reaching 11, an increase of 7, and the number of products sold reaching 35, an increase of 14.

Jinjia Co., Ltd. (002191.SZ): The main business is the research and production of high-end packaging printing products and materials, with main products including cigarette labels, wine boxes, high-end electronic products, and daily necessities packaging and related supporting materials. In 2018, the company achieved total operating revenue of 3.373 billion yuan, a year-on-year increase of 14.51%; net profit attributable to shareholders of the listed company was 727 million yuan, a year-on-year increase of 26.49%. Basic earnings per share were 0.49 yuan/share. In 2019, it achieved revenue of 3.989 billion yuan, a year-on-year increase of 18.2%, with net profit attributable to the parent company of 874 million yuan, a year-on-year increase of 20.6%, and net profit excluding non-recurring items of 856 million yuan, a year-on-year increase of 23.6%. Previously, the company stated through an interactive platform that the new tobacco business is a strategic emerging sector for the company, currently in the investment phase. The company's electronic cigarettes are currently sold offline in China and have expanded market channels in the UAE and are currently exploring Southeast Asian market channels.

Jiyou Co., Ltd. (603429.SH): The company specializes in the research, production, and sales of cigarette labels, cigarette wrapping paper, aluminum foil, and cigarette sealing paper. In 2018, it achieved operating revenue of 458 million yuan, a year-on-year increase of 96%; net profit attributable to shareholders of the listed company was 115 million yuan, a year-on-year increase of 16.39%. Basic earnings per share were 0.6061 yuan. In the first three quarters of 2019, it achieved operating revenue of 412 million yuan, a year-on-year increase of 42.86%; net profit attributable to shareholders of the listed company was 101 million yuan, a year-on-year increase of 33.18%, with earnings per share of 0.40 yuan, and it is expected that the net profit attributable to shareholders of the listed company for 2019 will be around 200 million yuan, an increase of approximately 84.59 million yuan compared to the previous year, representing an increase of about 73.3%.

Yingqu Technology (002925.SZ): The company's main business is based on its self-innovative UDM model (also known as ODM smart manufacturing model), mainly providing customers with the research and production of smart control components, innovative consumer electronics, and providing intelligent manufacturing solutions for small and medium-sized enterprises. Among them, the revenue from innovative consumer electronic products has been the highest in the past three years, with the main revenue coming from household engraving machines and precision plastic components for electronic cigarettes. In 2018, the operating revenue was 2.78 billion yuan, a year-on-year decrease of 14.95%; net profit attributable to shareholders of the listed company was 814 million yuan, a year-on-year decrease of 17.3%. Basic earnings per share were 1.81 yuan. In 2019, it achieved total operating revenue of 3.810 billion yuan, an increase of 37.13% compared to the previous year; net profit attributable to shareholders of the listed company was 965 million yuan, an increase of 18.64% compared to the previous year.

Conclusion

Currently, the impact of the pandemic is relatively limited, and the future development of the tobacco industry may continue to progress in two directions: focusing on product innovation and expanding overseas markets. Although the increase in health awareness will lead people to "stay away from cigarettes," this market may expand with the regulation and improvement of the electronic cigarette market, showing considerable growth potential.