Tobacco Industry Tax Revenue Hits Record High: Can E-Cigarettes Ride the Wave in 2020?

Recently, the National Tobacco Monopoly Administration released a set of data showing that the total tax revenue and contributions to the treasury from the tobacco industry reached a historic high in 2019. Specifically, the total industrial tax revenue was 1.2056 trillion yuan, an increase of 4.3% year-on-year; the total contribution to the treasury was 1.177 trillion yuan, an increase of 17.7%. This has attracted market attention and reflects the recent development trend of the industry.

As we know, the proportion of smokers globally is significant, accounting for about one-quarter of the world's 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. Therefore, under strict regulatory policies, the industry has developed relatively stably, 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, which has also contributed positively to national and local fiscal revenue and economic development. This is the main reason for the historic high in tobacco industry tax revenue.

At the same time, it must be said that the rise of the new tobacco industry, led by e-cigarettes, has also revitalized the entire tobacco market to some extent. It may replace traditional tobacco to meet the diversified demands currently present in the market. From the market perspective, the global new tobacco market size 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 as high as $173.4 billion. In 2018, China's e-cigarette market size was expected to reach $744 million, and by 2019, it was expected to exceed $800 million. Moreover, in 2017, China's e-cigarette production increased to 1.651 billion units, and it is expected that by 2022, China's e-cigarette production may reach 4.753 billion units.
 

Based on this, the previous year's boom in the e-cigarette sector and the influx of capital into the market were expected. In the first three quarters of 2019, a total of 35 e-cigarette brands in China received financing, with total financing exceeding 1 billion yuan.

However, it is important to note that although e-cigarettes have reduced the harmful burden on human health to some extent, the rise of this product has led to a sharp increase in the number of young smokers. This has compelled many countries, including China, to strengthen regulations on new tobacco products such as e-cigarettes. 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 the Harm of E-Cigarettes," which imposed three strict measures: prohibiting the sale of e-cigarettes to minors, prohibiting the online sale of e-cigarettes, and prohibiting the online advertisement of e-cigarettes. Meanwhile, due to the harm of e-cigarettes' popularity among youth, on February 28, the U.S. House of Representatives approved a bill banning the sale of flavored e-cigarettes and other flavored tobacco products. This bill will impose new restrictions on the sale of e-cigarettes and ban flavorings in tobacco products, including menthol cigarettes, and it will also impose new excise taxes on nicotine... As a result of these policies, the enthusiasm for e-cigarette development has been somewhat curtailed, and the industry is in a period of adjustment and reshuffling.
 

Moreover, it is worth noting that the negative impact brought by the COVID-19 pandemic has naturally affected the e-cigarette segment, potentially delivering a "double blow" to existing e-cigarette operations. Due to the pandemic, production resumption for e-cigarette companies has not fully commenced, coupled 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 poor market conditions and increasing sluggishness.

However, as the pandemic is gradually brought under control in the later stages, and with companies returning to normal operations, along with policy requirements to deepen reforms in key areas such as tobacco, relevant companies entering the market may continue to focus on high-quality development as a strategic priority. Under strong market regulation, they will continue to standardize operations and constantly meet consumer demands through technology and brand cultivation, keeping pace with market development. According to reports from relevant brokerages, the following stocks may be worth paying attention to:

Relevant stocks in the tobacco concept

China National Tobacco Hong Kong (6055.HK): The company mainly engages in the import and export of tobacco products and has exclusive operational rights for international tobacco business. In 2019, it achieved revenue of 8.977 billion HKD, a year-on-year increase of 27.64%; net profit was 319 million HKD, a year-on-year increase of 23.17%. Among them, the growth rates of revenue from tobacco leaf exports, cigarette exports, and new tobacco products were relatively fast, at 83.16%, 44.26%, and 59.76%, respectively; while the growth of tobacco leaf imports was only 6.75%. Meanwhile, in terms of new tobacco product exports, thanks to actively expanding overseas markets, the revenue from this business in the second half of 2019 was approximately 25.1 million HKD, 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 packaging materials, with main products including cigarette labels, wine boxes, high-end electronic products, and 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%, and net profit attributable to the parent company was 874 million yuan, a year-on-year increase of 20.6%, with net profit excluding non-recurring items at 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 e-cigarettes are currently sold offline domestically and have expanded into markets such as the UAE, and are currently exploring channels in Southeast Asia.

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, the operating revenue was 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%. The company's earnings per share were 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 same period last year, representing a year-on-year increase of about 73.3%.

Yingqu Technology (002925.SZ): The company's main business is based on its independently innovated 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 offering smart manufacturing solutions for small and medium-sized enterprises. Among them, in the past three years, the revenue share of innovative consumer electronics products has been the highest, with the main revenue coming from household engraving machines and precision plastic components for e-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 same period last year; net profit attributable to shareholders of the listed company was 965 million yuan, an increase of 18.64% compared to the same period last year.

Conclusion

Currently, given the limited impact of the pandemic, the future development of the tobacco industry may continue to progress in two directions: focusing on product innovation and expanding overseas. Although the rising health awareness will lead people to "stay away from cigarettes," this market may expand with the regulation and improvement of the e-cigarette market, and its growth potential remains quite promising.