A 200 Billion Market: Why Is Vaping So Frenzied, and Who Leads the Pack?

“Although the magical concept of e-cigarettes, which is shrouded in smoke, was named and criticized on March 15, it seemed that it did not affect its market trend. With the dual factor of e-cigarettes + industrial marijuana, the concept stock Shunhao shares increased more than four times during the year.

E-cigarettes are still a niche consumer product, and mainstream consumer products still have low awareness of this product. By then, with the clarification of corresponding regulations, consumers 'awareness of this type of product will become more mature, and e-cigarettes are expected to become one of the mass fast moving consumer products.
 
In the year-to-date marijuana carnival, China investors have enjoyed nearly six times the investment return in April. American investors on the other side of the ocean are also eager to move, but this time they are interested in an e-cigarette + marijuana unicorn company. According to foreign media reports, Pax Labs, a U.S. manufacturer of e-cigarettes and marijuana atomizers, is conducting a new round of financing. The financing amount will exceed US$400 million and the valuation will be as high as US$1.3 billion.

The market value of A-share related concept stocks is nearly 100 billion yuan.

According to media reports, even if they were named and exposed at the CCTV 3.15 party, e-cigarettes remained popular. On April 14, IECIE, the largest e-cigarette exhibition in China, opened for three days. According to statistics from the organizers, more than 70,000 people participated in this exhibition, 16000 more than last year.

Since the second half of last year, the attention of capital markets and entrepreneurs to small-cigarette e-cigarettes has skyrocketed. It is easy to operate and has a high repurchase rate of cigarettes. It is directly targeted at young user groups and the consumer upgrade market. It is believed to have potential to withdraw from the huge tobacco market. Divide a piece of cake.

According to Euromonitor International data, the global new tobacco market reached US$25.5 billion (approximately RMB 1700) in 2018, a year-on-year increase of approximately 50%. Among them, the growth rates of heated non-combustible products and enclosed small cigarettes represented by IQOS and JUUL were as high as 193% and 239% respectively. Taking the Japanese market as an example, the retention rate of heating and non-burning equipment exceeds 40%, and the era of new tobacco has already taken shape.

In January 2019, Shenzhen City issued the "Regulations on Smoking Control in Shenzhen Special Economic Zone (Revised Draft for Solicitation of Comments)", formally proposing to include e-cigarettes in the scope of smoking bans. In February, the Food and Health Bureau of the Hong Kong Special Administrative Region Government submitted the Smoking (Public Health)(Amendment) Bill 2019 to the Legislative Council of the Special Administrative Region, proposing to ban the import, manufacture, sale, distribution and promotion of alternative smoking products such as e-cigarettes. Offenders can be fined up to HK$50,000 and imprisonment for 6 months.

However, some people in the e-cigarette industry said that this industry has been developing for more than ten years and the scale of the industry is already very large. In recent years, it has only attracted attention because of the entry of the Internet and capital. A one-size-fits-all policy will obviously affect the development of enterprises in China, but with clear regulations, it will also be conducive to market regulation, and manufacturers are also willing to make efforts in overseas markets.

Amidst the curling smoke, who are you?

E-cigarettes are electronic products that imitate cigarettes and have the same appearance, smoke, taste and feeling as cigarettes. It is a product that users can smoke after turning nicotine into steam through atomization and other means. E-cigarettes do not use real tobacco, but only prepare tobacco oil containing the aroma and taste of cigarettes to meet users 'needs for nicotine. They do not contain harmful ingredients such as tar and reduce the harm caused by smoking traditional cigarettes. e-cigarettes

The original intention of the invention is to replace traditional tobacco products and play a role in quitting smoking and reducing toxic ingredients. It has been developing and gradually popular since 2010. Currently, major multinational tobacco companies have e-cigarette products.

From a structural perspective, e-cigarettes have three core components, atomizer, battery box and cigarette oil. Its development has gone through three generations of products, which can be divided into two categories. One is the type with added tobacco oil, which is called big cigarettes, and the other is the type with replaced smoke bombs. The latter is also called small cigarettes because of its small size. As the industrial chain matures, most of the startups that poured in at the end of 2018 released and sold small cigarettes.

About 90% of the world's products and accessories are produced in China

The e-cigarette industry chain includes upstream raw material suppliers, e-cigarette design manufacturers, and downstream sales companies. The increasingly strong demand in Europe and the United States and the regulation of domestic policies have made e-cigarette products present a global industrial chain pattern with the manufacturing center in China and the demand center in Europe and the United States. At the upstream raw material level, it can be divided into battery raw material suppliers (batteries, batteries, control circuits), atomizer raw material suppliers (plastics, glass, hardware, heating resistors) and tobacco oil raw material suppliers.# p#pagination title #e#

The middle reaches are mainly the design and manufacture of electronic cigarettes, which can be divided into two categories: professional electronic cigarette manufacturing enterprises and international tobacco giant manufacturing departments. The domestic self-owned brand market accounts for a small proportion. Domestic tobacco oil enterprises mainly adopt OEM/ODM mode to carry out OEM production for foreign famous brands.

Downstream is delivered to retailers through agents and distributors, including well-known e-cigarette brands, large supermarkets, convenience stores and pharmacies.
In fact, the current OEM industry chain is very mature. The entire production process is that the cigarette oil factory is responsible for synthesizing specific cigarette oil and sending it to the OEM's filling workshop for filling, and the OEM is responsible for hardware manufacturing and assembly.

Many industry insiders said that e-cigarette factories have high profits, with a gross profit of 50%-80%. Although they are also trying independent brands, they are far from making solid money as OEMs, which leaves a market space for startups. Tianfeng Securities Research Report shows that China is already the world's largest producer and exporter of steam e-cigarettes, and about 90% of the world's products and accessories are produced in China.
It is undeniable that nicotine has never been absent from the e-cigarette industry chain. Vice President of China Tobacco Control Association also said in an interview with CCTV that nicotine is an addictive substance. Teenagers who smoke e-cigarettes for a long time can also become dependent on nicotine, and their chances of becoming cigarette consumers are very high.

The upstream industrial chain of the e-cigarette industry mainly includes chip design solution providers, battery, cotton, silk and other accessory manufacturers, plastics, hardware and other raw materials, screen printing, packaging and other suppliers, etc.

The chip is the core control element in the electronic host box, realizing functions such as power regulation, mode switching, temperature control, and power management of e-cigarettes. The quality of the chip directly affects the explosiveness, stability, and durability of the e-cigarette product experience, and even affects the taste of the atomizer. The batteries used in e-cigarettes are mainly 18650 batteries. Among the DIY components of e-cigarettes, there are also oil-conducting cotton, heating wire, etc. These accessory manufacturers generally do not specifically produce e-cigarettes. Plastics, hardware, etc. are the raw materials used by e-cigarette manufacturers to produce e-cigarette products. The industry has strong commodity attributes.
The midstream industrial chain of the e-cigarette industry mainly includes tobacco oil producers, e-cigarette manufacturers and tobacco companies. Tobacco oil is a consumable of e-cigarettes, neither a component of e-cigarette equipment nor a raw material. There are two main types of manufacturers manufacturing e-cigarettes: international tobacco giants and professional e-cigarette manufacturers. Tobacco companies mainly include Chinese tobacco companies and foreign tobacco groups in various places that have entered the e-cigarette industry.
The downstream industrial chain of the e-cigarette industry mainly includes agents, distributors, retailers and end consumers. Retailers obtain products from agents and distributors and sell them to end customers. Among them, retailers can be divided into two categories, online retailers and offline retailers. Online sales channels mainly include e-cigarette companies 'own platforms, online e-commerce platforms and related e-cigarette forums, online clubs, etc.; Offline sales channels are mainly experience halls, offline clubs, professional e-cigarette stores, convenience stores, and tobacco product stores.
Tianfeng Securities analyzed: At present, the domestic atomized e-cigarette industry chain generally presents a small, scattered and chaotic competition pattern. Manufacturers use export OEM as their main business model, and only a few leading companies have obvious R & D and technological advantages. We believe that with the introduction of policies and regulatory regulations related to e-cigarettes, the industry entry threshold will be greatly increased, unqualified manufacturers will gradually be eliminated from the market, and manufacturers with outstanding R & D capabilities and design capabilities will be expected to gain more market share.# p#pagination title #e#

At the same time, at present, e-cigarettes are still a niche consumer product, and mainstream consumer products still have low awareness of this product. By then, with the clarification of corresponding regulations, consumers 'awareness of this type of product will become more mature. E-cigarettes are expected to become one of the mass fast-moving consumer products.
Institutional interpretation

Tianfeng Securities:

We believe that after the establishment of new tobacco-related policies and regulations, industrial chain service providers that have cooperated with the China Tobacco System for decades are expected to continue to serve China Tobacco in the field of new tobacco and share the blue ocean market for new tobacco with China Tobacco!

Guosheng Securities:

New tobacco regulatory policies are becoming stricter. The 315 CCTV Gala has named and criticized e-cigarettes. There is a possibility that the supervision of e-cigarettes will become stricter in the future and may affect the supervision of other new tobacco products, especially HNB products. If the country becomes stricter on HNB products, it will affect the development of the entire domestic new tobacco industry.

Analysis of concept stocks

Tianfeng Securities:

Focus on: Jinjia Co., Ltd.(working together with Yunnan China Tobacco and Xiaomi Ecological Chain to block the main channel of new tobacco), Jiyou Co., Ltd.(laying out the R & D and industrialization of new tobacco);

It is suggested to pay attention to: Shunhao shares (dual-pronged layout of cigarette bombs and smoking articles), Dongfeng shares (equity participation in layout of new tobacco products), Huabao shares (leading tobacco flavor), Huabao International (leading layout of tobacco flavor and new tobacco raw materials), China flavor and fragrance (acquisition of international electronic cigarette manufacturer Jirui).