3.15 Gala Exposed E-Cigarettes, JD.com Blocked Listings—Is the Vaping Industry in Trouble?

The 3.15 Gala exposed e-cigarettes, JD.com blocked listings—Is the vaping industry in trouble? With costs of around 30 RMB, yet selling for high prices of 300 to 500 RMB, is the e-cigarette industry a lucrative one?

Since 2019, e-cigarettes have become the hottest trend in the capital market. However, the 3.15 Gala has thrown a bucket of cold water on this industry.

During the gala, CCTV exposed that "e-cigarettes can also release harmful substances, and long-term use can lead to nicotine dependence." That night, platforms like Taobao, JD.com, and Suning all removed e-cigarettes from their listings. Additionally, A-share e-cigarette industry chain listed companies also faced some impact on their stock prices.

Besides the exposure during the 3.15 Gala, bans on e-cigarettes have been continuously emerging. In October 2018, Hong Kong announced a complete ban on the sale of e-cigarettes and other new tobacco products, rather than just prohibiting sales to minors. Shortly after, Shenzhen upgraded its smoking control regulations, and several representatives in Beijing proposed to strictly control e-cigarettes.

For entrepreneurs and investors hoping to cash in on the e-cigarette trend, could this be a bubble?
Reasons for the popularity of e-cigarettes

In recent years, the global smoking population has been on the decline. According to WHO statistics, the global smoking rate dropped from 29.4% in 1990 to 15.3% in 2015. On one hand, this can be attributed to government anti-smoking campaigns and bans; on the other hand, it reflects people's increasing pursuit of health.

The decline in the proportion of smokers has made it more challenging for tobacco companies to improve performance by increasing sales volume, thus leading to a focus on developing e-cigarettes, which are perceived as less harmful.

Most consumers initially turn to e-cigarettes to quit smoking, and the vast majority of e-cigarette users are former traditional smokers. Compared to other cessation methods like gum or prescription drugs, e-cigarettes offer a similar experience and taste to traditional cigarettes, while producing no secondhand smoke, making them the most acceptable option for smokers.

On the other hand, e-cigarettes are popular for their large vapor production, high playability, and diverse flavors, allowing consumers to add flavors according to their preferences. Many young people view vaping as a fashionable way to express themselves and showcase their individuality, making vape culture popular among youth in many regions of Europe and America.

CDC data shows that the percentage of students using e-cigarettes in the U.S. rose from just 1.1% in 2011 to 11.4% in 2015.

U.S. student e-cigarette penetration rate

Tobacco giants have significant funding and technological advantages, and with continuous investment in research and development, e-cigarette products are constantly being improved, enhancing the taste experience and steadily increasing conversion rates.

China: A potential e-cigarette market

E-cigarettes officially began selling in China in 2004, and in just 14 years, they have developed significantly.

According to the "2017 World Tobacco Development Report," it is estimated that by 2017, there were 35 million e-cigarette consumers, with sales reaching approximately $12 billion, a 13-fold increase from 2010, with a compound annual growth rate of about 45%.

In 2017, due to increasing regulations in various countries, market growth slowed down. However, it is expected that with rationalization and normalization of regulations, along with continuous technological breakthroughs, the e-cigarette market still has considerable growth potential.

The report predicts that the e-cigarette industry will continue to grow, with the market size expected to exceed $47 billion by 2025, with a compound growth rate of 20.78%.

Global e-cigarette industry market size (Source: World Tobacco Development Report) China is the world's largest tobacco producer, with approximately 350 million smokers, accounting for nearly 30% of the global smoking population. In 2017, domestic cigarette sales reached 47.38 million boxes, accounting for about 40% of the global total.

At the same time, China is also the birthplace of e-cigarettes and a major global production base. By the end of 2017, China had become the world's largest e-cigarette manufacturer, producing 95% of the world's e-cigarettes. According to the China Electronic Chamber of Commerce's E-cigarette Industry Committee's 2017 statistics, there are about 700 companies manufacturing e-cigarettes in China, with over 90% located in Shenzhen.

Since 2016, China's e-cigarette market has developed rapidly, with a market size of approximately 3.2 billion RMB, and a compound annual growth rate of 71.1% from 2012 to 2016.
China's e-cigarette market size (Source: Anxin Securities Research Center)

However, the current penetration rate of e-cigarettes in China is still low, with approximately 1.5 to 2 million consumers, mainly purchasing through online and overseas purchasing channels, accounting for only 0.47% to 0.63% of the total smoking population.

According to the World Tobacco Development Report, the main consumption of e-cigarettes is still in the European and American markets, which account for 83.7% of export shares. In 2016, U.S. e-cigarette sales accounted for 43.2% of global e-cigarette sales, followed by the UK and Italy, while China's e-cigarette consumption accounted for only 6%, with a penetration rate of less than 1%.

Thus, it appears that while China is the manufacturing center for e-cigarettes, the consumption center is in the U.S. However, the Chinese e-cigarette market has a vast user base and potential market demand, indicating long-term development potential.

Continuous capital influx

With such a vast market, who wouldn't be tempted? Under the alluring "prospects," many listed companies have ventured into the e-cigarette industry chain, and e-cigarettes have even become the main business segment and core profit source for many listed companies.

Currently, the domestic e-cigarette manufacturer Maikweier, which is still listed on the New Third Board, is one of the earliest e-cigarette manufacturers in China. Since its establishment in 2009, the company has focused on the research and production of e-cigarette products. Its 2017 annual report showed that it achieved an annual revenue of 1.566 billion RMB, with 1.374 billion RMB (87.8%) coming from overseas sales.

It is understood that Yiwei Lithium Energy is Maikweier's second-largest shareholder, holding 37.55% of the company's shares. Benefiting from Maikweier's rapid growth, Yiwei Lithium Energy achieved a net profit growth of 41.57% in 2018.

Another company, Aivipusi, which has terminated its listing, reported overseas sales of 628 million RMB in 2016, accounting for 69.27% of its revenue during the same period.

Additionally, traditional tobacco companies are also eyeing this "cake." In 2017, Sichuan Tobacco's "Kuanzhai Kung Fu" entered South Korea, Yunnan Tobacco's MC also broke into the South Korean market in April 2018, and Guangdong Tobacco and Hunan Tobacco's e-cigarette products were launched in Laos and the UK, respectively.

Meanwhile, e-cigarettes have ignited the venture capital circle. On January 20, 2019, Tongdao Dashi founder Cai Yuedong and Huang Taiji founder He Chang announced the launch of YOOZ e-cigarettes; a week later, several self-media figures, including Visual Zhi CEO Sha Xiaopi and Junwu Cidu CEO Zeng Hang, jointly launched the "Lingxi LINX" e-cigarette; in the investment list announced in the second half of 2018, investments included 38 million RMB from Source Code Capital and IDG Capital in RELX's angel round in June 2018, and Zhenge Fund's investment in MOTI in December.

E-cigarettes have always been heavily promoted under the banners of "quitting smoking" and "health." This exposure during the 3.15 Gala has likely given everyone a new understanding of e-cigarettes; they are not a miraculous quitting tool but rather a different way to become addicted. One should not fall into the trap of consumption just to pursue fashion.

Furthermore, since we now understand the harms of e-cigarettes, we hope the government can quickly categorize e-cigarettes under the special category of cigarettes and strengthen regulation. At the same time, we hope that industry personnel in the e-cigarette sector can standardize production, inspection, and sales processes, and not just chase profits by selling products to minors.

The recently started widespread e-cigarette entrepreneurial boom may need to hit the brakes after this exposure. I wonder if everyone will still dare to vape in the future? As for me, I certainly don't have the guts anymore.

【Summary】

In summary, China is the world's largest e-cigarette manufacturing hub, while the main consumption power remains overseas. The local market's penetration rate of less than 1% represents a vast potential for future development. Coupled with high growth rates and profitability, e-cigarettes seem like a perfect business, which explains the influx of various investments.

However, while the e-cigarette industry is highly profitable, its greatest risk comes from regulatory risks. The 3.15 Gala incident is one such example.

Although the impact of the 3.15 incident on the e-cigarette industry is relatively limited, it is likely that relevant authorities will introduce stricter industry regulations in the future to bring this addictive business back under official control.

I remind everyone that such policies could be quite strict! As investors, when assessing the investability of the industry, it is essential to factor in this regulatory risk probability.