The Unusual “Ecosystem” of the Vaping Industry

Introduction: With the rapid growth of export business laying the foundation for orders. Changes in domestic policy regulation drive qualitative changes in e-cigarette marketing and channels, enhancing awareness and trial rates; consumer habits are gradually cultivated. It is expected that in the future, a market system dominated by China Tobacco will build competitive entry barriers.
According to Chinese e-cigarette news: With the rapid growth of export business laying the foundation for orders. Changes in domestic policy regulation drive qualitative changes in e-cigarette marketing and channels, enhancing awareness and trial rates; consumer habits are gradually cultivated. It is expected that in the future, a market system dominated by China Tobacco will build competitive entry barriers.
1. We believe that the rapid development of e-cigarettes in overseas markets is driven by three main factors:
1) Demand-driven. Smokers' health awareness is increasing, seeking healthier and more environmentally friendly alternatives to traditional cigarettes. The stylish appearance of e-cigarettes and the development of social functions attract non-smokers to consume.

2) Changes in the policy regulatory environment drive marketing and channel advancements. Taking the North American market as an example, after the US federal court announced the FDA's defeat, e-cigarettes made qualitative breakthroughs in marketing and channels. In terms of promotion, openly extensive marketing greatly enhances product awareness; in terms of channels, products are widely distributed in offline retail channels, facilitating purchasing convenience.

3) Leading companies drive market development. After 2011, the overseas e-cigarette industry experienced a wave of consolidation, gradually increasing concentration. Leading companies drive market development through product innovation and active marketing strategies. For example, Blu, the market leader in the US, increased its revenue from $50 million in 2011 to $150 million in 2012 (with $177 million reached in the first three quarters of 2013) through product improvements (taste, appearance, social functions, etc.) and channel expansion (retail channels expanded from 12,000 to over 100,000). Japan Tobacco and Ploom jointly launched low-temperature non-combustible products, quickly capturing market share through segmented positioning.

2. Referring to overseas, the domestic e-cigarette market also has a foundation for rapid development; it is expected that future development will still be dominated by China Tobacco. In terms of demand, consumers' emphasis on health and pursuit of new things provide a grassroots consumption foundation for e-cigarettes. In terms of regulation, it is expected that the domestic policy regulatory environment will also trend towards overseas, primarily encouraging. From the perspective of competitive landscape, due to strict regulation of domestic nicotine and other raw materials, and the implementation of a tobacco monopoly system, the China Tobacco system enjoys first-mover advantages in aspects such as flavor formulas, promotional resources, and retail channels (over 5 million retail outlets). It is expected that the large-scale development of domestic e-cigarettes will still be dominated by the China Tobacco system. This is beneficial for tobacco packaging companies like Shanghai Green New, Dongfeng Co., and Jinjia Co., which have long-term cooperation with China Tobacco and possess channel advantages. They are also expected to leverage their channel advantages to integrate the currently fragmented domestic e-cigarette industry chain, enhancing industry concentration.

Stock price performance catalysts: Changes in the domestic policy environment, reasonable definition of e-cigarette identity, and the enrichment of offline sales channels.

Core assumption risks: The acceptance and popularity of e-cigarettes in the domestic market may take a long time.