The E-cigarette Market May Reach 100 Billion — Who Will Be the Next Big Winner?

 　　The tobacco industry is facing a development bottleneck, and major companies are actively developing new reduced-harm tobacco products

  　　Since the WHO Framework Convention on Tobacco Control was formally signed in 2003, governments around the world have restricted the development of the tobacco industry. As a result, global tobacco industry growth has slowed significantly, with some years even seeing negative growth. Major tobacco companies have been trying to develop new technologies and products to reverse this trend, and various new reduced-harm tobacco products have emerged accordingly, with e-cigarettes being one of the most important categories.   　　E-cigarette retail market may reach the 100 billion level, with explosive growth in the domestic market   　　Compared with traditional tobacco products, e-cigarettes are significantly less harmful to the human body. Driven by smoking cessation demand and other factors, the e-cigarette market has developed rapidly. The global market size grew from RMB 6 billion in 2010 to around RMB 60-70 billion in 2016, representing a compound growth rate of 41%. China accounted for only about 5% of the market, or RMB 3 billion, but growth was extremely fast, with a 316% growth rate in 2016.   　　At present, the supply and demand structure of the e-cigarette market is relatively stable, with Europe and the United States as the main markets. However, China has a highly developed e-cigarette industry, and nearly 90% of the world’s e-cigarettes and related accessories are manufactured in China. There are thousands of domestic e-cigarette and accessory companies, and the industry remains fragmented. In recent years, however, major tobacco companies and leading related enterprises have entered the sector through mergers and acquisitions, and industry concentration has shown an upward trend. In 2016, the U.S. FDA’s premarket tobacco application policy had a major impact on the e-cigarette industry, but there have been signs of easing since Trump took office.   　　IQOS sales far exceeded expectations, and domestic R&D is accelerating   　　IQOS, the benchmark heated tobacco product, was officially launched nationwide in Japan in April 2016. While reducing harmful smoking-related substances by 90%, it delivers a user experience close to that of conventional cigarettes. In the more than one year since its launch in Japan, its market share surged to 7.1% despite production shortages and sales restrictions, and its conversion rate among Japanese smokers is expected to exceed 10% in the future.   　　China’s tobacco market exceeds RMB 1 trillion. If similar products were allowed to be sold domestically, then based on a 5%-10% conversion rate, China could create a new heated tobacco market worth RMB 50-100 billion within 1-2 years, starting from zero. The industry opportunity is huge. At present, China has fully banned the import of such products, and tobacco manufacturers and e-cigarette companies are actively developing similar products.   　　Investment recommendations   　　It is recommended to pay attention to leading domestic e-cigarette companies with accumulated expertise in next-generation tobacco technologies.   　　NEEQ: Smoore (one of the leading e-cigarette companies), Sigelei (one of the leading e-cigarette companies), and FJ Battery (IQOS battery supplier).   　　Other key companies to watch: IVPS (one of the leading e-cigarette companies), Joyetech (one of the leading e-cigarette companies).