Eweipusi: Digging Deep into the E-Cigarette Market and Focusing on Independent Brand Building

 The company has strong new product development capabilities and excels at creating hit products that quickly ignite the market. In 2016, the company's patented product, the TFV8 atomizer core (atomizer consumable accessory) and Alien Kit (alien kit), were launched, featuring massive vapor output. Both product series adopted the latest industry technology, with stylish designs, high quality, and powerful functions, gaining widespread popularity in foreign markets and quickly becoming bestsellers, leading to rapid growth in performance. The TFV8 atomizer core series sold over 1.1 million units in 2016, generating sales revenue of 136 million, accounting for 14.9% of that year's revenue; the Alien Kit series sold over 500,000 units, generating sales revenue of 127 million, accounting for 13.6% of that year's revenue.

Alien Kit Series

The company primarily relies on distributor distribution, combined with online direct sales, mainly covering developed markets in Europe and America, including the US, UK, and France, while also expanding into the domestic market. The company relies on distribution channels to establish a solid customer base; through online direct sales, it promotes products in strategic cooperation with JD.com, Tmall, Amazon, etc., enhancing consumer experience. In 2016, the company increased its overseas marketing efforts, successfully expanding into markets in Russia, South Africa, and others, with exports to Russia in 2016 reaching $2.22 million, accounting for 1.6% of that year's revenue. Domestic sales include traders, offline wholesale, and e-commerce platforms. The company actively expands offline traders and increases e-commerce promotion efforts, resulting in significant growth in domestic sales, with domestic market sales revenue reaching 280 million in 2016 (+189%), accounting for 30.4% of that year's revenue.

SMOK Tmall Flagship Store

The company employs multi-dimensional marketing promotion both online and offline, actively expanding domestic and international channel resources. The company collaborates strategically with globally renowned e-cigarette sales websites, utilizing Facebook, Twitter, official websites, WeChat, and other brand promotions, leveraging well-known reviewers to promote products, and placing advertisements in major industry forums, establishing a mature and comprehensive online marketing model. The company participates in major exhibitions in the US, France, Germany, the UK, Russia, and other countries, vigorously promoting the company's latest technology and products, including the newly developed best-selling product, the SMOK brand's "Alien Kit," which shipped nearly 2 million units.

Details of the Alien Kit

Based on the social sharing characteristics of e-cigarettes, the company caters to the new generation of consumers who advocate individuality and pursue fashion and coolness, creating its own vertical social platform for e-cigarettes, Vaping Tour, which has over 600,000 registered fans, becoming the largest global vapor fan community in the industry. E-cigarettes are highly dependent on actual experience; consumers prefer to learn about products through shared experiences from other users, obtaining more objective and referenceable information. The company has built the Vaping Tour community for e-cigarette exchanges, cultivating a "circle culture" that gathers e-cigarette enthusiasts, becoming a platform for communication and interaction among e-cigarette lovers.

The company closely follows changes in consumer demand and continuously launches competitively unique products. Established in 2010, the company created its own brand, SMOK, targeting the mid-to-high-end market; in 2011, it developed and launched the patented "dual-coil disposable atomizer" (dual coils can produce larger vapor), leading the e-cigarette market into the dual-coil era; in 2012, it designed and produced adjustable voltage products, the VMAX and its upgraded version, the ZMAX series, marking the entry of e-cigarette products into the adjustable voltage and power era; in 2014, product design and development shifted towards smart technology, launching smart Bluetooth products BEC Pro and X CUBE BT50; in 2015, the SMOK brand launched a 160W high-power full temperature control Bluetooth smart box (X CUBE II) and the revolutionary TFV4 atomizer, ushering in a new era of high power and large vapor; in July 2015, it launched the KOOPOR brand targeting young consumers, emphasizing high cost-performance with products like KOOPOR mini and Plus.

KOOPOR Series Products

The company has top-notch R&D capabilities and holds multiple independent intellectual property rights. The R&D team consists of over 40 senior electronic engineers and ID designers, including some key researchers in e-cigarette technology, with advanced research laboratories and substantial funding for research, supporting innovation. The company has leading research and development capabilities, having obtained 123 patents by the end of 2016, including 54 utility model patents, 69 design patents, and 129 patents applied for but not yet authorized, including 6 invention patents, 82 utility model patents, and 41 design patents. The company's products have obtained high-standard certifications recognized in the industry, such as CE, RoHS, and FCC.

The company benefits from the rapid growth of the e-cigarette market, maintaining high growth in performance. Total revenue from 2014 to 2016 was 50 million, 310 million (+528%), and 920 million (+200%). Net profit attributable to the parent company was 5 million, 50 million (+1,011%), and 190 million (+272%). Gross margin was 37.7%, 32.2%, and 30.4% from 2014 to 2016. Net profit margin was 9.3%, 16.4%, and 20.3% from 2014 to 2016.

The company's core technical personnel have rich industry experience and strong influence. According to the latest business registration information, the company's chairman and general manager, Ouyang Junwei, born in 1989, previously served as the marketing director of Shenzhen Siyongchuang Technology Co., Ltd. The company's director Chen Wen (former chairman), born in 1986, holds a bachelor's degree and previously served as the marketing manager of Sanfu Company in the US and a supervisor at Shenzhen Siyongchuang Technology Co., Ltd.; director Shen Jinwan, born in 1975, holds a college degree and has worked as a warehouse employee at Shenzhen Linjian Electronic Industry Co., Ltd., a production employee at Shenzhen Zhongxiexing Industrial Co., Ltd., and the factory manager at Shenzhen Baoan District Gongming Lanxin Hardware Products Factory; director Shen Cheng, born in 1988, holds a college degree and previously served as the deputy manager of Shenzhen Siyongchuang Technology Co., Ltd.

On April 23, 2014, Shen Jinwan, Chen Wen, Shen Cheng, Ouyang Junwei, and others acquired 100% of the shell company (Shenzhen Xufeng Aluminum Technology Co., Ltd., established in 2010, primarily engaged in aluminum product production and sales) for 500,000; on April 25, 2014, the shell company was renamed Shenzhen IVP Technology Co., Ltd., shifting its main business direction to the research, development, production, and sales of electronic atomizers, controllers, and their components; and was listed on the New Third Board in November 2015; in June 2016, it distributed 6 yuan in cash for every 10 shares to all shareholders; in May 2017, it distributed 18 yuan in cash for every 10 shares to all shareholders; and in July 2017, it terminated its listing.

The company currently has one wholly-owned subsidiary, with the number of employees at the end of 2014, 2015, and 2016 being 301, 554, and 402, respectively. In 2016, the company strengthened internal management, streamlined work processes, and improved work efficiency, resulting in a corresponding reduction in the number of employees.

The company widely conducts research and development of new electronic cigarette products, continuously launching innovative electronic cigarettes. The patented dual-coil disposable atomizer developed and launched by the company led the e-cigarette market into the dual-coil era; the self-developed adjustable voltage VMAX and upgraded ZMAX series led battery box devices into the adjustable voltage and power era. With continuous innovation in e-cigarette products, the company has developed over 200 models of electronic cigarette products.

The company pays close attention to customer needs and market trends, driving product development. The company closely monitors the release and application of new technologies and products, conducts extensive research on relevant information, provides market information and new product trends based on product market research and analysis, and organizes new product projects to study new technology applications. Through technical research or new product project development work, the company promotes technological innovation and the application of new technologies, continuously developing and improving new products.

The company will integrate more intelligent functions into electronic cigarettes, planning to shift towards a "hardware + service" model. The company's revenue and profits mainly come from electronic cigarette product sales. With increasing R&D investment, the company will incorporate more intelligent functions into electronic cigarette products, further enhancing product added value, and gradually shifting the profit model towards diversified methods such as "hardware + service."

The company adopts a "self-production + outsourcing" production model, combining "distributor distribution + online direct sales" as its marketing model.

The company self-produces electronic cigarette controllers and outsources the production of electronic cigarette atomizers, making reasonable use of production capacity. The company's workshop completes controller product assembly and quality inspection based on orders; the warehouse issues materials to outsourcing manufacturers based on outsourced orders, and the outsourcing manufacturers process atomizers and other materials according to the commission, conducting quality inspection before storage. Before the outsourcing manufacturers begin work, the company communicates fully about key quality points and processes for product production, supervises and inspects the production process, and tests and accepts outsourced products.

The company has stable suppliers, with increasing concentration, ensuring the stability of raw material quality. The proportion of purchases from the top five suppliers from 2014 to 2016 was 46.2%, 56.1%, and 60.7%, respectively. The main raw materials for the company's electronic cigarette products include battery assembly materials, atomizer assembly materials, and packaging materials. The raw materials for battery assembly include control boards, protection boards, adapters, etc., while the raw materials for atomizer assembly include drip tips, large copper components, etc., and packaging materials include cartons and paper boxes.

The company adopts a sales model primarily based on distributor distribution, combined with online direct sales promotion. The distributor model targets large customers, relying on distributors to cover a global customer base, resulting in short supply cycles and fast cash flow. Initially, the company primarily sold to overseas distributors through two major distributors, IVP (Hong Kong) and Hong Kong Leiman Te, collecting cooperation deposits from domestic distributors and authorizing them to sell the company's branded products at suggested retail prices in designated areas. Online direct sales: The company collaborates strategically with globally renowned e-cigarette sales websites such as JD.com, Tmall, and Amazon to enhance consumer experience.

The company's customer concentration has decreased, reducing reliance on large customers, which is beneficial for the company to gain pricing power. From 2014 to 2016, the revenue share of the top five customers was 98.8%, 35.3%, and 19.2%, respectively.

Note: IVP Technology Co., Ltd. is a Hong Kong enterprise controlled by the company's shareholder and current chairman Ouyang Junwei. The company's overseas e-cigarette sales business mainly relies on it, forming related transactions; on October 20, 2015, IVP Technology Co., Ltd. was deregistered, and the corresponding business was completed by the company's wholly-owned subsidiary, Hong Kong IVP.

The company adopts various pricing methods based on product lifecycle and positioning. The company prices according to product type lifecycle: high-price policy, discount pricing, price-following policy, and low-price policy. New products developed through independent innovation are launched into the market, and due to leading the market with high demand, a high-price strategy is adopted, pricing at 170%-200% of cost; during the product development mid-stage, when the product matures and production capacity stabilizes, discount pricing is adopted, pricing around 150% of cost; during the mature stage of product development, when competition intensifies, a price-following policy is adopted, pricing at 115%-130% of cost based on competitors' similar products; during the late stage of product development, a low-price policy is adopted, with sales pricing based on inventory, either below cost or clearing at cost. The company also prices based on product tier: high-end products developed independently target the high-end market, adopting a high-price policy, pricing at 180%-250% of cost; mid-to-low-end products take a mass-market approach, adopting a low-price policy, pricing at 120%-160% of cost.

The e-cigarette market has performed outstandingly, maintaining high growth in performance. Total revenue from 2014 to 2016 was 50 million, 310 million (+528%), and 920 million (+200%). Net profit attributable to the parent company was 5 million, 50 million (+1,011%), and 190 million (+272%). Gross margin was 37.7%, 32.2%, and 30.4% from 2014 to 2016. Net profit margin was 9.3%, 16.4%, and 20.3% from 2014 to 2016.

The company has actively expanded, continuously enhancing profitability and maintaining good cash flow. The company's debt-to-asset ratio rose from 67.4% in 2014 to 74.0% in 2016, indicating a high leverage level, as the company adopts a relatively aggressive expansion strategy; from the perspective of cash flow and liquidity ratio, the company has good liquidity, and its high accounts receivable turnover rate indicates strong collection capability, with revenue primarily reflected in cash; from the net profit margin growth rate, the company maintained high growth from 2015 to 2016.