China Flavors & Fragrances Is Bullish on the E-Cigarette Outlook (With Images)

■ Liang Meiyu, Corporate Finance and Investor Relations Manager of China Flavors & Fragrances. Photo by Chen Chuqian

Hong Kong Wen Wei Po reported (by reporter Chen Chuqian) that Liang Meiyu, Corporate Finance and Investor Relations Manager of China Flavors & Fragrances (3318), said at a media luncheon yesterday that the mainland China e-cigarette market has enormous potential. The company completed its acquisition of vaping device manufacturer Kimree in May this year, and revenue recognized in the first half of the year amounted to RMB 33.8 million, accounting for 8.4% of total revenue.

The company previously completed the acquisition of e-cigarette manufacturer Kimree, Inc., which guaranteed a 2016 profit of RMB 60 million. Based on the proportion of time after completion of the acquisition, full-year profit is expected to reach RMB 48 million. Together with the four tobacco flavoring companies acquired by the group, the two acquisitions are expected to contribute a total of more than RMB 80 million in profit to the group for the full year.

Liang Meiyu said that the Chinese government classifies e-cigarette products as electronic products rather than tobacco products, which has eased market concerns by confirming that developing the e-cigarette business will not conflict with traditional tobacco operations. The group’s own cigarette factory clients are also interested in developing e-cigarette businesses, so after acquiring Kimree, the group can leverage its own sales channels to create synergies. At present, cigarette factories in Shandong and Anhui have already contacted the group and visited Kimree’s factory in Huizhou to inspect its production environment and specifications. Liang added that the group will not make any more large-scale acquisitions this year or next year, and will instead focus on properly developing the newly acquired businesses, since the guaranteed profit period is only three years and the group needs to make full use of the time to become familiar with the operation of these new businesses. She also said that in the future, the group hopes to acquire food flavoring or daily chemical fragrance companies. There is no specific size requirement, but they must be profitable and capable of generating synergies with the group.

Focus on developing the core business over the next two years

Liang Meiyu said that the company has already acquired four flavor manufacturers this year and currently has no further acquisition targets. The company plans to focus on developing its core flavoring business over the next two to three years. Meanwhile, the new factory in Dongguan is expected to begin production in the first quarter of next year, with a designed production capacity of about 5,000 tons, including 3,000 tons of food flavorings and 2,000 tons of daily chemical fragrances. As of the end of June this year, profit attributable to the company increased 55.3% year on year to RMB 48.3 million, revenue increased 17.1% year on year to RMB 400 million, and gross margin rose by 3.2 percentage points to 48.3%.