As World No Tobacco Day Approaches, the Vaping Sector May See a New Market Rally

As the 27th World No Tobacco Day (May 31) approaches, the vaping sector is beginning to attract market attention.

Previously, the stock prices of related electronic cigarette companies adjusted and have now returned to the levels seen at the beginning of the year. We believe that the reasons for this round of adjustment mainly come from two aspects:

First, the stock prices of related companies surged at the beginning of the year and subsequently adjusted along with the market as it weakened;

Second, due to the impact of smoking control, the production and sales of traditional cigarettes in the first quarter decreased year-on-year, raising concerns about the performance of tobacco companies. The continuous upgrade of cigarette product structures will ensure steady growth in the mid-to-high-end tobacco market, while the emerging electronic cigarette business helps break through the ceiling limitations of traditional tobacco, bringing new profit growth points. The stock prices of related companies have adjusted and returned to a safe zone, and the vaping sector is expected to welcome a new market rally.

Clear regulations benefit leading companies

The biggest obstacle to the development of electronic cigarettes has been the lack of policy regulation. However, with various parties pushing for it, industry regulation is expected to become clearer this year.

Recently, the U.S. Food and Drug Administration (FDA) proposed a rule to regulate electronic cigarettes and other tobacco products that may emerge in the future, with main measures including prohibiting the sale of regulated tobacco products to minors and imposing restrictions on packaging and advertising displays. We believe that the FDA is likely to finalize relevant regulatory legislation this year. The further clarification of regulatory policies will promote the industry's focus on the quality of electronic cigarettes. This will accelerate the exit of many small and medium-sized enterprises from the competition, benefiting leading companies during the industry reshuffle, which is conducive to healthier industry development.

The market launch is imminent

The National Tobacco Administration stated at the 2014 National Tobacco Work Conference that it would grasp the development trends of the international tobacco market, pay close attention to the research and development of new tobacco products, including electronic cigarettes, and upgrade them to a strategic major topic, with the main leaders of the National Tobacco Administration coordinating and promoting the work.

Recently, Shanghai Green New (002565) announced that its subsidiary Shanghai Green Xin is conducting a four-party technical cooperation with Jilin Tobacco, Changbai Mountain Technology, and Zhengzhou Tobacco Research Institute to research and develop Changbai Mountain cigarette companions (electronic cigarettes). It can be said that the cooperation between Shanghai Green Xin and Jilin Tobacco marks a substantial step for the domestic tobacco system in the development of electronic cigarettes, moving beyond mere policy exploration. We predict that more provincial tobacco companies will test the waters in the electronic cigarette field, and the domestic electronic cigarette market launch is just around the corner.

The market scale reaches hundreds of billions

In the context of increasingly stringent smoking control, electronic cigarettes, due to their relatively low harm and high cost-effectiveness compared to traditional cigarettes, have good substitutability for traditional cigarettes. With over 300 million smokers in China, conservatively estimating that if 10% of smokers are willing to accept electronic cigarettes, the annual equivalent consumption of electronic cigarettes could exceed 7 billion sticks, leading to a market scale of over hundreds of billions, with enormous growth potential.

As a new type of tobacco product, electronic cigarettes are likely to be regulated by the National Tobacco Administration in the future. As policy regulation becomes more certain, the domestic electronic cigarette market is expected to make substantial progress. Relevant listed companies, with outstanding advantages in capital and technology, along with close ties to the tobacco system, are likely to capture a larger share of the market. Major beneficiaries include Jinjia Co., Ltd. (002191), Shanghai Green New, Dongfeng Co., Ltd. (601515), and Meiyingsen (002303).