Continued Downturn: When Will the Vaping Industry Bottom Out and Rebound?

This article is originally from "Mobile Decision Reference". It discusses the significant performance declines faced by several publicly listed companies in the vaping industry, exploring whether anti-counterfeiting measures and exports can inject vitality into the sector. The analysis incorporates a wealth of data and reports, aiding industry professionals in observing current trends in the vaping industry.

Here is the original text:

In 2023, the domestic vaping market continues to decline, with the market running downward in the first quarter.

Recently, a leading brand released its first-quarter financial report, showing a staggering year-on-year decline. Although there are signs of recovery in March, it is still insufficient to boost industry confidence, which is filled with pessimism.

There is no clear indication of when the domestic vaping market will hit bottom and rebound, and this uncertainty poses a significant challenge for vaping companies.

Last year, the domestic vaping market was in a state of "lamentation". Companies like Smoore International (06969.HK), RLX Technology (RLX.US), and China Borton (03318.HK) faced severe performance declines.

On May 17, the parent company of the leading brand RELX, RLX Technology, disclosed its unaudited first-quarter performance for 2023, which attracted widespread attention from industry insiders.

The latest performance shows that RLX Technology achieved revenue of 189 million yuan (all amounts in RMB), down from 1.715 billion yuan in the same period last year, a year-on-year decline of 89%; under US GAAP, the net loss for the period was 56.3 million yuan, compared to a net profit of 687 million yuan in the same period last year; under non-GAAP, the net profit for the period was 184 million yuan, down from 362 million yuan in the same period last year.

Looking at the quarter-on-quarter situation, RLX Technology's revenue in the fourth quarter of 2022 was 340 million yuan, with a profit of 150 million yuan, and the adjusted net profit under non-GAAP was 250 million yuan, mainly from contributions of non-operating income.

It is evident that RLX Technology's performance in the first quarter was unsatisfactory, continuing the trend of dual declines in revenue and net profit from 2022, with the decline still expanding.

In response, RLX Technology stated that the main reason for the revenue decline in the first quarter of 2023 was due to "the discontinuation of old products and the negative impact of illegal flavored products in the market, which led to a slower-than-expected adoption of our new products that comply with national standards." Additionally, due to the comprehensive impact of the new consumption tax, RLX Technology's gross margin has also declined.

The financial report shows that the company's gross margin fell from 38.3% in the first quarter of 2022 to 24.2% in the first quarter of this year, which has clearly negatively impacted RLX Technology's profitability. In the first quarter, RLX Technology's operating expenses reached 419 million yuan, compared to only 33.6 million yuan in the same period last year, which also contributed to the decline in net profit. The increase in operating expenses was mainly due to a change in stock-based compensation expenses of 240 million yuan in the first quarter of 2023.

Furthermore, the first-quarter financial report also shows that as of March 31, 2023, RLX Technology's cash and cash equivalents, restricted cash, short-term bank deposits, short-term investments, long-term bank deposits, and long-term investment securities totaled 15.369 billion yuan, which is roughly the same as the end of the previous quarter, indicating that it still possesses strong risk resistance and sustainable development capabilities, and the company's financial situation remains relatively optimistic.

Now, let's take a look at the performance of the leading vaping manufacturer Smoore International.

According to media reports, Smoore International achieved revenue of 2.527 billion yuan in the first quarter of 2023, a year-on-year increase of 11.9%; the adjusted net profit attributable to the parent company was 306 million yuan, down 44.8%. Among these, the sales revenue from overseas and domestic markets were 2.512 billion yuan and 16 million yuan, respectively, with year-on-year changes of 58.2% and -97.7%.

It is clear that the domestic market's business has nearly hit rock bottom.

As one of the largest OEM companies in the industry, Smoore International's poor revenue also indicates the continued "decline" of domestic vaping brands, with many brands likely operating at a loss in the domestic market.

However, it is encouraging that the overseas market's business has seen significant growth, although profit margins have decreased compared to previous periods, mainly due to the booming disposable products in the European market, which have lower profit margins than the previously popular pod products. #p#分页标题#e#

Additionally, some OEM companies and brands focusing on overseas markets have reported higher revenues and profits than the aforementioned leading companies, primarily benefiting from rapid growth in overseas markets without being affected by the domestic market's decline.

While leading companies are struggling, small and medium-sized enterprises are facing even greater difficulties. As a result, some industry players have completely exited the vaping industry or focused on overseas markets, relying on the booming disposable products in overseas markets to "survive" in the challenging market environment.

2. Can anti-counterfeiting measures and exports save the "storm-tossed" vaping industry?

Overall, with the implementation of flavor restrictions, licensing requirements, and tax restrictions at various levels, the domestic vaping market is currently under pressure. Coupled with the disruption caused by non-compliant products, this is the main reason for the significant decline in the domestic market.

Currently, vaping consumers still have a lingering attachment to flavored vaping products, which has created space for illegal vaping products such as "milk tea cups" and "cola cups" to thrive, putting immense sales pressure on compliant products. Therefore, the national bureau, in conjunction with multiple departments, has launched special actions to regulate the vaping market order.

As of May 22, a total of 1,848 administrative penalty cases related to various vaping products have been investigated nationwide, with 398 criminal cases involving vaping products being handled in conjunction with public security departments. A total of 2.94 million tobacco sticks, 730,000 vaping devices, 3.57 million disposable vapes, 9.8 tons of nicotine and aerosol substances, over 10 tons of accessories, 25 counterfeit production sites, and 36 finished product warehouses have been destroyed, with an involved amount of approximately 2.1 billion yuan, and 1,323 individuals have been arrested.

It is important to note that the sales volume of vaping products in the domestic market is estimated to be around 10-20 billion yuan, and the elimination of 2.1 billion yuan worth of illegal products in just a few months is a significant achievement. However, in the face of massive illegal production capacity, the crackdown on counterfeiting must not be relaxed. In addition to regulating the production end, it is also necessary to strengthen the regulation of logistics, delivery, and illegal sales channels to continuously purify the vaping market and provide a healthy and orderly market environment for compliant products.

From a long-term perspective, the implementation of regulatory policies and the formation of a regulatory framework for the Chinese vaping industry mark the beginning of an orderly development period. Strengthening regulation is beneficial for the early elimination of substandard and illegal small enterprises within the industry, which is a significant advantage for the subsequent healthy growth of the entire market.

It is worth noting that the Chinese vaping industry supplies 95% of the world's vaping products, and the supply chain has a strong advantage from technology research and development to product design and manufacturing.

In light of the dismal state of the domestic market, more and more vaping companies are turning their attention to overseas markets to "recover".

At the same time, policies are also encouraging vaping companies to export and generate foreign exchange. The trend of vaping manufacturing companies exporting for foreign exchange is on the rise, and the booming performance of disposable products in overseas markets has made them a battleground for competition.

According to statistics from Shenzhen Customs, in the first two months of this year, Shenzhen exported 7.1 billion yuan worth of vaping products, a year-on-year increase of 38.9%, accounting for 66.9% of the total value of vaping exports in the country. It can be inferred that the total value of vaping exports nationwide in the first two months was around 10.6 billion yuan. According to the General Administration of Customs of China, the export value of vaping products nationwide in March was 6.739 billion yuan, a year-on-year increase of 36.1%; in April, the export value was 7.11 billion yuan, with a month-on-month increase of nearly 400 million yuan. The continuous growth of the overseas market has provided a "lifeline" for domestic vaping manufacturing companies, offsetting the negative impact of the domestic market's decline.

Therefore, Smoore International held a press conference in London in mid-May to launch a brand new disposable vaping solution, featuring the world's first ceramic core. The main feature is a high puff count, achieving 800 puffs with 2ml, while traditional cotton core products are at the 600 puff level, marking a significant upgrade. This move has attracted brands like BAT, RELX, KIWI, and Totally Wicked, hoping to create a new growth point in overseas markets and further meet consumer demand in markets like Europe.

In summary, the current domestic vaping market remains "struggling". Even though the crackdown on illegal flavored products has shown significant results, the consumer conversion to compliant products remains pessimistic, and major vaping brands have yet to find the best tobacco flavoring.

Of course, it is also essential to have a clear understanding of the distribution of the vaping industry. The domestic market's consumption value is still at a low level globally, and the growth of overseas markets can provide development space and time for vaping companies and brands to cope with the pain of the domestic market. Ultimately, it is crucial to increase research and development efforts and accelerate the speed and quality of product iterations.

At the same time, it is necessary to closely monitor regulatory policies in overseas markets, especially the future direction of disposable products, to avoid unnecessary losses caused by sudden policy changes.