China Regulations May Lead to the Sharp Drop in Sales for Electronic Cigarette Company

Two Firsts (compiled from Seeking Alpha) reports that a recent announcement from Huixing Technology sheds light on how new regulations in the domestic market will impact the company. Analysis suggests that under these new rules, we believe their business may decrease by 30% or more this year as part of the efforts to reduce or eliminate electronic cigarettes worldwide.

30% of the figures come from last Friday's announcement, which provided details about the license obtained by FogCore Technology in accordance with China's new regulations.

To be honest, the new regulations may have a negative impact on Wuxin Technology, which controls more than half of China's electronic cigarette market, thanks to its savvy marketing strategies and its exclusive stores becoming a fixture in various shopping malls and other locations throughout China. We suspect that the new regulations may lead to a sharp decline in sales, and the company will likely try to control costs, with many of its exclusive stores possibly disappearing in the next year.

Investors were not particularly excited about the latest announcement, which caused the stock price of Wuxin Technology to fall by 7.8%. These shares, which were first publicly traded at $12 per share in January 2021, have now fallen by 84% to a recent close of $1.89. Only time will tell whether e-cigarettes have a longer-term future or whether they will end up as discarded fashion items that were merely a passing trend.

However, we will closely examine the announcement from Fogcore Technology, which states that it has obtained a license from China's tobacco regulatory authority to produce its electronic cigarette products, including rechargeable and disposable e-cigarette devices, as well as pods used in these devices. According to new regulations, all manufacturers must obtain such licenses.

Optimists may believe that Fogcore Technology has been fortunate to receive a license because China often uses this requirement to remove small, unreliable manufacturers of products and services. However, given its position as a clear market leader, it seems unlikely that Fogcore would be denied a license, as regulatory agencies have already expressed their intention to allow e-cigarette companies to continue competing with traditional tobacco products.

A new license will allow Fuxin Technology to produce up to 15 million rechargeable electronic cigarette devices, 6.1 million disposable devices, and as many as 329 million ink cartridges annually. This is a significant increase compared to the sales reported in the company's latest annual report in April, which showed sales of around 19.5 million rechargeable devices and 212.6 million pods last year.

Scaling down" or "reducing the size

Some simple calculations show that the number of licensed production of rechargeable e-cigarette devices has decreased by 23% compared to last year's sales, while the number of licensed pod productions is actually 35% higher than the sales of 2021. However, the first figure seems to be the more significant one, which leads us to say that its sales may decrease by about 30% based on new regulations.

In our efforts to timely comply with new regulatory requirements, this license is an important milestone in our strategic roadmap. We believe that we are fully capable of achieving compliance in our operations as planned," said Chairman Wang Ying in the latest statement.

Fogcore Technology's revenue for the first quarter of this year has decreased by approximately 30%, from the 2.4 billion yuan ($356 million) earned a year ago to 1.7 billion yuan ($252 million). The company attributes this decline to disruptions caused by the COVID-19 pandemic, as measures aimed at curbing the spread of the virus have affected its manufacturing base in the southern city of Shenzhen.

In its latest quarterly report, Fogcore Technology did not provide any guidance for Q2, despite the fact that strict pandemic control measures led to a city-wide lockdown in Shanghai in April and May resulting in poor performance for consumer-facing companies in China. Three analysts surveyed by Yahoo Finance believe that Fogcore Technology's revenue for this year will decrease by approximately 30% from 2021's Yuan 8.5 billion, dropping to around Yuan 6 billion.

Apart from the pandemic, the main culprit behind the sharp decline is a new regulation that came into effect in May, which banned popular e-cigarettes and allowed companies to sell only tobacco-flavored e-cigarette products. Juul, a US competitor of Wuxin Technology, suffered a similar or even greater blow in June, when the US Food and Drug Administration (FDA) banned all of its products due to insufficient data on harmful chemicals that may seep from its products.

Before the ban, non-tobacco flavored products accounted for 90% of China's e-cigarette sales. This means that if users are forced to only use tobacco flavored products, the e-cigarette industry in the country could take a massive hit. A decrease of 90% in sales seems unlikely, but a decline of 50% or more should not be surprising when non-tobacco flavored e-cigarettes are taken off the market.

The bearish sentiment has caused a collapse in the market capitalization of Fogcore Technology, which now stands at 6. Despite not going public, Juul has lost attention from many due to the FDA's aggressive stance on e-cigarettes. The market capitalization of other e-cigarette companies, such as Smoore International (OTCPK: SMORF) (6969, Hong Kong) and Huabao International (OTCPK: HUIHY) (0336, Hong Kong), is much higher at 21 and 27, respectively, possibly due to their diversified customer base as electronic cigarette component manufacturers compared to Fogcore Technology.

In essence, the future of Fogcore's technology will be closely intertwined with the development of the electronic cigarette market in China. Compared to the United States, Chinese regulators seem to have taken a more lenient stance on their latest regulations surrounding electronic cigarettes. By contrast, the US Food and Drug Administration has taken a more aggressive approach, aiming to eradicate the industry entirely. If this holds true, Fogcore technology can continue to survive in the future, albeit likely at a much smaller scale than its peak in 2021.

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