A recently released report called "2022 Blue Book of Electronic Cigarette Industry Exports" shows that China's electronic cigarette exports reached 138.3 billion yuan in 2021, increasing by 180% YoY. This growth rate significantly surpasses the total amount of goods exported, and it is projected that the total electronic cigarette exports in 2022 will reach 186.7 billion yuan with a growth rate of 35%.
In the domestic market with over 1,500 electronic cigarette companies, over 70% of them focus on exports. Following the release of unfavorable policies, electronic cigarette companies' stock prices may experience a reversal.
The primary company's performance continues to decline.
In recent years, many companies have shifted their focus towards overseas markets in a bid to expand. However, despite the continued growth in these markets, this has failed to reverse the downward trend in the company's performance.
On August 24th, leading electronic cigarette OEM manufacturer SMOORE International disclosed their operating performance for the first half of 2022. According to their financial report, SMOORE International's revenue for the first half of 2022 was 5.653 billion yuan, a decrease of 18.7% compared to the same period last year. Their adjusted net profit was 1.436 billion yuan, a decrease of 51.7% compared to the same period last year.
Semiconductor International has reported a significant decline in net profits for the first half of the year, citing several factors such as slower sales to enterprise customers, a decrease in gross profit margins, and an increase in sales, management, and R&D expenses. The company's financial report showed that revenue from sales to enterprise customers amounted to CNY 5.093 billion for the first half of 2022, a 21.6% decrease from the same period last year. Gross profit margins also fell from 54.9% to 47.9%. Meanwhile, Semiconductor International's R&D expenses increased by 156% to CNY 604 million compared to the same period last year. The combination of declining sales, lower gross profit margins, and increased R&D spending resulted in a significant drop in the company's net profits.
Compared to Smoore International, another electronic cigarette company had a relatively stable performance. China's Boaton achieved a revenue of RMB 1.199 billion in the first half of 2022, an increase of 10.86% year-on-year. The company's net profit attributable to shareholders was RMB 96.31 million yuan, a decrease of 6.7% year-on-year.
Chinese e-cigarette leader brand Wuxin Technology reported a net revenue of 1.71 billion yuan in the first quarter of 2022, a decrease of 28.5% year-on-year. Adjusted net profit for the first quarter under non-US Generally Accepted Accounting Principles was 360 million yuan, down from 611 million yuan in the same period last year. The latest financial results indicate that major e-cigarette companies have yet to see a reversal in their performance and are still on a downward trend.
Overseas markets are worth anticipating.
Amidst tightening domestic policies, exporting abroad has become an important development strategy for numerous e-cigarette companies. According to a report, there are currently over 1,500 e-cigarette manufacturing and brand companies in China, with more than 70% of them mainly exporting products overseas. It is expected that the total export volume of e-cigarettes will reach 186.7 billion yuan by 2022 with a growth rate of 35%. Exporting to overseas markets has become the most important growth point for e-cigarette companies.
The most important countries and regions in the export market are the United States, the European Union, Russia, and the United Kingdom. In 2021, China's total export value of electronic cigarettes was 138.3 billion yuan, with 53% of electronic cigarettes exported to the United States. The export amounts to the European Union, Russia, and the United Kingdom accounted for 15%, 9%, and 7%, respectively. With the promotion of electronic cigarettes, the penetration rate of electronic cigarettes in the European Union, the United Kingdom and other regions is expected to deepen further.
The "Blue Paper" report indicates that the global electronic cigarette market size will exceed $108 billion in 2022, with overseas electronic cigarette market expected to maintain a growth rate of 35% in 2022.
Looking at the global market, the electronic cigarette industry boasts significant and rapid growth, with steady increases in domestic exports.
According to data, the electronic cigarette industry in China exported approximately 138.3 billion yuan in 2021, a YoY increase of 180%. This export scale is expected to continue to grow, with export revenue reaching 340.2 billion yuan by 2024.
The rapid growth of the global market and the high-speed growth of domestic exports may become the most important growth points for domestic e-cigarette companies in the future.
The Chinese market has enormous potential.
The number of smokers in China is estimated to be around 350 million. China's tobacco industry has maintained numerous "world firsts" for many years, including the largest area of tobacco cultivation, the highest amount of tobacco purchased, the highest cigarette production and consumption, the largest number of smokers in the world, and the highest tobacco tax revenue.
China, a major tobacco-producing nation, has a relatively small but rapidly growing electronic cigarette industry.
According to data, the retail sales of electronic cigarettes in China in 2021 were approximately 19.7 billion yuan, with a year-on-year growth of 36%.
According to the "2021 Blue Book of the E-Cigarette Industry," by the end of 2021, there were over 1500 companies in China involved in the manufacturing and branding of electronic cigarettes, with over 1200 manufacturers, 200 e-cigarette branding companies, and around 120 e-liquid companies. There are nearly 190,000 retail stores in the domestic electronic cigarette industry, including 138,000 authorized stores, 47,000 specialty stores, and 5,000 to 7,000 collection stores. Chengdu is currently the city with the most electronic cigarette retail stores in China, followed by Beijing, Shanghai, Shenzhen, and Chongqing.
Over 95% of electronic cigarettes produced globally, including their components, are made in China, with 70% of them coming from Shenzhen and over 95% of Shenzhen's production coming from Bao'an. China is gradually shifting from being the largest producer of electronic cigarettes in the world to becoming the world's largest exporter of electronic cigarette brands.
China is not just a leading producer of traditional tobacco products, but also a major manufacturer of electronic cigarettes.
However, from a penetration rate perspective, China falls far behind other developed countries. According to data from the Zhongzhi Consulting Group, the market penetration rate of electronic cigarettes in the United States was 38% in 2021, 30.3% in Japan, and 20.9% in the United Kingdom. Compared to these countries, the market penetration rate of electronic cigarettes in China is only 1.5%. From a penetration rate perspective, the electronic cigarette market in China is still in the early stages. With the future increase in penetration rates, the Chinese market has huge growth potential.
Will e-cigarette companies see a new opportunity ahead?
Over the years, a significant factor in the development of electronic cigarettes has been policy, but attitudes towards e-cigarettes at the policy level vary from country to country.
In 2016, the US Food and Drug Administration (FDA) issued a statement declaring that electronic cigarettes are considered tobacco products. This means that electronic cigarettes are subject to the same strict regulations as traditional tobacco products in terms of production, sales, and advertising. Moreover, any electronic cigarette product exported to the US must obtain FDA certification.
Meanwhile, the FDA has required all retailers to not sell e-cigarettes or similar products to customers under 18 years old, with age verification required at the time of purchase. In January 2020, the US Food and Drug Administration (FDA) officially released new regulations on e-cigarettes in the United States, prohibiting the use of most fruit and mint-flavored nicotine e-vapor products to curb the surge in youth usage.
In terms of electronic cigarette policies, the United States tends to lean towards limited allowance, but the policies vary from state to state.
In the UK market, policies are becoming more open. On October 29th, 2021, the UK government website announced that the National Health Service (NHS) will classify electronic cigarettes as prescription drugs to help smokers quit. This is a significant change pushed by the UK Secretary of State for Health and Social Care, Sajid Javid, in regulating electronic cigarettes and marks the first country globally to grant medical product licenses to e-cigarettes.
Germany's regulations on e-cigarettes follow the same laws as tobacco products, prohibiting sales to those under 18 years of age. E-cigarettes are regulated as tobacco products in Germany, with a plan to implement a comprehensive tobacco advertising ban from 2022, and a ban on smoking and advertising e-cigarette products from 2024.
When looking at European countries, the sale of electronic cigarettes is generally allowed to some extent. However, compared to European countries, Southeast Asian countries tend to be more conservative. In most Southeast Asian and Middle Eastern countries, there is a tendency to impose an electronic cigarette ban, directly prohibiting the import and sale of electronic cigarettes in order to curb their distribution from the source.
China's policy of openness also has its limits.
In the past two years, as the Chinese electronic cigarette market has rapidly developed, policy regulation on electronic cigarettes has also been gradually strengthened. Particularly, a series of regulatory measures have been implemented to protect minors from electronic cigarettes.
On February 2nd, 2021, the State Tobacco Monopoly Administration released the "Administrative Measures for Electronic Cigarettes (Draft for Comments)", which clarified the regulatory policies for the production, wholesale, retail, import and export of electronic cigarettes (excluding heated tobacco products) at all levels. In November 2021, new tobacco products such as electronic cigarettes were officially included in the tobacco system for regulation. Since then, the electronic cigarette industry has seen a period of intensive policy releases.
On November 26, 2021, the State Council of China issued a revised version of the "Regulations on the Implementation of the Tobacco Monopoly Law of the People's Republic of China," officially including e-cigarettes in traditional tobacco regulation. On November 30, 2021, the National Tobacco Monopoly Administration released a draft national standard for e-cigarettes, clarifying the standards for the product. On March 11, 2022, the National Tobacco Monopoly Administration released the "E-cigarette Management Measures," which specifies that from May 1, 2022, the sale of flavored e-cigarettes other than tobacco and e-cigarettes with self-added atomizers will be prohibited. The "E-cigarette Management Measures" officially came into effect on May 1, 2022, and on June 15, 2022, the national unified e-cigarette trading management platform was launched. On October 1, 2022, the mandatory national standard for e-cigarettes will also come into effect. With these regulations, the e-cigarette industry has entered a new development stage in which there are laws and standards to follow.
From a policy perspective, the regulation of the electronic cigarette industry has now moved from the stage of policy formulation to policy implementation. In terms of companies, the major domestic electronic cigarette industry listed companies currently include Wuxin Technology, Huabao International, Smoore International, Jinjia shares, and Yingqu Technology, among others. Since 2021, the stock prices of these companies have all fallen by 50%-90%.
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