China's Largest E-Cigarette Brand YOOZ Obtains Manufacturing License

China's Largest E-Cigarette Brand YOOZ Obtains Manufacturing License
China's e-cigarette industry is gaining attention with major brands like RELX receiving manufacturing permits from the state tobacco monopoly bureau, indicating an end to the industry's turmoil and uncertainty.

After a prolonged silence, the e-cigarette industry has once again caught attention.

Recently, the parent company of electronic cigarette brand Yooz, Wuxin Technology, announced that it has obtained a manufacturing enterprise license from the State Tobacco Monopoly Bureau. The approved annual production capacity includes 15.05 million cigarette sticks, 329 million pods, and 6.1 million disposable electronic cigarettes. Yooz is the largest e-cigarette brand in China, with a market share of over 60%. The validity period of the manufacturing enterprise license obtained in this announcement is from July 18, 2022, to July 31, 2023.

Before that, Smoore, China's largest electronic cigarette atomization equipment manufacturing company, also announced that it had received a tobacco monopoly production enterprise license, but did not disclose actual production capacity.

Over the past two years, the e-cigarette industry has experienced a roller-coaster ride from unregulated growth to comprehensive regulation. Currently, it is a established fact that e-cigarettes will be subject to a monopoly management system similar to tobacco products, requiring all three aspects of production, wholesale, and retail to obtain special licenses.

This also means that the overall market size of the electronic cigarette industry will be strictly controlled, and the capital stories related to electronic cigarettes will basically come to an end.

The strict production limit will result in a 50% decrease in the net profit of e-cigarettes.

Currently, there are nine domestic e-cigarette brands that have obtained production licenses. Among them, the approved annual production capacity for YOOZ pods is about 329 million, for SNOWPLUS 77.3 million, for MOTI 33 million, for PLUUS and XIAOYAN respectively 16 million and 12 million, while other brands are all below 5 million.

According to the response from the State Tobacco Monopoly Administration on the issue of determining the production scale of electronic cigarette-related companies, provincial tobacco monopoly administrative authorities have organized personnel to conduct on-site verification of the nominal capacity of production equipment, the average actual sales volume over the past three years, and the utilization rate of industry equipment production capacity. The tobacco monopoly administrative authorities have combined relevant data and actual conditions to comprehensively calculate and determine the approved production scale of the companies.

According to a report by Huachuang Securities, in the past three years, Fogcore Technology has shipped 4.3 million, 10.2 million, and 19.5 million cigarette devices, with an average of 11.33 million units per year. In the same period, they also shipped 74 million, 213 million, and 506 million pods, with an average of 264 million units per year.

Yueke, a vaping company, has been given permission to produce 77.18% of the tobacco sticks and 65.02% of the pods it produced in 2021. If the company continues with its growth rate from 2021, it is estimated that their pod shipments in 2022 will exceed one billion units. However, the final approved production capacity for pods is only one-third of the projected output.

According to current regulatory policies, the e-cigarette industry has adopted a fixed production and sales commercial model. With restricted upstream production capacity, the overall market size of the industry is also limited. The approved production capacity of an e-cigarette enterprise can basically determine its revenue ceiling.

Using Yooz as an example, based on sales prices in 2021, the revenue generated from 328.7 million pods and 15.05 million cigarette sticks would be approximately 5.5 billion yuan. When factoring in the net profit margin in 2021, Yooz is projected to have an annual net profit of approximately 1 billion yuan after accounting for production capacity constraints, which represents a decline of more than 50% compared to 2021.

After obtaining its production license, FogCore Technology saw a nearly 10% increase in its stock price at the opening of trading on July 22. However, the price quickly plummeted, ending the day with a 7.8% drop. Currently, FogCore Technology's latest stock price is approximately $1.77 per ADS. Its total market value has evaporated by over 90% compared to its highest point since going public.

Product and channel restructuring lead to a complete industry upheaval.

Actually, compared to the current difficult situation, the electronic cigarette industry was once a sector full of imagination.

The high addictiveness of electronic cigarettes results in an extremely high rate of repeat purchases. Additionally, due to the unclear nature of e-cigarettes as a commodity, they are not subject to the same high tax standards as traditional tobacco products. This has made e-cigarettes a hotly contested industry for both capital investment and entrepreneurship. The leading e-cigarette brand in China, Yooz, for example, raised a total of 3 billion yuan in multiple rounds of financing before going public. Within three years of its founding, Yooz was listed on the American stock market and reached a peak market value of nearly 300 billion yuan.

However, as the electronic cigarette industry experiences rapid growth, problems also arise. For example, some brands engage in malicious marketing that misleads consumers, the proportion of minors using electronic cigarettes is increasing, and there are significant safety concerns with the products.

In November 2019 and July 2020, two rounds of electronic cigarette regulation were implemented, requiring e-cigarette brands to cease selling their products through online channels, prohibit sales to minors, and prohibit online brand and product marketing. As a result, the e-cigarette industry experienced a downturn from its previous booming market.

On November 26, 2021, the revised Implementation Regulations of the Tobacco Monopoly Law were officially announced and implemented. They clearly stipulate that the management of electronic cigarettes should follow the existing regulations for traditional cigarettes. Subsequently, the "National Standard for Electronic Cigarettes" entered the stage of soliciting opinions, clarifying product manufacturing standards. The draft of the "Electronic Cigarette Management Measures" was released, which includes relevant provisions on the entry threshold for various links in the industry chain, product listing procedures, and import and export management.

For example, according to regulations, all electronic cigarette products will only be available in tobacco flavor, while fruity and other flavors will be completely banned. Previously, fruity and other flavored electronic cigarettes accounted for over 90% of the entire electronic cigarette market. In terms of taxation, unlike cigarettes that have a comprehensive tax burden of over 55%, currently electronic cigarettes in China are only subject to a 13% value-added tax as ordinary consumer goods. In the future, the electronic cigarette industry, which will be regulated under cigarette management regulations, will likely also be subject to additional taxes similar to cigarettes.

Finally, the issue of distribution arises. With stricter limitations on e-cigarette flavors, offline e-cigarette stores will undoubtedly face significant impacts on their business. Additionally, due to changes in tax standards and strict limits on brand production, the supply and distribution ratio of e-cigarettes will likely be managed as a whole, further limiting growth opportunities for offline stores.

This article contains excerpts or reprints from third-party sources, and their copyrights belong to the original media and authors. If there is any infringement, please contact us for deletion. Any unit or individual who needs to reprint should contact the author and not directly repost.

This document has been generated through artificial intelligence translation and is provided solely for the purposes of industry discourse and learning. Please note that the intellectual property rights of the content belong to the original media source or author. Owing to certain limitations in the translation process, there may be discrepancies between the translated text and the original content. We recommend referring to the original source for complete accuracy. In case of any inaccuracies, we invite you to reach out to us with corrections. If you believe any content has infringed upon your rights, please contact us immediately for its removal.