Electronic cigarette license distribution picks up pace in August

As August begins, there are less than two months left before the transition period for new regulations on electronic cigarettes comes to an end. There has been a recent increase in the issuance of tobacco production licenses. On August 4th, several companies in the electronic cigarette industry announced that they had received licenses. GTI Group International (06969.HK), a leading electronic cigarette company, announced that three of its wholly-owned subsidiaries had been awarded the "Tobacco Monopoly Production Enterprise License" by the State Tobacco Monopoly Bureau. On the same day, BYD Electronics (00285.HK) and Jinjia Co., Ltd. (002191.SZ) also announced that their subsidiaries had been awarded the "Tobacco Monopoly Production Enterprise License (Electronic Cigarette Processing Enterprises)".

Industry expert Chen Zhong told Securities Daily reporters that the current pace of issuing licenses for electronic cigarettes is in line with expectations. Issuing licenses intensively at this point in time allows these companies enough time to produce compliant electronic cigarette products.

On August 4th, stocks related to electronic cigarettes showed strong performance, with Minxin Co. rising by 19.4%, Lingda Co. rising by 10.62%, and Watertek Co. hitting its daily limit of increase. In the Hong Kong stock market, Smartac International Holdings Ltd. rose by 3.47%, and BYD Electronic Co. rose by 9.5%.

However, after conducting multiple interviews, it has been revealed that the era of electronic cigarettes' "abnormal profits" may come to an end due to stricter regulations and tax adjustments. As a result, the enthusiasm for capital market speculation on electronic cigarette concept stocks may decrease.

Is competition intensifying in the e-cigarette industry?

In discussing the receipt of a license, the representatives of Smoller International stated that it is a recognition by the government of the company's past compliant operations and precise management. In the future, the overall production and operations of the company will proceed according to planned schedules, while also continuing to implement regulatory requirements for standardized and orderly development.

BYD Electronics has announced its achievements in developing a full range of electronic atomization products, including the construction of automated production lines, while also successfully integrating new material research and development, precise mold making, product design and development, and intelligent manufacturing capabilities. The company aims to become a leader and practitioner in the field of health protection and harm reduction.

Before this, electronic cigarette brands such as Yooz and Relx have also obtained licenses. Data shows that as of August 4th, over 130 companies have received permits.

Chen Zhong told reporters that the gradual issuance of licenses means that the once chaotic market for e-cigarettes will become increasingly refined, and consumers' rights will be better protected.

The "Tobacco Monopoly Production Enterprise License" is not a scarce license and compliant enterprises are highly likely to obtain it. Therefore, there may be new players entering the industry. Chen Zhong also admitted that among current license holders, leading companies with larger production quotas still have advantages. Therefore, after October this year, some non-compliant or small businesses may be eliminated while companies with sufficient funds and resources will have more opportunities to succeed.

According to data from Blue Hole, among the electronic cigarette brands that have obtained licenses and disclosed their production quotas, Yooz has been granted the highest quota. Its annual production capacity can reach 328.7 million pods, 15.05 million sticks, and 6.1 million disposable e-cigarettes, which significantly exceeds other brands.

According to the quotas received from various brands, top companies are still able to maintain their industry status through their financial strength and market resources. I don't believe there will be any major shifts in the industry hierarchy," said Chen Zhong in an interview with journalists.

An expert from the Credit Management Committee of the All-League Mergers and Acquisitions Guild, An Guangyong, believes that as a new sector in the tobacco industry, the electronic cigarette industry has many innovative packaging points. However, from an economic perspective, the phenomenal profit margin of the industry will attract more companies to enter the field with the issuance of electronic cigarette licenses. As competition intensifies, the industry's future profits will also be adjusted to a reasonable range.

The era of excessive profits will become a thing of the past.

E-cigarette industry is no longer a highly profitable business," said Chen Zhong in an interview with reporters.

On the one hand, adjustments to taxes may significantly reduce profits for electronic cigarette products. Data shows that comprehensive taxes on traditional cigarettes are over 55%, while currently electronic cigarettes are only subject to a 13% value-added tax as ordinary consumer goods. Unnamed industry insiders have disclosed to reporters from the Securities Daily that tax rate adjustments for electronic cigarettes are approaching, which means that industry profits will see a significant reduction.

According to financial data from S&P Global Market Intelligence, from 2019 to 2021, the net profit margin of the company has increased from 28.56% to 38.44%, and the gross profit margin has also increased from 44.04% to 53.63%. The financial report of Wuxin Technology, the parent company of the Yooz electronic cigarette brand, shows that as of March 31, 2022, Wuxin Technology's net profit margin was 40.07%.

According to Chen Zhong's calculations, if the prices of electronic cigarettes remain unchanged, the reasonable net profit margin is expected to be adjusted to between 20% and 30%.

On the other hand, the adjustments to the new regulations will also cause pain for industry practitioners in the short term. "With the cancellation of fruit-flavored e-cigarettes, it is expected that the performance of e-cigarette companies will experience a significant decline. It is expected that the performance of e-cigarette companies will not be very optimistic in the next one to two years," said Chen Zhong.

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