Global E-cigarette Leader Smoore Faces Competition Challenges

The world's largest electronic cigarette company, Smoore International (06969.HK), is facing a challenge.

Recently, it was announced by Smore International that three fully-owned subsidiaries have received the Tobacco Monopoly Administration's Production License for Tobacco Monopoly Enterprises.

In the past two years, as regulations for electronic cigarettes have been gradually issued, the industry is moving towards standardization. Data shows that by 2022, the global electronic cigarette market will exceed $108 billion, attracting many industry giants to enter the market.

On the same day that the above notice was released, BYD Electronic and Jingjia Stock also announced that their subsidiaries had obtained exclusive production licenses. This has intensified the competition faced by SMOORE International.

A journalist from China Yangtze Daily noticed that in 2021, Smoore International held a global market share of 22.8%, exceeding the sum of the second to fifth largest companies, and maintained its position as the world's largest manufacturer of electronic atomization devices.

However, after moving towards standardization, the "age of profiteering" for the electronic cigarette industry will become a thing of the past. In the first half of this year, Smoore International's net profit is expected to decline by 46.0% to 53.8% year-on-year.

The industry is rapidly developing and enterprises are increasingly entering cross-border markets.

As the "Electronic Cigarette Management Measures" and mandatory national standards for electronic cigarettes have been introduced this year, the electronic cigarette industry is facing significant changes and gradually moving towards standardization.

Recently, Smoore International announced that its subsidiary has obtained a license to produce tobacco products. The company expressed confidence in its future development and stated that its overall production and operations will continue as planned. The company also affirmed its commitment to comply with relevant national policies and operate within the confines of the law.

According to data, the global electronic cigarette market size is expected to exceed $108 billion by 2022, with overseas markets sustaining a growth rate of 35%. Currently, there are over 1,500 electronic cigarette manufacturers and brands in China, with over 70% of them focused on exporting products overseas. Last year, Chinese electronic cigarette exports reached ¥138.3 billion, a year-on-year increase of 180%; it is expected that the total export value of electronic cigarettes for the whole year will reach ¥186.7 billion, with a growth rate of 35%.

The electronic cigarette industry is rapidly developing, with many large domestic companies diversifying into it. Manufacturing giants like Luxshare Precision, as well as Jingjia Allocation, Jinlong Machinery & Electronics, Shunhao Allocation, Jincheng Medicine, Boteng Allocation, and Huabao Allocation, have successively obtained production qualifications for electronic cigarettes. According to incomplete statistics, more than 130 enterprises have received compliant certificates as of now.

One notable development in the electronics industry is BYD's entry into the electronic cigarette market. Since 2018, BYD Electronics has been laying the groundwork for its electronic cigarette products, having completed patent layouts for its complete range of vaporization products, investment in automated production lines, and the integration of research and development of new materials, precision moulds, product design and development, as well as intelligent manufacturing capabilities.

Abundant production capacity leads to an increase in market share.

Despite facing increasingly fierce competition, Smurfit Kappa, as the industry leader, currently holds a relatively stable position.

In 2021, SMIC held a global market share of 22.8%, surpassing the combined total of second through fifth place. Furthermore, the company has ample production capacity with a scale of 2.59 billion standard units per year in 2021. The completion of its Jiangmen phases one and two will raise its total production capacity to over five billion standard units per year.

However, with the adjustments to regulations in the e-cigarette industry, the era of "excessive profits" will become a thing of the past. As a result, Smoore International experienced a decline in revenue growth during the first half of this year.

According to its recently released performance forecast, the company is expected to generate revenue of approximately RMB 1.322 billion to RMB 1.554 billion in the first half of the year, representing a year-on-year decrease of about 46.0% to 54.1%. The net profit is estimated to be about RMB 1.375 billion to RMB 1.606 billion, representing a year-on-year decrease of about 46.0% to 53.8%.

Simo International has announced a projected 50% decrease in revenue and net profit, citing reduced income from the Chinese market and a shift in product mix leading to lower gross margins. The company also reported significant increases in research and development expenses, management fees, and sales costs as it seeks to bolster its growth prospects in new areas.

It is worth mentioning that in terms of overseas business, Smoore International's major client under the British and American Tobacco umbrella, Vuse brand, has had three products approved through the Pre-Market Tobacco Product Application (PMTA), validating the company's supply chain capabilities. Additionally, the company's contract-manufactured disposable product Vuse go has been launched in non-US markets in Q2, and there will be a rapid increase in production of disposable products in the second half of the year, leading to an expected acceleration of overseas revenue growth in the latter half of the year.

In addition, Sumore International has increased its investment in research and development, with more than 3,000 patent applications filed to date. In 2021, the company's research and development expenses amounted to 670 million yuan, representing a year-on-year increase of 59.7%.

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