Throughout the world, tobacco consumption is characterized by rigid demand, high viscosity and high frequency. Tobacco supply monopoly makes overseas tobacco giants popular with institutional investors. Buffett once said, “Tell you why I like tobacco industry? It costs only one cent to make and one dollar to sell. Smokers are addicted and have a strong brand loyalty.”
Under the trend of harm reduction in tobacco industry, electronic tobacco emerged as the times require, and pushed the industry into a new stage. This process will also brew a series of investment opportunities.
The development of electronic cigarette is imperative
For the majority of smokers, tobacco consumption has a strong demand attribute. To meet consumers’ health needs, the tobacco industry has been reducing tar content in cigarettes for decades. Taking European and American cigarettes as an example, the average tar content reached over 40 mg in the 1960s, gradually decreased to more than 30 mg in the 1970s and further decreased to more than 10 mg in the 1980s. However, too low tar content will have a greater negative impact on the taste, so far it remains at the level of 10 mg. On the road of harm reduction, the limitation of traditional technology also indirectly promoted the birth of electronic cigarette.
Different from traditional tobacco, electronic cigarettes have the characteristics of no burning and significant reduction of harmful substances. There are two main categories of electronic cigarettes: one is vape, the other is heat-not-Burn (HNB).
Vape electronic cigarette is an electronic product that imitates cigarettes. It can atomize vape oil (composed of propylene glycol, glycerol, spices, nicotine, etc.) into aerosal, without tar involved in the whole process. HNB products are more like improved products of traditional tobacco. The principle is still to heat tobacco by heat source and release nicotine and other aroma. Therefore, the taste of HNB products is closer to that of traditional cigarettes. However, due to the drastic decrease of temperature, HNB will not produce as many harmful ingredients as traditional cigarettes.
After weighing the advantages and disadvantages, medical and health institutions in Britain and the United States tend to believe that electronic cigarettes do less harm to human health than cigarettes, which is also an important reason for the rapid development of the electronic cigarette industry in recent years. By the end of last year, the penetration rates of electronic cigarettes in the United States and Britain had reached 5.5% and 9.5% respectively, compared with 0.3% in China. There is still much room for further development in the long run.
According to the author’s calculation, when the penetration rate reaches 5%, the domestic vape-type electronic cigarette scale will reach 70 billion yuan, including 65 billion yuan for cartridges and 5 billion yuan for smoke devices and appliances, and 90 billion yuan for HNB e-cigs. Among them, 80 billion yuan for pods or cartrdges and 10 billion yuan for smoke devices respectively.
Look for Investment Opportunities around Supply Chain
Electronic tobacco industry can be divided into upstream raw materials, midstream OEM and downstream brand manufacturers.
The upstream raw materials and components are different because of the different types of electronic cigarettes: vape electronic cigarettes mainly involve vape juice (propylene glycol, glycerol, nicotine, etc.), atomizer, battery components, and HNB electronic cigarettes involve tobacco, chips, batteries, etc.
In the middle reaches, thanks to the maturity of domestic electronic manufacturing technology, a large number of overseas electronic cigarette brands are manufactured in China. Data show that 95% of domestic electronic cigarettes are exported.
In terms of downstream brands, since CITIC has not yet approved HNB products for sale in China, a large number of private capital is mainly concentrated in vape-type electronic cigarettes, such as Luo Yonghao, founder of Smartisan Technology, who has recently joined the electronic cigarette industry.
Currently, E-cigarette investment in A shares is still in the stage of thematic speculation. From the perspective of investment, although downstream brand dealers are supposed to be the most valuable, it is difficult to have a good long-term opportunity considering the uncertain competition pattern of the current industry and the unchanged monopoly position of domestic cigarettes.
Overall, to find high-quality suppliers that are deeply bound with the traditional tobacco giants and have stable supply capacity, or the main line of investment with high certainty in the electronic tobacco industry for a period of time in the future, mainly related to the target: Intretech, Jinjia, Dongfeng Stock, Eve battery, etc.
Intretech is a global tobacco giant Philip Morris International supplier of electronic cigarette plastic parts. Philip Morris International is the world’s largest tobacco company. In 2014, it launched the HNB representative product IQOS, which has rapidly become popular. According to Philip Morris’ report, the company’s sales revenue of electronic cigarette-related products increased rapidly from $666 million in 14 years to $4.1 billion in 18 years. At present, the penetration rate of IQOS in Japan and Korea has reached 16% and 8%.
Intretech mainly supplies IQOS tobacco plastic parts for PMI, which contributes half of PMI gross profit. Driven by the business of electronic tobacco and plastic parts, the company’s revenue of innovative consumer electronics products increased from 330 million yuan in 15 years to 2.381 billion yuan in 17 years, and fell to 1.845 billion yuan in 18 years under the influence of IQOS replacement inventory. With the launch of a new generation of IQOS products at the end of last year and the FDA authorization of IQOS to be launched in the United States on April 30, the plastic business of Intretech is expected to usher in a turning point.
By virtue of the good cooperative relationship established earlier with China Tobacco, Jinjia have reached cooperation with provincial Chinese Tobacco companies in HNB products. The company is the largest tobacco label enterprise in China, and maintains long-term cooperation with 80% of the provincial tobacco companies in China. In the past few years, the company has actively expanded the packaging business in non-tobacco label areas, such as food, liquor, electronic products and so on.
In terms of electronic cigarette business, the company has launched its own vape products, and has obtained the qualification of IQOS packaging supplier of PMI, and has reached cooperation with Yunnan, Shanghai, Henan, Guangdong and other provinces in HNB products. It is expected that with the liberalization of the follow-up policy, it will bring a new perspective to the company’s growth.
