Some people say that e-cigarettes will become the next trillion-level market; in the e-cigarette market "gold rushing", you must focus on Simer International.

Shenzhen Smol International Co., Ltd. (hereinafter referred to as "Simall International", 06969.HK) released its 2020 results announcement on April 1. As of December 31, 2020, the company's revenue was 10 billion yuan (RMB, the same below), a year-on-year increase of 31.5%; the adjusted net profit for the same period was 3.893 billion yuan, a year-on-year increase of 71.9%. The company said that the main reasons for this increase include revenue growth and gross profit margin increase.

As the Ministry of Industry and Information Technology issued the "Decision on Amending the Implementation Regulations of the Tobacco Monopoly Law of the People's Republic of China" (Draft for Solicitation of Comments) on March 22, the "regulatory storm" for e-cigarettes has suddenly risen. Can Smol International really be strong enough to withstand the regulatory storm?

The business is getting bigger and bigger, but it's getting harder and harder to pay

After Smol International went public in Hong Kong in July last year, people realized that when everyone wanted to "gold" in the e-cigarette market, Smol International, a company that relied on selling "shovels", was already in this gold rush. It made a lot of money in it.

According to the data, Smol International mainly supplies atomizing cores and atomized tobacco products (HNB) to the world’s major e-cigarette manufacturers. The company’s main customers include British American Tobacco, NJOY, RELX, etc. Revenue contribution exceeds 80%. According to research, Smol International was once the global leader in electronic atomization equipment OEMs, mainly producing heating devices (ceramic atomizing cores) that atomize e-liquid, "its status is equivalent to Intel in notebook computers."

However, with the growth of income, the number of credit accounts of the company's customers has increased day by day, and the increase in the company's available cash has therefore been declining year by year.

"Investor Net" combed the company's financial report and found that in the past two years, the company's trade receivables and bills receivable have surged. From 2019 to 2020, the company's trade receivables and bills receivable surged 236% from 659 million yuan in 2019 to 2.218 billion yuan in 2020, far exceeding the 31.5% increase in revenue over the same period.

In addition, comparing the company’s trade receivables and bills receivables with the growth rate of cash flow from operating activities in the past four years, it can be seen that the company’s cash flow growth rate has slowed year by year, while the growth rate of trade receivables and bills receivable in the same period Expand further. These signs indicate that the company's business dealings with customers are gradually becoming a passive position.

E-cigarettes have a solid position and have been imitated but have not been surpassed

In the past, Smol International has always left people with the impression that it is only a foundry of electronic cigarette making equipment. Today, its core competitiveness is no longer foundry, but porous ceramic heating technology FEELM.

In 2018, the company established technical barriers with FEELM to achieve a medical level of atomized particles as small as 1 micron, further promoted performance growth, and gradually widened the gap with competitors in the upstream of the e-cigarette industry.

Although in the freely competitive market, "the latecomers come first" is nothing new, but Smoore International has not stopped its progress.

Mcwell, the company's main business entity, continues to increase R&D investment. As of December 31, 2020, the company's R&D expenses were 420 million yuan, a 25-fold increase from 2016; during the same period, the company had 615 R&D personnel (except for the production and manufacturing departments), which accounted for the highest proportion.

Compared with other competitors in the industry, Smol International's investment in research and development is far ahead. According to data from Everbright Securities Research Report, with the exception of 2016, Mcwell's R&D investment from 2012 to 2019 ranked first in the industry.

However, although Smol International has an irreplaceable core position in the industry chain, the e-cigarette market competition pattern is relatively fragmented, so the company's current market share is not high. The company's prospectus disclosed that in terms of ex-factory price gains, the company ranked first in the global atomization equipment market share in 2019, but it was only 16.5%.

Regarding how the company will continue to maintain its leading position in the industry, "Investor Net" wrote to the company's chairman Chen Zhiping, but did not receive a reply from the other party.

Luo Zhanhong, a former analyst at Savills, an international consulting company, believes that “e-cigarettes are similar to new energy and are a trillion-level market. However, the industry is in the early stage of development and is still relatively chaotic. There are several major brands competing with each other. As the industry leader, Smol International will definitely go further than other companies in mastering the core technology of atomization."

However, Liu Yu, director of investment advisory at the Beijing No. 3 Branch of Kaiyuan Securities, pointed out to Investor.com, “In the future, strict supervision will increase the compliance cost of e-cigarette manufacturers. Although it is difficult for other competitors to enter, it is expected that a market Industries whose scale and growth rate are hard to reach investors' expectations, even the leading companies in the industry, I am afraid it will be difficult to attract the attention of funds."

It is worth mentioning that the mid-stream and downstream e-cigarette manufacturers and retailers that contribute more than 80% of SM International’s performance are facing regulatory pressure on the one hand, and difficulties in changing the habits of smokers and the increased health awareness of non-smokers on the other. The expansion problem.

Strict supervision storm suddenly rises. Domestic e-cigarettes are almost sentenced to "death penalty"?

On March 22, 2021, the Ministry of Industry and Information Technology issued the "Decision on Amending the Implementation Regulations of the Tobacco Monopoly Law of the People’s Republic of China" (Draft for Solicitation of Comments). Implementation of relevant regulations."

As soon as the news came out, on the same day, the stock prices of the e-cigarette industry chain-related companies listed in Hong Kong stocks, U.S. stocks and A-shares could be described as sad, and RELX plunged 47.8%; even battery manufacturers in the industry chain were not spared, and Yiwei Lithium was able to close. Fell 15.85%; while Smol International’s share price was in a downturn throughout the day, and finally closed at 48.00 Hong Kong dollars, a decrease of 27.22%.

However, the company's share price has rebounded slightly recently. As of the close of trading on April 23, Smol International's share price was HK$54.65 (a decrease of 3.1% on the day).

In fact, as early as November 1, 2019, the State Administration for Market Regulation and the State Tobacco Monopoly Administration jointly issued the "Notice on Further Protecting Minors from E-cigarettes", expressly prohibiting the sale and advertising of e-cigarettes online Publicity, while emphasizing that "all kinds of market entities must not sell electronic cigarettes to minors."

"After the strict supervision documents issued by the Ministry of Industry and Information Technology on March 22, e-cigarettes were almost sentenced to death in the domestic market. Although Smol International has an export business, the company can adjust its export business to its main business, but for the domestic market, especially for As far as stock investment is concerned, if market expectations and growth cannot be guaranteed, the investment prospects will be very bleak.” Liu Yu continued to analyze, “China has a special historical background and is highly sensitive to tobacco. For the three major e-cigarettes Regulation: License regulation, tax regulation and taste regulation are likely to be implemented."

He added, “The bleak market development prospects of strictly regulated industries are a lesson from the past. For example, in the video game market, there is no such thing as Sony and Microsoft-level video game equipment terminal manufacturers and software vendors in China.”

Old smokers’ habits are hard to change, new users are hard to "cultivate"

In fact, on the consumer side, the development of e-cigarettes has also fallen into the embarrassing situation of "the habits of old smokers are difficult to change and new users are difficult to develop".

"No reasonable person would regard things that hurt their bodies as a fashion and fashion. Now the number of young people who smoke is obviously less." Liu Yu said frankly.

"Many smokers over the age of 35 have not used e-cigarettes so far, and still use cigarettes. E-cigarettes are generally purchased by smokers under the age of 35. Smokers should be allowed to use e-cigarettes instead of cigarettes and change their habit of using cigarettes. It’s not easy.” A small song from a REC E-cigarette retail store said, “Compared to cigarettes, many people are not accustomed to smoking e-cigarettes. Apart from nicotine, it is more difficult for older people to quit the habit of smoking cigarettes.”

In addition, according to The Lancet's "China Smoking Status Epidemiological Survey Report", the population with the highest smoking rate is mainly those in the 40-50 age group.

"There is an irreplaceable part between traditional tobacco and e-cigarettes: first, some people who are more addicted to cigarettes are not used to e-cigarettes, because e-cigarettes are not addictive; second, even e-cigarettes and traditional cigarettes The effect is the same, and there is also the problem of consumption habits. Therefore, it is not easy for emerging markets to replace traditional markets.” Liu Yu added.

In fact, the road of e-cigarettes in cultivating new users is not smooth. Domestic e-cigarettes have been developed for more than ten years, and they still cannot escape the reality that their usage rate is still very low. At present, the users of e-cigarettes are still mainly young smokers, rather than newly added smokers.

Liu Yu pointed out that “the low penetration rate of e-cigarettes is the result of multiple factors, and the main reason is that the number of young people who smoke is significantly reduced.”

Research data from the China Centers for Disease Control and Prevention shows that from 2018 to 2019, smokers accounted for about 96.2% of domestic e-cigarette users, that is, non-smokers accounted for less than 4%. From 2015 to 2019, the domestic use rate of e-cigarettes rose from 1.3% to 1.6%. Among them, the use rate of e-cigarettes among young people aged 15-24 was 1.5%.

Looking at the world, the expansion of e-cigarettes is also moving forward with heavy burdens. Although e-cigarettes developed and became popular in Western countries earlier, the market share of e-cigarettes has increased in recent years, but the market share is not high and the growth rate is very slow.

According to data from the Sullivan Report, in 2014, the global market share of e-cigarettes was only 1.7%. In 2019, the figure was 4.2%. It is estimated that by 2024, the figure may rise to 9.3%.