The Regulatory Landscape of vape is Becoming Clearer, and Device Manufacturers are Waiting for Growth

I. Classification of E - cigarettes

E - cigarettes, unlike other tobacco products, can be categorized into two classes, namely heated - not - burned tobacco products (HNB) and vapor - based e - cigarettes. In general, vapor - based e - cigarettes can be categorized into closed - system e - cigarettes and open - system e - cigarettes. E - cigarettes are classified as closed - system and open - system, with the closed - system e - cigarettes further sub - segmented into pod - based and disposable e - cigarettes. All these products are battery - powered electronic for heat. The main difference is that HNB heats real tobacco, providing a taste more similar to traditional cigarettes, while vapor - based e - cigarettes heat e - liquid, allowing a wider range of flavors through the addition of food flavorings.

II. Market Size and Growth Trends

2-1 Global Market

Research reports from Essence Securities pointed out that the global trade sales values of vapor - based e - cigarettes reached $36-7 billion in 2019 up 28-32% yoy accounting for 4-2% of the global tobacco market. E - vaping products market share is not too high in sale proportion of retail. But as a development trend e - cigarettes popularity already appeared.

The CAGR of global cigarettes vapor - based e - cigarettes HNB and other tobacco products were 3-18%, 24-24%, 235-21% and 3-24% from 2014 to 2019- The fastest - growing tobacco varieties were HNB and vapor - based e - cigarettes. If we calculate at this growth rate theoretically the share of e - cigarette market will increase from 4-2% to 9-3% by 2024-

2-2 Domestic Market in China

As for the domestic segmented e - cigarette market in China according to the Latest data of LeadLeo Research Institute the closed - system e - cigarette dominates the domestic e - cigarette market. In 2016 the size of domestic closed - system e - cigarette market was only 2-01 billion yuan By 2020 it reached 11-8 billion yuan with compound annual growth rate high to 55-80%. Because open - system e - cigarettes have the complex e - liquid replacement process and a small number of manufacturers its market size was only 1-95 billion yuan in 2016 and the market size remains basically stable. HNB sale was also banned in China during the same period. But the tobacco companies like China National Tobacco Corporation had already actively deployed HNB market.

As can be seen, the domestic e - cigarette market has huge demand scale and rapid growth speed. When the "final version" of the e - cigarette industry regulatory policies is implemented domestic e - cigarette consumer electronics - related enterprises are expected to welcome the second growth curve.

III. Policy related to Regulatory Policies: With gradual clarification

With the emergence of e - cigarettes as a new type of product in recent years the relevant regulatory policies on e - cigarettes are still in the exploration stage in China. It can be seen from the order of policy announcement that the supervision of e - cigarettes by national regulatory agencies has gradually taken shape.

3-1 Early Regulatory Steps

In August 30, 2018, the State Administration for Market Regulation and the State Tobacco Monopoly Administration jointly issued the "Notice on Prohibiting the Sale of E - cigarettes to Minors", establishing the same sales management standards of e - cigarettes as cigarettes.

As of January 1 2019 the newly revised version of Hangzhou public place smoking control regulations come into effect formally the e - cigarette and ordinary cigarette put in the scope of smoking prohibiting. In June of that year, e - cigarettes were officially included in the scope of tobacco control by the "Shenzhen Special Economic Zone Smoking Control Regulations".

3-2 Strengthened Regulations

On November 1, 2019, the State Tobacco Monopoly Administration and the State Administration for Market Regulation jointly issued the "Notice on Further Protecting Minors from the Harm of E - cigarettes," clearly stating that e - cigarettes should not be sold to minors Don't sell e - cigarettes on the InternetDon't publish advertisements about Vape on the Internet.

On March 22 2021 the Ministry of Industry and Information Technology issued a public notice of the "Decision on Amending the Regulations for the Implementation of the Tobacco Monopoly Law of the Peoples Republic of China (Draft for Soliciting Opinions)". According to the draft an extra article was added to the supplementary provisions of the "Regulations for the Implementation of the Tobacco Monopoly Law" that read: "New tobacco products such as e - cigarettes shall be implemented by reference to the relevant provisions on cigarettes in these regulations.

But in an era of tightening regulation on e - cigarettes, domestic tobacco enterprises all the more are making forays into the e - cigarette field.

Research reports from Societe Generale Securities showed that the China National Tobacco Corporation laid out the e - cigarette industry chain very early. In 2018 China National Tobacco Corporation gradually commercialized e - cigarettes developed its own brand of e - cigarettes and made strategic investment in the e - cigarette enterprises. At the same time&1548; Sichuan China Tobacco introduced the HNB brand "Kuanzhai Kungfu". In 2019 the establishment of Guangdong Wuyeshen Group e - cigarette brand "Laimi". In 2020, the e - cigarettes jointly developed by Sichuan China Tobacco and South Koreas YM were exported to South Koreans market, and Kuanzhai Kungfu also tried the domestic market by opening offline experience shops in Nanjing and other cities.

At the same time domestic listed companies have also quietly arranged the e - cigarette industry. FEI Xuan APP reports a total of 32 listed companies in the e - cigarette sector. Among them Penghui Energy (300438-SZ) announced in July 2020 that Smoore International (6969-HKthe top e - cigarette enterprise in China is its e - cigarette battery customer. Intretech (002925-SZis engaged in R&D of Heated - not - burned tobacco device and their biggest customer is Philip Morris InternationalIQOS the world's largest application tobacco company. Eve Energy (300014-SZ) was not CPDA's only supplier thoughSZ) was established in 2009 and for a brief overviewCZ) and SZ) established a supplier relationship as early as 2011 supplying small soft - pack lithium - ion batteries. The company in 2014 purchased a 50.10% stake in McWell for 440 million yuan. McWell went public on the Hong Kong Stock Exchange in 2020 as Smoore International.

Based on this perspective in the short term the core risk that restricts the development of the e - cigarette market is policy regulation. However in the long run strict regulation will certainly speed up the some extent of the brand pattern concentration.

IV. The Rise of Leading Enterprises

4-1 Market Dominance of RELX

The domestic closed - system e - cigarette market has the most players. The RELX series of RLX Technology (RLX.N)1which holds the highest share of mind preference and recommendation among consumers. According to the third quarter 2020 China E - cigarette Brand List RELX's mind share as high as 86-40% RELX ranks first.

The device brand RELX's exclusive stores were 9,841 nationwide according to the data from LeadLeo Research Institute as of January 15,2021- The five leading provinces by the number of stores were Guangdong Jiangsu Zhejiang Shandong and Henan boasting 1,163 966 791 645 and 645 stores respectively.

In addition RELX has access to the national chain enterprises such as Lawson China Resources Cool designer toysChina Mobile Tmall Stores Yonghui Supermarket and Wangyu Internet Cafe.

Data show that the total sales of RLX Technology's RELX series were 1-549 billion yuan and 3-82 billion yuan respectively in the Chinese mainland during 2019 and 2020. More importantly, only in the first quarter of 2021, RLX Technology achieved sales of 23-99 billion yuan in the Chinese mainland, accounting for 62-79% of the total sales in 2020. Based on retail sales, RELX has also the largest market share in Chinese closed - system e - cigarette market.

In 2019, RELX's market share in the Chinese closed - loop cigarette market was 48%. By the end of the third quarter of 2020, RELX's market share soared to 62-60%, making RELX an undisputed industry leader.

4-2 Effects on the Upstream Industry Chain

The rapid increase of e - cigarette demand also drives the upstream enterprises of the industry chain.

If we decompose the value chain of the vapour - based e - cigarette industry the upstream of the value chain consist of raw material suppliers such as e - liquid batteries atomizers chips etc. The middle reach is the device manufacturers, brand owners, etc.; the downstream is mainly distributors and users.

In the closed - system e - cigarette industry chain the proportions of OEM factories brand owners distributors and retailers in the value chain are 12% 21% 12% and 40% respectively (research report of Founder Securities.

Considering that the ratios of upstream and mid - stream enterprises such as supplier and OEM factories are not particularly eye - catching in the whole industry value chain under the high - speed growth of e - cigarette demand the first beneficiary will be the upstream and mid - stream enterprises.

Let's take an example of Smoore International an e - cigarette device manufacturer. In the recent fiscal year the purchase amount from RELX took up for as high as 79% of the company's total procurement. More importantly according to Wind data Smoore International's operating income has increased rapidly from 723 million yuan in 2016 to 10-079 billion yuan in 2020 with a compound annual growth rate of 93-23%. In the same period of the net profit attributable to the parent company's shareholders deducting non - recurring items increased from 104 million yuan to 3-432 billion yuan compound annual growth rate of 139-68%. Smoore International also released its unaudited operating conditions. In the first quarter of 2021 its adjusted net profit is 1-23 billion yuanan increase of 287-8% year - on - year which indicates the strong demand of the downstream of the e - cigarette industry chain.

Moreover if Smoore International's revenue is further parsed from the perspective of sales regions it can be clearly seen that its sales in the Chinese mainland have also developed rapidly.

Smoore International's sales in the Chinese mainland in 2017 2018 2019 and 2020 were 187 million yuan 408 million yuan 1-589 billion yuan and 2-709 billion yuan respectively representing year - on - year growth rates of 55-67% 117-88% 289-69% and 70.52% respectively according to Wind data.

This indicates that domestic e - cigarette has still achieved notable growth in such a harsh environment under the pressure of policy.

In parallel the crude drug manufacturers in the e - cigarette industry chain have also benefited from the "upward trend". According to Wind data, from 2017 to 2020, Eve Energy, the lithium - battery supplier of Smoore International, sold goods with a worth of 44-68 million yuan, 114 million yuan, 209 million yuan and 181 million yuan, respectively.

BYD Electronics (0285-HK), the consumer electronics giant.

Recently BYD Electronics announced the authorization and public announcement of its patent for "A Charging Device for E - cigarettes and an E - cigarette Set" was in early 2021 by the National Patent Office. This is that BYD Electronics layout in the e - cigarette industry chain is for e - cigarette structural parts motherboards EMS contract manufacturing. The answering device is a ceramic atomization product. Additionally the e - cigarette business is highly synergistic with BYD Electronics metal and ceramic powder material businesses.

As early as 2020 the operating income of BYD Electronics' e - cigarette business had reached nearly 1 billion yuan according to research reports of Soochow Securities. Their complete machine products including vapor - based atomization devices and HNB will be promoted for mass production in 2021- BYD Electronics has also invested a considerable amount of research and development expenditures in the e - cigarette direction at this stage. Data show that from 2019 to 2020 BYD Electronics total R & D investment is 2-09 billion yuan and 2-91 billion yuan respectively and the proportion of R & D investment in current operating income is 3-9% and 4-0% respectively a large part of which is used for the R & D of e - cigarette products.

With major listed companies joining the e - cigarette industry chain one after another relevant consumer electronics enterprises are expected to usher in a second growth curve once domestic e - cigarette regulatory policies are "implemented".

Vape User Feedback Reference

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