Recently, the US Food and Drug Administration (FDA) approved four menthol flavored e-cigarettes under NJOY, marking the first time in the US that e-cigarettes other than tobacco flavors have been approved. Against the backdrop of strict regulation in the global e-cigarette industry, the move by the US FDA undoubtedly sends a positive signal.
After the announcement of the news, the stock price of atomization equipment manufacturer Simor International opened significantly higher by 12% and briefly rose to HKD 10 per share. As an industry leader, the performance of Simor International in the first quarter of 2024 indicates that it is emerging from a downturn. Will the approval action of the US FDA become a catalyst for its future valuation recovery?
Tore open a hole
After a period of adjustment in recent years, the electronic cigarette industry has finally seen a glimmer of hope.
As a new business model in the tobacco industry, electronic cigarettes have been rapidly developing while a large number of non compliant products have seriously disrupted market order, and industry regulation has become increasingly strict. This is consistent globally.
Since 2020, major markets such as China, the United States, and Europe have successively increased regulatory efforts in the electronic cigarette industry, such as the 2020 ban on flavored electronic cigarettes in the United States; After 2021, China has also entered an era of strict regulation, forming a "1+2+N" regulatory system.
The review of menthol flavored electronic cigarettes in the United States this time is of great significance to the electronic cigarette industry, which means that the safety and harm reduction of the product have been recognized, and the regulatory direction is clearer. In the future, the focus will be on non compliant products, and other fruit flavored products are also expected to be approved.
The US FDA's green light for menthol flavored e-cigarettes is not without warning. In early June, the FDA revoked the marketing refusal order for Juul tobacco and menthol flavored products in June 2022, and re included the company's application in the review process, indirectly confirming the regulatory relaxed attitude towards related flavored electronic cigarettes.
In addition, after the FDA approved menthol flavored e-cigarettes, the Australian government also followed suit and announced a relaxation of the e-cigarette ban, allowing adults to purchase e-cigarettes without a prescription, but still only sold in pharmacies and with pharmacists. The new policy still needs to be approved by the local Senate.
Although major countries around the world still have strict regulations on the electronic cigarette industry, the regulatory actions of the United States undoubtedly have opened a loophole, which may have an impact on the global regulatory landscape and taste policies.
In the past, due to the slow approval pace and weak enforcement by the US FDA, other electronic cigarette products with non compliant fruit flavors continued to be active in the market. With the gradual clarification of audit standards and the strengthening of law enforcement, the pattern of "bad money driving out good money" in the market will also improve.
Meanwhile, most of the products approved by the US FDA are produced by large tobacco companies such as Logic, Vuse, and NJOY. This indicates that regulation is more inclined towards compliant and scalable brand owners, and also reveals that in the future, market share will gradually concentrate on top enterprises, and the share of small and medium-sized brands will continue to shrink.
As the world's largest electronic atomization equipment manufacturer, Simor International mainly engages in ODM outsourcing and self owned brand sales, and will also benefit from changes in industry regulatory policies. The 4 products under NJOY that have passed the audit this time are all manufactured by Simor. In addition, the company has also bound top brands such as Nippon Tobacco, Vuse, and Yueke. After NJOY's menthol products pass the audit, other brands of menthol products are also expected to pass the audit.
From a performance perspective, Simor International is also emerging from a downturn.
The performance has hit the bottom
Affected by regulatory policies, there have been significant fluctuations in the performance of Simor International in recent years, especially in the domestic market.
According to the financial report, the overall operating revenue of the company decreased from 13.76 billion yuan to 11.17 billion yuan between 2021 and 2023, a decline of 18.8%. Although there was not much overall fluctuation, the regional differences were very obvious.
During this period, Simor International's sales to domestic enterprise customers decreased from 4.673 billion to 163 million, a decrease of 96.5%, and the proportion of revenue decreased from 34% to 1.5%; The revenue of enterprise customers in the US market has decreased from 4.883 billion to 4.084 billion, with little change in the proportion of revenue, which has remained at around 36%. Europe and other regions saw an increase from 3.038 billion to 5.074 billion, with their revenue share rising from 22.1% to 38.3%.
Is the electronic cigarette giant going to make it through?
After a significant reduction in domestic market revenue, Simor International's global layout has achieved the goal of risk diversification. More importantly, the domestic market is already in a state of liquidation, and there is not much room for a downward trend in the proportion of future revenue.
In addition, compared to the fluctuations in the OEM business, the performance of Simor International's own brand business is more impressive. During the same period, it increased from 1.162 billion to 1.63 billion, and its proportion of total revenue also increased from 8.4% to 16.5%, which also boosted the company's performance.
It can be said that 2023 is the year when Simor International's performance will bottom out. In the first quarter of 2024, the company's pre tax profit was about 400 million yuan, a year-on-year increase of 25.2%, ending the continuous decline for two years, which is also an important reason for the company's stock price to continue to rise in the first quarter. As of July 5th, the current stock price of HKD 8.6 per share has increased by over 85% compared to the bottom price of HKD 4.6.
Despite the significant impact of regulatory policies on the electronic cigarette industry, the market size still maintains a certain growth rate. According to Sullivan's report, the global market size of atomization electronic equipment will grow from 6.702 billion US dollars to 11.511 billion US dollars from 2019 to 2023, with a compound annual growth rate of 14.5%. It is expected to grow to 19.858 billion US dollars by 2028, with a compound annual growth rate still reaching 11.5%.
Is the electronic cigarette giant going to make it through?
In the electronic atomization equipment market, the market size of enclosed electronic atomization equipment is the largest, reaching 704.83 billion yuan in 2023, accounting for over 60% of the total market size. The products of closed atomization equipment mainly include replaceable and disposable products, especially disposable electronic cigarettes, which are widely sought after due to their convenient portability, fixed and controllable e-liquid composition, high safety, and similar product experience to open electronic cigarettes.
In recent years, the proportion of disposable products in major market countries has significantly increased. As the world's largest electronic cigarette market, the United States, according to CDC data, will account for nearly 60% of the shipment volume of disposable products in the US market in 2023. Menthol flavored products will account for about 30% of the shipment volume of electronic cigarettes, and about 50% of the shipment volume of refillable products.
Without a doubt, the recent approval of NJOY menthol products has further boosted the US market. For the brand, NJOY's channel stores are still expanding rapidly, reaching 80000 in the first quarter of 2024 and expected to grow to 100000 by the end of the year. Product approval not only increases brand sales, but also increases Simor International's business revenue in the US region.
In terms of valuation, after recent adjustments, Simor International is still at a reasonably low level.
The valuation is still not high
In terms of products, Simor International's diversified layout not only drives performance growth, but also serves to diversify risks.
At present, the company has layout in disposable, replaceable, open and special purpose atomization products, and is actively exploring in the fields of heating non combustion, atomization medical and beauty.
Among them, special purpose electronic atomization products, namely cannabis atomizers, are mainly sold in the United States. In recent years, the global market size of special purpose electronic atomizers has grown rapidly. According to Sullivan's report, it is expected to grow by over $2 billion by 2028, almost doubling compared to 2021.
In the fourth quarter of 2023, Simor International Innovation launched a special purpose aerosol product for cream products. In addition to being smaller and more portable, it also significantly improved the efficiency of consumable use. After pilot testing in the United States, there was even a shortage of supply. It is expected that this category will become an important performance growth point for the company.
In terms of risk sharing, the UK plans to ban the sale of disposable electronic cigarette products in early 2024. As the second largest electronic cigarette market, if the proposal is ultimately approved, it will have an impact on the company in the short term, but there will be a trade-off between disposable and refillable products in the local market.
Although Simor International has been facing regulatory pressure, the company's financial situation remains good. After the company went public in 2020, its asset liability ratio rapidly decreased and remained below 20%. The company's outsourcing model, after completing fixed asset investment in the early stage, is now more inclined towards light assets.
Is the electronic cigarette giant going to make it through?
At the same time, Simor International currently has sufficient cash on hand. From 2021 to 2023, the company's short-term deposits amounted to 3.236 billion, 5.432 billion, and 10.836 billion, respectively, generating interest of 423 million, 416 million, and 515 million. In 2023, the company's cash and cash equivalents also reached 5.332 billion, which is sufficient to meet its current liabilities of 3.566 billion.
It should be noted that in recent years, the net profit margin of Simor International has shown a certain decline. On the one hand, this is due to a decrease in net profit scale, and on the other hand, it is also due to an increase in expenses, especially research and development and sales expenses.
From 2021 to 2023, Simor International's sales expenses increased from 193 million to 526 million, mainly used for overseas market development, promotion of its own brand, and channel construction.
Research and development expenses are also a major source of expenditure for Simor International, with investment intensity increasing year by year, from 671 million in 2021 to 1.48 billion in 2023, and research and development rates increasing from 4.9% to 13.3%. The cost allocation mainly revolves around the product end, including special purpose electronic atomizers, non combustible heating series, and atomized medical beauty products.
At present, Simor International has made progress in nebulization beauty and its business boundaries are constantly expanding. In the first quarter of 2024, the first scientific and technological skin care brand MOYAL Lanzhi and innovative category fog light essence instrument was launched, and the company's core TPS transdermal technology was first applied to the C-end beauty field.
On its own brand, in 2023, the company launched the world's first high-end series COSS with automatic oiling and charging, which has longer battery life and ensures fresh and consistent taste. The product has been widely praised by the market since its launch.
Overall, after experiencing a recent rebound, the price to earnings ratio of 29.11 times for Simor International's stock is still not considered high as of July 5th. Considering that the company has already passed a performance turning point and its financial condition is good, with a market value of 48.2 billion yuan corresponding to over 10 billion yuan in cash on hand, there is still a high margin of safety.
Is the electronic cigarette giant going to make it through?
And with the increasingly clear regulatory direction of compliance, and the support of diversified product categories, Simor International, as a leading equipment manufacturer, may still have room for upward valuation in the future.