The legal identity of e-cigarettes has finally been confirmed. Decree No. 750 of the State Council on November 26 clarifies the legal status of e-cigarettes in China. As a result, the e-cigarette industry eliminates policy uncertainty.

Although the decree of the State Council makes it clear in law that e-cigarettes refer to the relevant regulations of cigarettes, it still does not specify the supervision of national standards, channels and tax rates on e-cigarettes.

On November 25th, the State Tobacco Monopoly Administration issued a notice on the reform of "license separation", referring to "inclusive and prudent supervision of new technologies, new industries, new business type, new models, etc., and tailor-made regulatory models". This expression leaves room for imagination for subsequent e-cigarette channel forms and tax rates.

As far as the e-cigarette industry itself is concerned, according to Wall Street, the mainstream attitude of the industry has long been looking forward to the implementation of regulatory policies. Therefore, the landing of the boots, the industry will be more standardized, and the industry's leading companies will undoubtedly benefit from this.

Eliminate policy uncertainty

On November 25, Wall Street learned that the legitimacy of e-cigarettes in the domestic market is about to be confirmed by policy. On November 26, the State Council issued a decision on revising the regulations on the implementation of the Tobacco Monopoly Law of the people's Republic of China (hereinafter referred to as "implementation regulations").

In fact, the landing caliber and path of e-cigarette related policies have changed a lot since November.

On November 18th, the National Standard Information Service Public platform showed that the status of the National Standard for Electronic cigarettes (20171624-Q-456) had been changed from being reviewed to being drafted. On November 12, some media reported that some e-cigarette enterprises were invited to participate in the consultation meeting on the mandatory national standard for e-cigarettes. The implementation process of the national standard for e-cigarettes is expected to be accelerated.

By November 26, the State Council called for strengthening the supervision and control of new tobacco products such as electronic cigarettes, and decided to amend the regulations of the people's Republic of China on the implementation of Tobacco Monopoly Law as follows: add one article, as Article 65: "Electronic cigarettes and other new tobacco products shall be implemented with reference to the relevant provisions of these regulations on cigarettes." This decision shall enter into force as of the date of promulgation.

Wall Street learned that a number of e-cigarette brands in the industry had been eager for regulatory landing. Therefore, as soon as the "implementation regulations" were issued, they declared their position one after another, saying that they firmly support the revision of the regulations, actively implement regulatory requirements, and adhere to the development of compliance management.

"as a practitioner in the e-cigarette industry, I firmly support the revision of the regulations." Wuxin Technology, China's largest e-cigarette brand, said that in the follow-up, it will actively implement regulatory requirements, continue to increase investment in research and development, provide users with high-quality products, earnestly fulfill their social responsibilities, and strive to contribute to the long-term healthy development of the industry and society.

The domestic market of e-cigarettes has expanded rapidly in recent years. From 2013 to 2020, the scale of the domestic market of e-cigarettes has a compound annual growth rate of 47.56% (data source: Ai Media Consulting).

The market predicts that by 2021, the size of China's e-cigarette market will exceed 10 billion yuan. In addition, China is the world's largest e-cigarette production base, the main production base is located in Baoan District of Shenzhen City, the export of e-cigarettes accounts for 90% of the world's total output; in terms of employment, it directly and indirectly led to the employment of nearly 3 million people (data source: steam dynamics).

According to Leyi Electronic Tobacco University, a foreign trade data service platform, a total of 218 countries and regions in the world purchased e-cigarettes from China in 2019, with a total purchase amount of 76.585 billion yuan, of which the United States is the largest market, accounting for more than 25%.

Tianyan survey statistics show that since 2019, the registration of e-cigarette-related enterprises has changed from the decline of the previous eight years, and the growth rate began to accelerate, with a total of 4650 registrations that year, an increase of 100% over the same period last year. The scale of the industry expanded rapidly in 2020, with a total of 17900 registered enterprises in the whole year, an increase of 284.6% over the same period last year.

However, the issue of the legality of e-cigarettes is not clear until November 26, and policy confirmation is of vital importance to the industry, which is indirectly reflected by the shrinking market capitalization of e-cigarette leading listed companies.

On March 22nd this year, the Ministry of Industry and Information Technology and the State Tobacco Administration jointly issued the decision on revising the regulations of the people's Republic of China on the implementation of Tobacco Monopoly Law (draft for soliciting opinions). So far, the market capitalization of three related listed companies, including industry leader RLX Technology Inc. (RLX.N), has shrunk by 200 billion yuan.

This time, new tobacco products such as e-cigarettes will be brought into the management of the Tobacco Monopoly Law, that is, the formal amendment and landing of the "3.22 draft" to clarify for the first time the legal and compliant production and marketing status of new types of tobacco such as e-cigarettes in China.

The revised regulation, issued by the State Council on November 26, implements the main body and direction of e-cigarette supervision, which the market believes means that regulators will not adopt an across-the-board approach to the domestic e-cigarette industry, but will manage with reference to traditional tobacco. this will promote the healthy development of the industry under orderly supervision.

Can you speed up applying for a permit?

From the perspective of the specific amendments, the "implementation regulations" and "Article 65" are on the ground, benefiting e-cigarette manufacturers with higher production standards and technical standards. However, the brand end, channel end, national standard and tax rate and other elements of e-cigarette still need to be clearly defined in the follow-up supporting rules of the implementation regulations.

The official inclusion of e-cigarettes in tobacco monopoly regulations is likely to show that the pace of e-cigarette and new tobacco-related standards and regulatory policies is accelerating, according to a research report released by Citic Construction Investment.

For the macro direction of the follow-up regulatory rules, a number of brokerages believe that they can refer to the State Council Circular on deepening the Reform of "Certificate Separation" (Guofa (2021) No. 7) issued by the State Tobacco Monopoly Administration on November 25, referring to "inclusive and prudent supervision of new technologies, new industries, new business type, new models, etc., tailored to the regulatory model".

In September 2018, the State Council decided to push forward the reform of "license separation" throughout the country, with the aim of further clarifying the relationship between the government and the market, comprehensively reforming the examination and approval methods, streamlining enterprise-related licenses, and strengthening comprehensive supervision during and after the event. we will further create a stable, fair, transparent and predictable market access environment, transform pre-examination and approval to strengthening supervision during and after the event, and strengthen comprehensive supervision.

On May 27, 2021, the State Council issued a circular calling for deepening the reform of "separation of licenses and licenses", clearly proposing that from July 1, 2021, the management system of full coverage list of licensed items related to enterprises should be implemented nationwide, and strive to establish industry quasi-camp rules that are simple, efficient, fair, transparent and strictly regulated by the end of 2022, so as to greatly improve the convenience and predictability of market entities.

In the notice of the State Council on May 27, the State Council also issued the Reform list of Enterprise-related Business license items set at the Central level (2021 National Edition). The items in the list need to be optimized and reformed as required, and enterprises shall not be restricted in violation of regulations outside the list.

Among them, there are mainly eight items related to the tobacco industry: first, the establishment of tobacco purchasing stations (sites) for examination and approval; second, the establishment, division, merger and revocation of examination and approval of tobacco products production enterprises; third, the issuance of licenses for tobacco monopoly production enterprises; fourth, examination and approval for the establishment of tobacco monopoly production enterprises with foreign investment. Fifth, the establishment, division, merger and revocation of examination and approval of tobacco products wholesale enterprises; sixth, the issuance of tobacco monopoly wholesale enterprise licenses; seventh, the issuance of tobacco monopoly retail licenses; eighth, the approval and issuance of tobacco monopoly license.

The reform mode of the above eight contents is to "optimize the examination and approval service", and the specific reform measure is to reduce the time limit for examination and approval: if the applicant voluntarily promises to meet the licensing conditions and submit materials as required, the licensing decision shall be made on the spot by the tobacco monopoly administrative department.

It is worth noting that the implementation regulations of the State Council on November 26 mentioned that "e-cigarettes and other new tobacco products shall be implemented with reference to the relevant provisions of these regulations", and the wording of "reference" is obviously different from that of "in accordance with". Leave room for operation on subsequent undecided matters.

Market policy observers believe that the definition of the national standard for e-cigarettes is likely to be the first to land, followed by the detailed rules of channel regulation, and the formulation of the tax rate range that has the greatest impact on the industry is likely to be settled at a later stage.

Wall Street learned that on November 12, atomization brand companies such as RLX Technology Inc., Platinum and low temperature Materia Medica participated in the consultation meeting on the national standard for e-cigarettes. During the meeting, a preliminary discussion was made with all parties concerned on the definition of e-cigarette, additives, nicotine content and so on.

According to a research report released by Zheshang Securities, "after the implementation of the national standard, all kinds of negative public opinion on e-cigarettes is expected to end, and will accelerate the clearance of small workshops in the industry."

Tianfeng Securities believes that "in the later stage, the research on the tax system of atomized e-cigarettes and other new tobacco products will be similar to China's traditional cigarettes."

The share price of Yueke, the leader of the industry, has soared.

At present, the regulatory environment at home and abroad is relatively friendly to e-cigarettes, which forms a policy support for industry leaders.

October 13, 2021, the United States FDA (Food and Drug Administration: Food and Drug Administration) for the first time authorized the legal sale of e-cigarette products in the US market, allowing British American Tobacco PLC's RJ Reynolds tobacco to sell tobacco

Taste Vuse Solo Power Unit, Vuse Replacement Cartridge Original 4.8% G1 and Vuse Replacement Cartridge Original 4.8% G2 three products, while rejecting the other 10 flavored cigarettes, peppermint flavor application is still under evaluation.

From the update of the approval progress of FDA, it can be seen that FDA recognizes that e-cigarettes have harm-reducing properties compared with traditional tobacco, and has a positive demonstration effect on the US and global e-cigarette markets; non-flavor cigarettes (especially tobacco flavor) are more policy-friendly; VuseSolo is one of the first products to be submitted for review, and the approval time of other brands in the United States may be approaching, JUUL, NJOY,

Leading brands such as Logic are expected to speed up the review.

International tobacco giants take the new type of tobacco as the focus of strategic research and development, and the global reform of new type of tobacco has become a trend.

By 2025, Philip Morris International Plan smokeless products will account for 50% of revenue, currently 28%, and Q1-Q3 will grow by 38% in 2021. British American Tobacco PLC plans to generate 5 billion pounds in new tobacco revenue in 2025, an increase of 40% in H1 in 2021, and a compound growth rate of 28% in 2021-2025.

According to steam dynamic data, the global e-cigarette industry market sales reached 42.4 billion US dollars in 2020, an increase of 15.6% over the same period last year. The number of smokers in China ranks first in the world, but the penetration rate of e-cigarettes is only 0.6%. It is estimated that there is still room for improvement in the size of the market.

Tianfeng Securities believes that this regulation clearly defines the regulatory main body and direction of atomized e-cigarettes, and the landing of supervision will effectively push up the industry threshold, enhance concentration, and benefit the leading enterprises in the upstream and downstream of the industry.

Zheshang Securities believes that from the development ideas of overseas e-cigarette giants, the development of the new tobacco industry has ushered in a golden era. "it is possible to lay out high-quality supply chain companies with core technical barriers, such as Huabao International (heating not burning full card position layout), Smoore International Holdings Limited (atomization technology core company), and so on."

Wall Street noticed that the State Council's "implementation regulations" was approved on November 10. From that day to November 26th, Yueke (RLX Technology Inc.: RLX), the leader of domestic atomized e-cigarette brand, rose by 32.45%.

If we analyze the industrial chain, we can find that it is mainly in two directions:

First, the HNB (heating not burning: Heat Not Burning) industrial chain: leading for Huabao International / shares (domestic tobacco flavor leader, new sheet only private license), Jinjia shares (domestic tobacco brand leader, the only strategic cooperation with Yunnan tobacco private enterprises), forward-looking layout of herbal HNB Shunhao shares and so on.

Second, the atomization industry chain: Smoore International Holdings Limited (global atomization equipment manufacturer leader), RLX Technology Inc. (Yueke: domestic atomization e-cigarette brand leader), Ashder (domestic atomization channel leader) and so on.