China's Bolton revenue rose 23.4% year-on-year to 2.286 billion yuan in 2021. E-cigarette business revenue recorded 51.5% year-on-year growth, while flavor enhancer business revenue slightly increased 1.5% year-on-year. In the second half of 2021, the company's revenue rose 5.9% year-on-year to 1.082 billion yuan. In 2021, the after-tax profit of the company increased by 30.2% year-on-year to 226 million yuan, and the net profit of shareholders increased by 57.4%.
We believe that the continuous promotion of domestic e-cigarette regulatory rules will contribute to the sustainable and healthy development of the industry as a whole. The measures for the Administration of E-cigarettes will come into effect on May 1, 2022. The national standard of E-cigarettes (GB 41700-2022) was approved on April 8, 2022 and will come into effect on October 1, 2022. Key regulatory updates: I) the sale of flavored e-cigarettes except tobacco flavor will be banned; ii) synthetic nicotine in e-cigarette oil should be banned, and the nicotine concentration in e-cigarette oil should be less than 2%; and iii) the number of licensed additives was reduced from 122 to 101, but two coolants and one sweetener were added.
Maintain the "collection" and lower the target price to HK $4.00. We have lowered our revenue forecasts by 17.7% and 24.8% from 2022 to 2023, respectively. We expect that after the ban on non-tobacco flavor e-cigarettes comes into effect, the sales of e-cigarettes in the domestic market will be negatively affected in the short term. However, we believe that, compared with traditional tobacco, the logic of e-cigarette products as harm reduction products is still clear. Our target price is equivalent to 16.2x / 13.6x / 11.5x 2022-2024.
Review of China Bolton's Annual performance in 2021
Revenue in 2021 grew 23.4% year-on-year, but lower than expected. The revenue of China Bolton (the "company") in 2021 increased by 23.4% year-on-year to 2.286 billion yuan, 8.2% lower than we expected. E-cigarette business revenue recorded 51.5 per cent year-on-year growth, while aroma enhancer business revenue slightly increased 1.5 per cent year-on-year to 729 million yuan. In the second half of 2021, the company's revenue increased 5.9% year-on-year to 1.082 billion yuan, of which revenue from e-cigarette business and flavor enhancer business increased by 13.2% and-9.0%, respectively. In 2021, e-cigarette sales revenue and flavor enhancer sales revenue accounted for 53.1% and 31.9% of the total revenue, respectively, making them the largest and second largest source of income, respectively. In 2021, the company's sales revenue of food flavors rose 13.7% year-on-year to 166 million yuan, while revenue from daily flavor fell 9.9% to 138 million yuan.
The profit fell short of expectations. In 2021, the company's gross profit rose 15.2% year-on-year to 892 million yuan, while gross profit margin fell 2.8% year-on-year to 39.0%, mainly due to rising raw material costs. The company's sales and marketing expense rate fell 0.7 percentage points to 6.3%, and the administrative expense rate fell 1.2 percentage points to 15.7%. Including an impairment loss of 14.5 million yuan in 2020 and 30.5 million yuan in 2021, the company's operating profit increased by 13.8 percent to 360 million yuan. China Bolton's shareholder net profit rose 57.4% to 184 million yuan in 2021, mainly due to rising net interest rates and a lower share of profits attributable to non-controlling interests. The company does not pay a dividend of 2021.
General situation of industry
The cigarette production and total operating income of China's tobacco industry will maintain a moderate growth in 2021. According to China's National Bureau of Statistics, China's total cigarette production in 2021 increased by 1.3% year-on-year to 2.4182 trillion cigarettes, equivalent to 48.4 million cases. At the same time, the total revenue of China's tobacco industry increased by 6.6% year-on-year to 1.2132 trillion yuan. The rising potential of revenue in China's tobacco industry reflects the steady growth in demand for flavor enhancers.
With the continuous growth of China's traditional tobacco industry, tobacco tax reached an all-time high in 2021. According to the data of the State Tobacco Monopoly Bureau, the total industrial and commercial taxes and profits of the tobacco industry in 2021 increased by 6.1% year-on-year to 1.3581 trillion yuan, while the total amount of finance turned over was 1.2442 trillion yuan, an increase of 3.4% over the same period last year. China's tobacco is closely regulated by law and operated by state-owned tobacco companies, so the development of the tobacco industry is usually stable. Due to China's moderate tobacco control policy and relatively high smoking rate, we expect the traditional tobacco industry to grow at a constant rate in the next few years, mainly driven by improved product mix.
Closed electronic atomization equipment occupies the dominant position in the e-cigarette market, and its dominant position is expected to be maintained. According to Frost Sullivan's independent market research report released in March 2022 (hereinafter referred to as the Sullivan report), between 2017 and 2021, the global market for electronic atomization equipment maintained a compound growth rate of about 23.4% at ex-factory prices, and is expected to grow at a compound growth rate of 25.3% from $11.5 billion in 2022 to $28.2 billion in 2026. Between 2017 and 2021, at ex-factory prices
Regulatory update
China's restrictions on new tobacco products, such as e-cigarettes, have been tightened as scheduled. In November 2019, the State Administration of Market Supervision and Administration and the State Tobacco Monopoly Administration issued a notice on further protecting minors from e-cigarettes to prevent consumers from buying e-cigarettes through e-commerce channels. In March 2021, the Ministry of Industry and Information Technology of the people's Republic of China added a clause to the regulations on the implementation of the Tobacco Monopoly Law of the people's Republic of China: "Electronic cigarettes and other new tobacco products shall be implemented with reference to the relevant provisions of these regulations on cigarettes."
According to the State Administration of Market Supervision and Administration (State Standardization Administration), the national standard of E-cigarette (GB 41700-2022) was approved on April 8, 2022 and will come into effect on October 1, 2022. (source: national Standard Information Public Service platform). On March 11, 2022, the State Tobacco Monopoly Administration promulgated the measures for the Administration of E-cigarettes and the national standard for E-cigarettes (the second draft for soliciting opinions) and openly solicited opinions. Among them, the measures for the Administration of E-cigarettes will be implemented on May 1, 2022, and the public consultation stage of the national standard for E-cigarettes (the second draft for soliciting opinions) ended on March 17, 2022. Article 26 of the measures for the Administration of Electronic cigarettes emphasizes that the sale of flavored e-cigarettes other than tobacco flavor and e-cigarettes that can add their own atomization are prohibited. The national standard of "Electronic cigarette" (the second draft for soliciting opinions) published this time is mainly updated as follows: I) the characteristic flavor of the product should not present any flavor other than tobacco; ii) the electronic cigarette set and cigarette cartridge using electronic cigarette liquid should have a closed structure to prevent artificial filling. Electronic cigarette sets and cartridges using electronic cigarette liquid should be well sealed and should not leak; iii) electronic cigarette sets should have a protective function against child startup and accidental start-up; and vi) the number of additives can be reduced from 122to 101, but 2 coolants and 1 sweetener have been added. In addition, the use of synthetic nicotine in e-cigarette oil is prohibited, and the concentration of nicotine in e-cigarette oil should be less than 2%.
We believe that the continuous promotion of domestic e-cigarette regulatory rules will contribute to the sustainable and healthy development of the industry as a whole. The domestic e-cigarette regulatory rules are constantly promoting the landing, and the restrictions on flavored e-cigarettes will significantly reduce the attractiveness of e-cigarettes in the domestic market. However, we believe that with the introduction of the measures for the Administration of E-cigarettes and the promulgation of the follow-up implementation rules, the export business of e-cigarettes will achieve rapid development in the global market in a more definite policy environment. Generally speaking, based on the previously published national standard of "e-cigarette" (draft for soliciting opinions), we believe that compared with traditional tobacco, the logic of e-cigarette products as harm reduction products is still clear.
Profit forecast adjustment
We lowered our profit forecast. We cut our revenue forecasts for 2022-2023 by 17.7% and 24. 7%, respectively. 8% to 2.607 billion yuan and 2.917 billion yuan, mainly because the restrictions on flavored e-cigarettes are expected to significantly reduce the attractiveness of e-cigarettes in the domestic market, we have lowered our revenue assumptions for our e-cigarette products; taking into account our revenue forecast adjustment and raw material cost pressure, we lowered the profit margin assumption We have lowered China Bolton's profit forecasts for 2022-2023 by 29.3% and 43.6%, respectively. We predict that the shareholder net profit of the company from 2022 to 2024 will be 217 million yuan, 260 million yuan and 305 million yuan respectively.
Maintain the "collection" and lower the target price to HK $4.00. We expect that after the ban on e-cigarettes for non-tobacco flavors (especially fruit flavors) comes into effect, the sales of e-cigarettes in the domestic market will be negatively affected in the short term. However, we believe that, compared with traditional tobacco, the logic of e-cigarette products as harm reduction products is still clear. China's e-cigarette industry is facing a new era. Companies that do not comply with or comply with the new national regulations and standards will be eliminated. This will be the process of survival of the fittest. We believe that the continuous promotion of domestic e-cigarette regulatory rules will contribute to the sustainable and healthy development of the industry as a whole. Our target price is equivalent to 16.2x / 13.6x / 11.5x 2022-2024.