FDA official announced that it rejected the PMTA of all JUUL products, while the three major brands through PMTA are all big customers, and the US market situation has improved much better than expected. We think that considering the recognition of VUSE brand by FDA and the excellent harm reduction of FEELM ceramic core, the passing of VUSE alto is still a high probability event.
It is conservatively assumed that the taste of peppermint-menthol is banned, and Smallville's overseas income is expected to reach 25%-30% CAGR in 3 years. It is highly recommended that the inflection point of overseas operation is established, or it is the best time for layout. Maintain a "buy" rating.
JUUL applied for PMTA was rejected, the U. S. market pattern improved much more than expected. On June 23, FDA announced that it had rejected a PMTA submitted by JUUL, a US head e-cigarette brand (36.0% of the end market in 2021), involving a cigarette rod and four tobacco-menthol-flavored cartridges. The main reasons for FDA's refusal to authorize are: 1) insufficient and self-contradictory data in toxicological tests, lack of sufficient evidence of harm reduction; 2) Marketing is highly attractive to teenagers; the potential risk of being used in combination with third-party cigarette sticks can not be avoided. Up to now, FDA has authorized 23 SKU PMTA from VUSE (35.9% of the end market in 2021), NJOY and LOGIC. The three major brands are all big customers, of which the core products of NJOY and LOGIC have been approved by PMTA, and they are all Semor ODMs. VUSE's core product Alto (ceramic core, Semoll ODM) is still under review. Even so, it is a fact that the US cigarette market has changed in a direction that is extremely beneficial to Seymour.
The trial of VUSE alto is still a high probability event. Main reasons: 1) VUSE brand has been recognized by FDA: as the initiator of taste marketing to attract teenagers, JUUL brand is plagued by negative public opinion and lawsuits, there is a greater risk in its PMTA review, and VUSE Solo is the first PMTA-approved e-cigarette, and then VUSEVibe&Ciro two products have been tested one after another, fully indicating FDA's recognition of the VUSE brand. 2) FEELM ceramic core has been approved by FDA: NJOY Ace products with FEELM ceramic core have been approved, which shows that the safety and harmfulness of ceramic core technology have been approved by FDA. To sum up, we think that the Alto series with more advanced indicators is less likely to pass the PMTA.
Under the assumption that peppermint-menthol flavor is banned, overseas income is still expected to reach 25% CAGR 30% in 3 years. FDA regulation is significantly tighter, we conservatively assume that peppermint-menthol flavors are also banned, then look at the 3-year dimension, taking into account the demand brought by the banned taste first hit and then recover (3-year CAGR 0%), and whether JUUL will bring the space to double the US market share. Semoll American cigarette revenue is expected to reach about 25% in 3 years CAGR, which is expected to fluctuate greatly from year to year. After superimposing Xiaoyan and APV, CBD&THC and other businesses in the European market, overseas revenue is expected to reach 25% to 30% in 3 years, and the pattern is greatly optimized.
The inflection point of overseas operation is expected to come ahead of schedule, which may be the best layout time in the medium and long term. We have repeatedly stressed that the safest layout of Si Moore lies in the full release of regulatory risks brought about by VUSE alto's approval of PMTA and peppermint-menthol flavors and the expected inflection point of overseas operations. The current domestic policy is fully in line with expectations, and the logic of Q4 domestic valuation is gradually clear; JUUL failed to bring more changes to the overseas competition pattern through PMTA, the expected inflection point of overseas operations came ahead of schedule, and the valuation is expected to continue to be repaired.
Risk factors: VUSE alto and menthol flavors failed to replace the PMTA; subversive atomization technology path; the industry was more regulated than expected; and new tobacco products were in the tax increase channel.
Investment suggestion: we maintain the adjusted net profit forecast of 3.91 billion / 4.67 billion / 5.59 billion yuan from 2022 to 2024, which is-29.9% compared with the same period last year, corresponding to EPS0.65/0.78/0.93 yuan. With the full release of overseas regulatory risks and the establishment of the inflection point of business expectations, the valuation is expected to be repaired to 30xPE to match the growth and pattern optimization of overseas business, maintaining the target price of HK $29, corresponding to about 30xPE in 2023, and maintaining the "buy" rating.