Bolton, China: The company, one of the market leaders in the fragrance and e-cigarette industry, was founded in 1991 and listed on the Hong Kong Main Board in 2005. It is the first company in the Chinese flavor and fragrance industry to be listed in Hong Kong. Over the past 30 years, the company has continued to cultivate the fragrance and essence industry chain, and its business has achieved full coverage of tobacco, food and daily essences. In 2016, the company completed the acquisition of Jirui e-cigarettes and officially set up the e-atomizer market.
Industry Analysis: Deepening the Whole Industry Chain of Flavors, Fragrances, and Novel Tobacco
1. New tobacco industry: demand is on the rise, regulations are speeding up the supply-side pattern and optimizing the demand side: the growth rate of the novel tobacco market in 2021 returned to an upward channel after the pandemic. According to Euromonitor International data, global sales of novel tobacco reached US$54.57 billion in 2021. In the context of the global epidemic being gradually controlled, the year-on-year growth rate reached 30.0%, returning to the high growth range before the pandemic.
Supply side: Major countries and regions around the world have implemented regulatory measures for atomized products one after another. We believe that with the gradual implementation of regulations, the entry threshold for the industry will rise further, and the concentration of the industrial chain is expected to accelerate in the future. At the domestic level, the National Tobacco Monopoly Administration issued the “E-cigarette Management Measures” in March 2022. Among them, products that meet the new national standards will be officially sold on October 1, 2022.
2. Fragrance and fragrance industry: Downstream demand is segmented, and the concentration of China's fragrance companies is low: 1) In the fragrance manufacturing process, leading enterprises have significant barriers and advantages. The more resources they have, the better the fragrance manufacturers can serve customers; 2) The brand effect is remarkable: fragrance manufacturers will collaborate with upstream and downstream enterprises in fragrance development and trial production, and determine long-term supply and demand relationships on this basis. To ensure flavor stability, upstream fragrance suppliers are usually not easily changed, thus forming a fixed brand effect.
Bolton, China: Multi-purpose flavors, fragrances & e-cigarette products, dual wheel drive 1) Scent enhancers: Strengthening of scientific research strength+expansion of business outreach, and steady, moderate and positive performance. Currently, Shenzhen Bolton manufactures and sells as many as 2,000 kinds of tobacco flavors, natural flavors, synthetic fragrances, biotech fragrances, etc. Among them, the core product tobacco essence has fully covered 18 domestic tobacco companies.
2) Food & Daily Essences: Promoting internally and externally to consolidate R&D capabilities. Dongguan Bolton's two core technology centers have jointly built five major platforms for chemical analysis, organic synthesis, biocatalysis, phytochemistry, and microcapsules. At the same time, the company plans to split Dongguan Bolton and prepare for its A-share listing on the Shenzhen Stock Exchange, and promised that Dongguan Bolton's revenue and net profit from 2020 to 2024 will maintain an annual growth rate of no less than 10%.
3) New biotechnology fragrance products: Forward-looking layout of synthetic biology technology platforms. Shanghai Bolton focuses on exploring biosynthesis and manufacturing technology for high-value-added natural compounds, deeply integrating biotechnology with traditional flavors and fragrances across borders to form new biotechnology fragrance products including biological manufacturing of fragrance raw materials, nucleic acid traceability of unknown components, microbial bacteriostatic agents, and biosimilar incense production.
4) E-cigarette products: The overall industry chain layout has obtained eight tobacco monopoly manufacturer licenses: At present, the company has obtained a series of licenses for e-cigarette oil, the production of e-cigarettes for its own brands (which also includes the production of e-cigarettes on behalf of customers), and the holding of e-cigarette brands, and sells to tobacco companies, independent e-cigarette manufacturers and other customers under various brands, covering end users from many countries around the world.
Profit forecasting and investment advice
We believe that with the implementation of domestic supervision, the advantages of the integrated layout of the company's industrial chain are outstanding, which is expected to further promote the layout of domestic and foreign channel networks. We expect the company's revenue for 23-25 to be 27.4/31.5/3.56 billion, and net profit to be 29/37/41 million yuan; PE corresponding to 23-25 is 9.5/7.5/6.7X. Based on the company's scarcity as a listed company that simultaneously lays out the domestic e-cigarette industry chain and flavors, we gave it 17 times PE in 2023, corresponding to a target market value of 4.91 billion yuan (corresponding to 5.60 billion Hong Kong dollars, 1 Hong Kong dollar is about 0.876 yuan), and the target price was 4.55 yuan (corresponding to 5.2 billion Hong Kong dollars, 1 Hong Kong dollar is about 0.876 yuan). It was covered for the first time, giving a “buy” rating.
Risk warning: market development falls short of expectations, policy risk, international trade risk, new tobacco sector business falls short of expectations