Event: on October 3, 2018, the company issued a "Disclosure transaction relating to the Sale of VMR PRODUCTS LLC", which mentioned that the company had entered into a sale agreement with JUUL, merged subsidiaries and agents to sell to JUUL the controlling interest in VMR held indirectly through subsidiaries, which was approximately 62.7%, with an initial price of US $7.5 million. A further announcement on the sale of VMR PRODUCTS LLC was issued on October 10, announcing that the final cost after the completion of the financial adjustment was $50 million.
Sell liabilities and assets, return funds to optimize profitability
In February 2015, the company subscribed to VMR51%, a US e-cigarette company, for a total cost of HK $178 million (US $22.95 million), which has since increased to 62.7 per cent, according to the company's announcement. VMR is an independent e-cigarette R & D, production and sales company, and one of the leading e-cigarette online retailers in the United States. This part of the business first contributed revenue to the company's new tobacco business in fiscal year 2016, but so far the company has issued a sale announcement, with a turnover of $26.3 million and a net loss of $6.4664 million for VMR, and VMR has yet to generate a profit for the company.
As of September 30, 2018, VMR had total assets of $13.29 million and net liabilities of $18.156 million. And since the acquisition, the company's accumulated losses and goodwill impairment recognized in previous fiscal years have reached $25.28 million. According to the further announcement on the Sale of VMR PRODUCTS LLC, the Company estimates approximately $1.67 million as an adjustment to the final consideration, so the portion of the final cost to be collected from counterparty Juul is unlikely to be less than $31.35 million based on the final cost of $50 million. The recovery price can make up for the company's related losses, and the removal of debt assets will be conducive to the optimization of the company's profitability.
The trend of integration of the international e-cigarette market has been obvious. According to the company announcement and the VMR official website of the target company, the transaction with the counterparty JUUL, the original resources of the target company are of high quality, and its products are sold offline in more than 30 countries, covering more than 1 million customers worldwide. One of the company's original intentions to acquire VMR is to obtain its extensive distribution of sales channels overseas. Counterparty JUUL is the largest e-cigarette company in the United States, and JUUL has a 68% market share in the United States as of June 2018, according to Nielsen data. We believe that through the acquisition of VMR and the integration of its own resources, JUUL is expected to consolidate its leading position in the US market, while laying the foundation for its expansion into other countries.
Avoid market risk and concentrate resources for advantageous business
According to the company announcement, in addition to reducing debt, the company sold the target out of uncertainty about future regulation and rapid changes in new tobacco products. We believe that, 1) from the current international regulatory attitude towards new tobacco is still changing, and domestic regulation on new tobacco is still accelerating the launch of two major trends, combined with this part of the company's new tobacco business related to e-cigarettes has lost money for two consecutive years, the company's sale of the mark can indeed avoid relevant policy risks; 2) the new tobacco market has developed rapidly in recent years, and the product form is also changing rapidly. The company's advantage business is the tobacco raw material business, and the applicable direction of its main product recycled tobacco flakes is the heated non-combustible tobacco cartridges in the new tobacco products. Compared with the e-cigarette business which has not yet contributed to the performance, the concentration of resources on the existing advantages of the business may be more powerful for the overall development of the company.
Profit Forecast and Investment suggestion (in RMB): we estimate that the company's revenue from 2018 to 2020 will be 44.18,52.05 and 6.104 billion yuan respectively, the net profit will be 18.63,24.25 and 3.094 billion yuan, the EPS will be 0.55,0.71,0.91 yuan, and the corresponding PE of the current market capitalization is 7,6,4 times. Based on the company's leading advantages and R & D strength in China's flavors and fragrances, scale advantages and first-mover position in the field of tobacco raw materials, as well as the synergy between its own technology and channel advantages and new tobacco business, we compare the price-to-earnings distribution of comparable companies in the same industry. We value the company at 12 times earnings over 18 years, with a target price of 6.6 yuan (HK $7.62 at the exchange rate of August 25, 2018), maintaining a "buy" rating.
Risk hint: the sale process is not as expected, policy risk, exchange rate risk
