Incident: The company announced its 2023 results. In 2023, the company achieved revenue of 11.17 billion yuan, a year-on-year decrease of 8.0%; net profit of 1,645 billion yuan, a year-on-year decrease of 34.5%.
Profit declined in 2023 due to product structure and the mainland Chinese market, and overseas revenue grew faster? By sector, in 2023, the company achieved revenue of 9.321 billion yuan (accounting for 83.5%), a year-on-year decrease of 12.7%, mainly due to the short-term impact on demand after the implementation of the domestic “e-cigarette management measures” and the national e-cigarette standard. The company's sales revenue in the mainland China market in 2023 was about 163 million yuan, a year-on-year decrease of 92.7%; sales to retail customers (APV) achieved revenue of 1,847 billion yuan (accounting for 16.5%), a year-on-year increase of 26.0%, mainly due to the company in 2023 Many differentiated products were launched year after year, and comprehensive expansion was carried out in terms of digital marketing, further stepped up overseas market development efforts, and completed the construction of local teams in major markets. In 2023, the company's disposable products achieved revenue of 3.37 billion yuan, an increase of 74.5% over the previous year, accounting for about 30.2% of revenue.
By region, Europe and other markets are the largest sales regions, achieving revenue of 5,074 billion yuan in 2023, up 8.9% year on year, accounting for 45.4%; followed by the US (considering products transferred through Hong Kong, China), which achieved revenue of 4.084 billion yuan in 2023, up 8.2% year on year, accounting for about 36.6% of sales, up 5.5 pct year on year; the mainland China market accounted for 1.5% of sales, down 17 pcts year on year. In terms of profit level, gross margin was 38.8% in 2023, a year-on-year decrease of 4.5 pct; the decline in gross margin was mainly due to a decline in revenue in the mainland China market with high gross margin and an increase in the share of revenue from disposable electronic atomization products with low gross margin.
R&D reserves and plans: The company continues to increase R&D investment. In 2023, the company's R&D expenditure was 1,483 billion yuan, an increase of 8.1% over the previous year, accounting for 13.3% of revenue. Among them, R&D expenses for atomized medical treatment and atomized beauty products were 278 million yuan, an increase of 67.4% over the previous year. The company launched the MOYAL Lanzhi brand and first-generation atomized beauty product solutions in the first quarter of 2024, making it the first beauty product in the industry to atomize high-viscosity skincare essences. In 2023, the company continued to maintain its position as the world's largest manufacturer of electronic atomization equipment, reaching a market share of about 13.7%, a year-on-year decrease of 4.4 pcts.
E-cigarette “tobacco-like regulation” is trending, and it is difficult to pass flavor reviews. As of February 5, 2024, the FDA has received more than 26 million product applications and completed the review of more than 99% of the applications, and has approved 23 types of tobacco-flavored electronic atomization products and devices. Judging from regulatory trends, we believe that the probability of “flavored products” passing the review is low. In the later stages, the US market may be dominated by tobacco flavors, and Vuse Alto tobacco-flavored products are expected to be marketed later. We believe that in the short term, due to poor FDA enforcement, non-compliant disposable products are illegally sold in the US market, temporarily squeezing market demand for compliant products; in the medium to long term, we believe that the “tobacco-like management” trend in the US e-cigarette market is trending. The resources and technical reserves of big brands and companies can cope with rising entry thresholds and regulatory costs in the context of stricter regulations, and the competitiveness and market share of leading brands is expected to continue to increase.
Profit forecasts and investment advice
We believe that as a global leader in providing atomization technology solutions, the company's barrier advantages continue to be highlighted. Against the backdrop of increasingly strict regulations, it is expected that the concentration of the industrial chain may increase at an accelerated pace. As the mainland China market continues to be sluggish due to illegal products and disposable products lower overall profit margins, we lowered the company's adjusted net profit for 2024-2026 to 16.64/20.71/2,462 billion yuan (the value was 21.02/2,672 billion yuan before 24/25), an increase of 1.16%/24.46%/18.88% year-on-year. Maintains a “buy” rating based on the company's technology and leading edge.
Risk warning: Risk of changes in new tobacco policies, risk of changes in US FDA regulations, risk of sales falling short of expectations, risk of consumer expansion falling short of expectations, risk of company capacity building falling short of expectations, risk of new technology development falling short of expectations, risk of price changes, exchange rate risk.