The Zhitong Finance App learned that Anxin International released a research report stating that it maintained the “buy” rating of Smore International (06969) and lowered the target price to HK$8.1. Combined with the decline in short-term performance, net profit for 24/25/26 was lowered to 19.6/20.5/2.11 billion yuan, respectively, and the corresponding EPS was HK$0.35/0.37/0.38, respectively. The bank believes that the policies of China and the US are clear, and there is not much room for performance to decline. Despite possible policy changes in Europe, disposable products are currently maintaining good growth. The worst time for the company should be over, and it is expected to maintain steady growth in the future.

Anxin International's main views are as follows:

European and other markets continued to grow, with single-use products being the main driver of growth.

Revenue from Europe and other markets reached $5.07 billion in '23, an increase of 8.9% over the previous year. The company launched the upgraded feelmmax ceramic atomization core platform in the first half of the year and achieved large-scale shipments, effectively boosting disposable product sales and product gross profit margin. Revenue from disposable products reached 3.37 billion in '23, accounting for 30% of revenue. The share of disposable products will continue to increase in the future and will be the main driving force for revenue growth.

The US market is constrained by non-compliant markets, and growth is slowing.

The company's 2B business revenue in the US in '23 was $4.08 billion, an increase of 8.2% over the previous year. Although it ended last year's downward trend, the growth rate in the second half of the year slowed compared to the first half of the year. The sales scale of disposable e-cigarettes in the US market has reached 50%. The suppression of the compliance market by the non-compliant market is obvious, and subsequent development depends on the strengthening of FDA enforcement efforts. Currently, SMOORE serves the largest number of PMTA-certified customers (Japanese tobacco, NJOY, and a small number of British American tobacco products).

The domestic market has bottomed out.

The revenue of the company's 2B products in China in 2023 was 160 million, down 93% from the previous year. The national standard for e-cigarettes was officially implemented on October 1, '22, and the e-cigarette consumption tax was implemented thereafter, leading to a sharp contraction in the domestic e-cigarette market. At present, the domestic market should have bottomed out, and the company's domestic sales have rebounded slightly since the second half of the year. Subsequent developments, however, still await policy changes.

APV products performed well.

In '23, the company's APV product revenue was $1.85 billion, an increase of 26% over the previous year. The VAPORESSOCOSS series and VAPORESSOARMOUR series have been introduced in overseas markets one after another. They have an innovative automatic liquid injection function, an automatic charging function, and a longer service life, and have attracted market attention.

Continue to invest in R&D.

In '23, the company spent 1.48 billion yuan on R&D, accounting for 13.3% of revenue, an increase of 110 million over the previous year. Research and development related to e-cigarettes and special use products declined year-on-year, and research and development of atomized medical and atomized beauty products increased. The MOYAL Lanzhi brand and first-generation atomized beauty product solution were launched in Q1 in '24. This product became the first beauty product in the industry to atomize high-viscosity skincare essences. Nebulized medical products are still being developed.

Gross margin picked up in the second half of the year.

The gross profit margin in '23 was 38.8%, down 4.5 pct year on year. There was a big difference in the first half of the year. The gross profit margin in the second half of the year was 41%, with a clear recovery. The main reason for the recovery in gross margin was large-scale shipments of disposable products with ceramic cores, which increased the gross profit margin of disposable products. However, the gross margin of disposable products is still lower than that of turnover. In the future, as the share of disposable products continues to increase, gross margin will still be under downward pressure in the long run.

Risk warning: policy changes, non-compliant market shocks, increased industry competition.