Incident: The company released the 2024Q1 financial update. After preliminary review, 2024Q1 achieved profit after tax of 340 million yuan, an increase of 12.8% over the previous year, laying the foundation for the full year of 2024 performance growth.
Domestic and international e-cigarette regulations have been strengthened to benefit the sales of leading brands in the US market: Since December 2023, the FDA has issued sales prohibitions (MDos) for more than 20,000 flavors of e-cigarettes. By April 15, 2024, the FDA had received more than 26 million product applications and completed the review of more than 99% of them, and 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. With the general trend of “tobacco-like management” in the US e-cigarette market, 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.
Chinese market: On March 18, 2024, the Office of the State Tobacco Monopoly Administration issued a notice on carrying out a special inspection to regulate the order of the e-cigarette market in 2024. This special inspection will last for 4 months. From April 1 to June 30, it will focus on mapping out clues about uncertified market players illegally operating e-cigarettes, cooperating with relevant government departments to shut down and ban all illegal market players that are unlicensed to manufacture and operate e-cigarettes, and prosecute responsibility for illegal violations in accordance with the law. Domestic compliant products are expected to benefit.
The global electronic atomization equipment market continues to grow at a high rate. According to the Frost Sullivan report, the global electronic atomization equipment market size is 14.5% CAGR in 2019-2023, and the CAGR is expected to be 11.5% in 2023-2028, of which the closed/open/special purpose electronic atomization equipment market size is 19.0/ 4.7%/24.9% respectively. The CAGR for 2023-2028 is expected to be 14.8%/ 2.9%/10.9%.
The company successfully resumed growth in the second half of 2023 in the US market by establishing local warehouses, strengthening channel sinking, and improving product matrices. At the same time, the company continued to increase investment in R&D. The R&D expenditure in 2023 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.
As the world's largest manufacturer of electronic atomization equipment, the company's market share in 2023 is about 13.7%. It is expected to benefit from the continuous expansion of the electronic atomization equipment market in the future, and the increase in performance can be expected.
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. We expect the company's net profit for 2024-2026 to be 16.64/20.71/2,462 billion yuan, 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.