Incident: On June 21, local time in the US, the Food and Drug Administration (FDA) approved the sale of four types of e-cigarette products in the US through the Pre-marketing Tobacco Product Application (PMTA). FDA issued marketing authorization orders to NJOY LLC for four mint-flavored e-cigarette products—NJOY ACE Pod Menthol 2.4%, NJOY ACE Pod Menthol 5%, NJOY DAILY Menthol 4.5%, and NJOY DAILY EXTRA Menthol 6%.
Non-tobacco-flavored e-cigarettes were approved for the first time, and the direction of market compliance supervision was gradually clarified. June 21, marketing authorization for four mint-flavored e-cigarette products marked the first time that the FDA approved non-tobacco-flavored e-cigarette products. Previously, the FDA was concerned about the risk of young people using all e-cigarettes, and in particular, strictly restricting non-tobacco-flavored products for flavoring products that are more attractive to young people. However, after a rigorous scientific review, the FDA believes the evidence for the benefits of adult smokers switching completely to less harmful products is strong enough to offset the risk to young people. Although the authorization does not apply to any other mint-flavored e-cigarette products, and the FDA reserves the right to suspend the withdrawal of the authorization, we believe that this authorization represents the beginning of the loosening of restrictions on non-tobacco-flavored products. The favorable policy trend is obvious, and the size of the non-tobacco-flavored market is expected to expand at an accelerated pace. Up to now, the FDA has approved 27 types of tobacco-flavored and mint-flavored e-cigarette products and devices. The NJOY brand authorized this time is an important customer of SMOORE International, and other brands of menthol flavoring products are expected to be reviewed one after another.
Meanwhile, on June 5, 2024, the US FDA revoked the MDO (Marketing Denial Order) issued to JUUL in June 2022, and the application was resumed pending processing, and the FDA carried out substantive review. This withdrawal mainly takes into account the fact that since the MDO was issued in 2022, the FDA has accumulated more experience in handling e-cigarette products, and court decisions have established new case law. Although the revocation of the MDO does not represent an authorization or rejection, nor does it indicate whether the application is likely to be granted or denied, this increases the likelihood of obtaining authorization. Based on the core foundation of e-cigarette harm reduction, the long-term logic of increasing the penetration rate of e-cigarettes is continuously verified.
The disposable product policy is getting stricter and favorable, and active repurchases show confidence in development 1) Disposable products: Demand for disposable products in overseas markets is still strong. FEELM Max, the ceramic atomization heater technology platform launched by the company, has been recognized by customers. At the same time, it continues to actively launch innovative products to strengthen the free brand layout, and the market share is expected to increase steadily. 2) Replaceable products:
On March 11, 2024, the UK government introduced draft regulations that plan to ban the sale of disposable e-cigarettes in April 2025. Any merchant that violates the regulations will face a £200 fine and may be imprisoned. The company's market share in the US is steadily increasing, and the regulation of disposable products is becoming stricter, which is beneficial to long-term development. 3) Heating does not burn: The company's product portfolio is a significantly differentiated and competitive product portfolio, and it is expected to gradually expand if cooperation with major customers succeeds in the future. 4) Nebulized medicine: In March, the nebulized beauty product solution “Lanzhi” was launched. The technology has differentiated advantages, and the development and production layout of pharmaceutical-combination products for asthma and chronic obstructive pulmonary disease is smooth. 5) Special purpose atomization: Continuously strengthen local marketing and delivery capacity building. Innovative products are recognized by customers as soon as they are launched in 23Q4, and are expected to contribute to growth in 24 years.
On June 10, the US Department of Justice (DOJ) and FDA announced that they will join forces to establish a federal multi-agency task force and convene multiple law enforcement agencies to cooperate to crack down on the illegal sale and distribution of e-cigarettes. The FDA is strengthening enforcement, or favoring leaders whose products have already been approved.
Furthermore, the company began this round of repurchases on May 16, 2024. Up to now, the company has repurchased a total of 786.61 million shares, accounting for 1.28% of the total shares, and paid a total of HK$665 million, demonstrating the company's confidence in its long-term development.
Investment advice: As a global leader in electronic atomization, Smore International continues to increase R&D and leads in technical strength. With the gradual steady recovery of the US and China markets and the continuous expansion of new products and new businesses, long-term growth can still be expected. We expect Smore International's 2024-2026 revenue to be 123.57, 140.24, and 15.702 billion yuan, up 10.65%, 13.49%, and 11.96% year over year; adjusted net profit will be 16.94, 18.91, and 2.164 billion yuan, up 0.95%, 11.64%, and 14.43% year over year, corresponding to PE 36.6x, 32.8x, 30.0x, for 2024, 41.0xPE, corresponding to the target price of HK$13.03, or HK$12.12. Maintain a Buy-A investment rating.
Risk warning: Risk of industry regulations exceeding strict expectations; risk of atomization technology path being disrupted; risk of new business development falling short of expectations; risk of majority shareholders' holdings reduction; risk of OEM products not being reviewed; risk of customer order growth falling short of expectations.