Company Profile: Global Atomization Solution Provider

SMOORE International is the world's leading provider of atomization technology solutions, focusing on the development of atomization products. Currently, the company's business covers electronic atomization, non-combustible heating (HNB), atomization for special purposes, medical atomization and medical aesthetics. As of 2024H1, the company's revenue was 5.04 billion yuan, -1.7% YoY, and net profit to mother was 0.68 billion yuan, or -4.8% YoY. Currently, the company's business is still dominated by ToB. 2024H1's ToB business revenue is 3.92 billion yuan, accounting for 77.9%. The main cooperating customers include Japan Tobacco, British American Tobacco, Renault Tobacco, Yueke, and NJOY. The TOC business is mainly based on its own open electronic atomization brand Vaporesso. 2024H1's TOC business revenue was 1.12 billion yuan, accounting for 22.1%.

The vaping e-cigarette industry: “bad money” cleared, bomb exchange regulations relaxed

Industry size: Currently, global cigarette sales are declining. According to the “2023 World Tobacco Development Report”, global cigarette sales in 2023 (excluding mainland China) were 54.68 million boxes, -2.1% year on year. As of 2023, e-cigarettes only accounted for 3.2% of the total tobacco market sales. With the implementation of tobacco harm reduction in various countries and regions, vaping e-cigarettes can penetrate a wide range of spaces. According to Euromonitor data, the size CAGR of the vaping e-cigarette industry is expected to be 5.5% in 2023-2028. The growth rate of HNB sales among new types of tobacco is also impressive. According to Euromonitor data, global HNB sales reached 106.6 billion units in 2023, and the sales CAGR in 2018-2023 was 18.0%. Currently, the four major international tobacco companies all have a layout for HNB products. Based on the taste of HNB, the subsequent increase is also impressive.

Industry policy: 1) Currently, uncertainty about China's e-cigarette policy has abated. Since 2022, most policies have increased the control of non-compliant products and enterprises, and the industry has begun to develop steadily after experiencing sales bans and taste controls; 2) Europe and the US have switched to disposable vaping e-cigarettes due to youth smoking problems. According to MordorIntelligence data, 85% of middle school students in the US who smoked e-cigarettes in 2021 smoked disposable e-cigarettes. In June 2024, four NOJY menthol products from SMOORE's customer were approved. This is the first time that non-tobacco-flavored vaping e-cigarettes were approved in the US market. It shows that regulations on European and American bullet exchange products are gradually being relaxed. With the subsequent approval of other products and flavors, the bomb exchange market is expected to benefit from it.

Follow-up interpretation of the international market: 1) Nebulized e-cigarettes: The current clearance of non-compliant disposable products in the European and American markets is expected to drive the customer base to switch to compliant products, open products, and HNB. We believe that the removal of non-compliant products may affect the overall growth rate of vaping e-cigarettes in Europe and the US in the short term, but compliant products and companies will benefit from it. The development of the Japanese market is limited due to government restrictions on the nicotine content in vaping e-cigarettes; 2) HNB: According to Euromonitor data, as of 2023, the Japanese market had the highest sales volume of HNB in the world, and the sales CAGR for 2019-2023 was 11.0%. Due to the previous HNB patent war in the US, the current market is still quite empty, but a settlement was reached in the patent war in February 2024. According to Euromonitor data, it is expected that sales in the US HNB market will begin to rise in 2025, and HNB sales will account for 3.5% of the new tobacco market by 2028.

Company advantages: Deeply cultivate atomization technology and explore multiple categories of spaces

R&D advantages: The company is deeply involved in atomization product research and development, and focuses on R&D investment. As of 2023, the R&D cost reached 1.48 billion yuan, the R&D cost rate reached 13.3%, and the number of R&D teams expanded from 615 in 2019 to 1,480 in 2023. As of 2023, the company has applied for a total of 3,867 invention patents, accounting for 50.3% of its total patent applications. Deep research and development has built a deep patent barrier for it.

Multi-category exploration: With extensive technology accumulation, the company currently has technology brands (FEELM, CCELL, METEX, etc.) and its own brands (VAPORESSO, AUXO, MOYAL, etc.).

The company's ceramic core has first-mover and technical advantages, and relies on experience to bind customers; relying on the Metex platform to deeply cultivate HNB patents, the company's major customer, British American Tobacco, launched the new HNB product Glohilo in Serbia at the end of 2024, which may bring considerable performance flexibility to SMOORE; according to Euromonitor data, the US marijuana atomization market sales CAGR reached 22.5% in 2019-2023, and the legalization of marijuana in the US market is accelerating, and the company's own cannabis atomization brand AUXO is expected to benefit from it; currently, China The medical nebulizer market is developing rapidly. According to intelligent research consulting data, the industry is expected to reach 5.14 billion yuan in 2024, +23.0% over the same period. The company is increasing investment in the medical/medical atomization business, continuing to explore multiple scenarios of medical and aesthetic atomization applications, and the future business is expected to blossom more.

Profit forecast and investment rating: As the world's leading provider of atomization technology solutions, SMORE International maintains high R&D investment and continues to expand atomization applications. The expected revenue for 2024-2026 is 11.964/13.456/16.383 billion yuan, with year-on-year growth rates of +7.1%/+12.5%/+21.8%, respectively; the net profit to the mother is expected to be 1.38/1.672/2.394 billion yuan in 2024-2026, with year-on-year growth rates of -16.1% /+, respectively 21.2%/+43.2%. As of January 2, 2025, the closing price was HK$13.00, and the corresponding PE was 54/44/31X, covered for the first time, giving it a “buy” rating.

Risk warning: risk of industry policy regulation exceeding expectations; risk of competitor launching breakthrough technology; risk of failure to approve related products; risk of exchange rate fluctuations; risk of product substitution; risk of new business development falling short of expectations.