[summary of the research report]
The new tobacco global penetration rate increases the general trend, the company channel layout is forward-looking, the first-mover advantage is obvious, has formed the brand barrier, the domestic market share is expected to reach about 70% in 2020. Short-term channel expansion leads to high income, medium-term repurchase rate increases to drive same-store growth, ex-factory price increases drive profit margins to rise steadily, and long-term category expansion opens room for growth. Coverage for the first time to give "overweight" rating, if the domestic atomization tobacco regulation landed, it will significantly improve its valuation stability.
Overview: consumer-grade electronic atomization brands, e-cigarette scene is the first to land. The company focuses on the light asset operation of the RELX Yueke brand, with a domestic market share of 48.0% of 19/20Q1-3, with a 62.6% market share. Forward-looking offline layout and innovative "brand stores + integrated retail outlets" retail model need to be developed. 18/19/20Q1-3 offline distribution channels account for 60% 74% 98%. By the end of 20Q3, it had 110 dealers, more than 5000 specialty stores, 100000 comprehensive outlets and 20 self-owned stores, covering more than 250 cities. The products lock in the high-quality production capacity of Si Moore, focusing on "FEELN ceramic core", and run quickly and iterate constantly before the supervision falls to the ground. Founder Wang Ying is absolutely controlled by 90% of the voting rights, and the long-term incentive system is expected to continue to stimulate the vitality of the economy.
Industry-regulation: under the general trend of increased penetration, the impact of regulation is manageable except for extreme expectations. Closed cigarette is expected to become the mainstream way of nicotine intake by human beings, and the global penetration trend is clear, with a global / US / UK penetration rate of 4.2%, 32.4% and 50.4%. China is the world's largest nicotine consumer market, with 290 million adult smokers selling about 1.6 trillion cigarettes in 2019, atomized tobacco users only 3.4 million, sales scale only 14 billion +, and overall penetration only 1% 6. It is cautiously assumed that the penetration rate will increase to 5 in 2025 and the domestic market will reach 100 million. Domestic atomization tobacco regulatory policy is temporarily absent, the landing time or after the PMTA is on the right track, and the earlier the landing, the better for the industry. There may be three situations in atomized tobacco regulation in the future, and the probability is the optimistic situation of "registration system + consumption tax". We estimate that the impact of tax landing on the profit space of the industrial chain is more controllable.
Barriers: flywheel effect, user stickiness, regulatory doors to build a moat. The company's channels and brands have formed a resonance to strengthen the flywheel effect, the industry homogenization of the channel play, the company is still able to maintain the leading position of market share. In the medium and long term, atomized tobacco, as a high-frequency consumer product, has high taste and taste, and obvious snow effect, and the company moat is expected to apply for PMTA strategically, actively embracing the highest industry standards in the world. after the landing of regulatory policies in the future, it is highly likely that the industry access threshold and compliance costs will be raised, and the long-term barriers of head brands will be raised.
Outlook: short-term channel, medium-term repurchase, long-term category expansion. Short-term channel-driven, new stores and same stores drive high growth, target the number of convenience stores and cigarette retail households in domestic second-tier cities, judge that the number of terminals rarely meet the ceiling within 3 years; medium-term repurchase-driven, the number of cartridges / chimneys continues to increase to contribute to the same-store growth, and with the increase in ex-factory prices and downward costs brought about by the slowdown in subsidies, the company's profitability & ROE still has room to improve. In the long run, the product line has great potential for expansion, the company is expected to evolve into a platform consumer-grade electronic atomization brand, growth empty continues to expand.
Risk factors: the degree of supervision of the domestic market is higher than expected; the problem of smoking among teenagers is improperly controlled; brand competition intensifies; atomized smoke threatens public health and safety.
Investment suggestion: the EPS of Forecast Company in 2020-22 is 0.48 RMB 1.73pm 2.81RMB. In view of the small liquidity within 6 months after IPO (7.5% to 8.1%), and taking into account the company's business model, performance growth and biological uncertainty of domestic regulatory policy, we believe that the reasonable market capitalization of the company in the next 6-12 months is about $51 billion, corresponding to 75 times PE in 2022, covering the "overweight" rating for the first time.
