Although it has been nearly half a year, the popularity of the listing of China Tobacco Hong Kong (06055) is still fresh in my mind. It is listed in Hong Kong at HK $4.88 per share, and its share price rose as high as HK $28.5, or 484 per cent, in 15 trading days.

As a result of the huge increase in the short term, the fervent mood of China Tobacco quickly exploded the entire Hong Kong new stock market, and the performance of new shares listed after China Tobacco was significantly better than before.

Now, another leading enterprise related to "cigarette" has officially sounded the horn of IPO to Hong Kong.

In fact, McWeill already wears the crown of "tenfold shares". As early as December 14, 2015, McWeill was listed on the new third board at the price of 11.8 yuan per share, rising to 130 yuan per share in 2018, realizing the feat of "ten times in three years" that investors have always dreamed of.

Behind the sharp rise in stock prices, thanks to the rapid development of the e-cigarette industry. From 2016 to 2018, the company's adjusted net profit rose from 106 million (RMB, the same below) to 735 million, with a compound annual growth rate of 163 per cent. And by the first half of 2019, Seymour's net profit was 931 million yuan, an increase of 414% over the same period last year.

With its brilliant performance, can Seymour recreate the popularity of China Tobacco Hong Kong? Continue the legend of "tenfold shares"?

Explosive growth in performance

McWeill was founded in 2009. After ten years of development, the company has become the leader in the domestic e-cigarette industry, with a market share of 10.1%. Its electronic atomization products mainly include three categories: closed electronic atomization equipment, electronic atomization components and open electronic atomization equipment.

Currently, McWeill mainly operates two business segments, one of which is the research, design and manufacture of closed electronic atomization equipment and electronic atomization components for the world's leading tobacco companies and independent e-cigarette companies, including Japan Tobacco, British American Tobacco PLC, Reynolds Asia Pacific, RELX and NJOY.

The second is to carry out the research, design, manufacture and sales of own-brand open electronic atomization equipment or APV (advanced e-cigarette private equipment) for retail customers. Under this business segment, McWeill sells all free brands to distributors and sells products to end consumers through distributors. As a result, so far, McWeill has no offline retail stores or online platforms.

From the perspective of business category, corporate customers are the driving force to contribute income. In the first half of 2019, the company's revenue from corporate customers accounted for 80.6%, while the remaining 19.4% came from distributors. Geographically, the United States, Hong Kong, China and Japan are the main sources of income. in the first half of 2019, income from these countries and regions accounted for 30.5%, 20.3%, 18.6% and 12.4%, respectively. The areas of income distribution tend to be more diversified, and their dependence on the US market is significantly reduced.

Thanks to the rapid development of the industry, McWeill's performance has exploded. Zhitong Financial APP found that from 2016 to 2018, the company's revenue increased from 707 million yuan to 3.434 billion yuan, with a compound annual growth rate of 120%. In the first half of 2019, revenue growth rose to 178.4%.

Meanwhile, adjusted net profit rose from 106 million in 2016 to 735 million in 2018, with a compound annual growth rate of 163 per cent. By the first half of 2019, the growth rate of adjusted net profit increased to 417%.

From the perspective of profit indicators, both gross profit margin and adjusted net interest rate are on the rise. This not only includes economies of scale, but also has a lot to do with the steady increase in the average selling price of electronic atomizing equipment for enterprise customers and the rebound in the average selling price of electronic atomizing components. The significant increase in gross profit margin and adjusted net interest rate in the first half of 2019 was also affected by this factor.

The business environment has changed.

Thus it can be seen that McWeill, as the leader of the industry, has a strong strength, and its profitability has improved steadily while its income is growing rapidly. However, the operating environment of the e-cigarette industry has quietly changed in the second half of 2019.

In mid-August, the news of serious lung disease caused by the use of e-cigarettes in the United States was gradually reported back to China, and the market's concern about the health risks of e-cigarettes gradually increased. By November 1, 2019, there had been 1888 cases of e-cigarette-related lung disease in the United States, with 37 deaths.

Faced with the uncertainty of the risk of e-cigarettes, the United States quickly took relevant measures. Beginning in September 2019, governors of several states in the United States announced temporary emergency aroma bans on electronic nicotine delivery products, which banned the sale of related e-cigarette products in various forms.

It is worth noting that the ban is mainly aimed at flavored e-cigarette products involving flavor, but there is no requirement for the original flavor e-cigarette, but it needs to be approved by the US government before May 2020, otherwise they will all be regarded as adulterated products.

And the ban in some states does not include menthol, which accounts for nearly half of the seasoning products. Even if the original and menthol-flavored products continue to be sold, sentiment on e-cigarettes has fallen to a freezing point, reducing the valuation of Juul, a US e-cigarette maker, by about $1/3 to about $24 billion.

However, with the investigation of relevant research institutions, the attitude of the US government towards e-cigarettes has eased somewhat. On November 8, 2019, the Centers for Disease Control and Prevention announced that patients with lung disease may be caused by the use of e-cigarettes or nebulizer products supplemented with vitamin E acetate. Since the news was reported in the media, no other states have announced an emergency ban on fragrance products.

In addition to the ups and downs of the US market, the domestic e-cigarette industry has also carried out regulatory rectification. On November 1, the State Tobacco Monopoly Administration and the State Administration of Market Supervision and Administration issued a notice on further protecting minors from e-cigarettes, requiring all Internet online channels to stop selling e-cigarette products, that is, they can only be purchased through offline channels, which will affect the penetration speed of e-cigarettes to a certain extent.

The annual compound growth rate of the industry is as high as 40%

However, after this supervision and adjustment, whether in the United States or China, the development of e-cigarettes has become increasingly clear. Patients with lung disease in the United States may be caused by smoking substandard products supplemented with vitamin E acetate. so far, original e-cigarette products can continue to be sold in the United States, and menthol-flavored products are not banned in some states.

Although online sales channels are banned in China, the policy states that e-cigarettes are a supplement to traditional tobacco. According to the person in charge of the Tobacco Monopoly Bureau, at present, there are numerous chaos in the e-cigarette market and the product quality is uneven, so we will continue to step up supervision and investigate and deal with illegal e-cigarette manufacturing and sales in accordance with the law. This will be conducive to the promotion of industry concentration, McWeill, as a domestic industry leader, will benefit from this.

In fact, even though the e-cigarette industry has experienced a series of twists and turns in the second half of 2019, the market is still optimistic about the development prospects of the industry. According to Frost Sullivan, the compound annual growth rate of e-cigarettes is 27.9 per cent from 2013 to 2018, while the compound growth rate of e-cigarettes will rise to 40 per cent from 2018 to 2023. The market share of e-cigarettes in the global whole grass market will increase from 4% in 2018 to 14.6% in 2023. McWeill, who is on the golden track and already has a starting advantage, is something to look forward to.

In addition, some of McWeill's actions may indicate a rebound in demand. On the eve of McWeill's submission of listing materials to the Hong Kong Stock Exchange, its shareholder, Yiwei LiNeng, issued an announcement that McWeill would cancel the cash dividend, and Yiwei LiNeng also replied to investors that the relevant funds would be used to expand production.

With regard to the information about production expansion, it is also mentioned in the listing materials. Mr McWeill said part of the money for completing the IPO would be used to build industrial parks in Jiangmen and Shenzhen to meet the needs of rapid business growth. It can be seen that McWeill may have passed the most difficult time.

On the whole, due to the impact of policy regulation, the e-cigarette industry has been volatile in the short term, which will have a certain impact on McWeill's performance in the short term. However, from the point of view of the lengthening cycle, both the United States and China promote the development of e-cigarettes to be more legal and standardized, which is conducive to the improvement of market concentration. At the same time, the e-cigarette industry is still in a period of rapid penetration, McWeill, as the industry leader, is expected to continue to benefit from the development of the industry.