When the world's first electronic cigarette "Ru Yan" was born, its founder, Chinese pharmacist Han Li, may never have thought that this product made for harm reduction could develop into a huge industry in the future.
According to the data of "2021 E-cigarette Market Penetration Rate in Various Countries" released by Ai Media Consulting, the market penetration rate of the United States in the first place has been as high as 38%, and the second place is Japan, with a penetration rate of 30.3%. According to the 2021 Blue Book of the e-cigarette industry, as of November 2021, the domestic e-cigarette retail market size is 14.5 billion yuan, and the export scale is 138.3 billion yuan, half of which is sold to the United States.
However, there are still many controversies surrounding e-cigarettes, and some investors still hold a pessimistic attitude towards the e-cigarette industry, which is vividly reflected in the stock price changes in the secondary market. With the gradual implementation of regulatory policies, the stock prices of Yueke's parent company Fog Core Technology and global atomization technology manufacturing giant Simao have dropped significantly.
Is the e-cigarette industry really what pessimists think? Perhaps, this is not the case.
Image from Canva Paintable
Where is the road?
In March 2021, the Ministry of Industry and Information Technology and the State Tobacco Monopoly Administration studied and drafted the Decision on Amending the Regulations for the Implementation of the Tobacco Monopoly Law of the People's Republic of China (Draft for Solicitation of Comments), mentioning that new tobacco products such as electronic cigarettes shall be implemented with reference to the relevant provisions on cigarettes in these Regulations. This regulation has attracted much attention from the market, and although most e-cigarette companies are ready to embrace regulation, many investors are still uneasy.
Of course, regardless of the attitude of the secondary market, the fact that the "e-cigarette market will usher in a more orderly development" is beyond doubt. As early as a few years ago, the overseas e-cigarette market has launched E-cigarette-related standards such as AFORN and TPD, taking the lead in industry specifications. After the initial regulation of the industry, the supervision of e-cigarettes in overseas markets will only become more stringent.
As an example, the U.S. Food and Drug Administration (FDA) has been stepping up its review of PMTA (Premarket Applications for Tobacco Products) in recent years, requiring applicants to provide sufficient scientific evidence to prove the harm-reducing nature of products. As of October 2021, the FDA has issued marketing rejection orders to more than 323 manufacturers.
This undoubtedly reflects a trend: as the global e-cigarette market supervision tends to be strong, the market's requirements for corporate technology and manufacturing will be higher, and those who cannot meet the standard will be eliminated. Those who have accumulated deep in the industrial chain and have strong R&D and manufacturing strength will further consolidate their position, and the Matthew effect of the industry will be more obvious. On the other hand, the intensity of competition in the industry will also be further upgraded, and the patent war is likely to become a common killer tool used by giants.
In the barbaric growth stage of the e-cigarette industry, many manufacturers will choose to seek a foothold in the market by means of wild-matched cigarette sticks, wild-matched smoke bombs, and product plagiarism. In the era of safety, quality, and standardization-oriented supervision, giants that have accumulated many patents through research and development can easily kick them out with legal weapons, just like the Ningde era did on the battery track.
As an example, in October last year, atomization technology giant Smore filed a "337 investigation" application with the US International Trade Commission, accusing 38 companies and individuals in the United States, Canada and other places of infringing their patent and trademark rights, and requesting itC to issue exclusion and injunction orders. It is worth noting that this is also the first time that a Chinese enterprise has independently acted as a plaintiff to actively sue an overseas enterprise through the "337 investigation".
Strengthened supervision has brought the beginning of order to the e-cigarette industry, and once the market is on the right track, more advanced technologies can drive the development of the industry unimpeded. Looking back at the development of the electronic atomization industry in the past 20 years, it is one innovation after another that promotes the progress and development of the industry, from the emergence of electronic atomization heating technology, to the change of atomization core from cotton to ceramic materials, at the key node of industry change, multiple rounds of scientific and technological innovation have allowed consumers to have more choices.
In the context of technology-based, where will the industry promoters and "technological innovators" led by Smore lead the industry?
Image from Smore
The merit of "atomization technology brother"
Looking back at the history of electronic atomization, it is not difficult to find that this is a fairly typical supply chain-driven industry, and the impact of the supply chain on the brand side is ultimately transmitted to the consumer level, that is, the actual product experience of consumers. Just like the new energy track, with the continuous evolution of battery giants such as the Ningde era on the technical side, more and more models of host manufacturers have long endurance, and ultimately consumers actually benefit.
In 2016, Smore developed the first generation of "FEELM" ceramic core technology. With this industry-leading solution for many years, Smore has won over major customers such as British American Tobacco, NJOY, yueke and so on, becoming their "unparalleled choice" and gaining valuable pricing power. These stable large customers, in turn, have helped Smore continue to increase its global market share and become the world's largest manufacturer of electronic atomization equipment in 2019.
The reason why Smore can break through the countless e-cigarette companies in "Foggy Bottom" Shenzhen and become the king, the pursuit of technology is undoubtedly the key - as early as the beginning of the business, it spared no effort to invest in technology, intending to create unattainable technical barriers, which can be seen from Simmer's rapid growth in research and development costs.
From the financial report, from 2016 to 2020, Smol's R& D expenditure increased by nearly 3 times. In the first half of 2021, Smol's R&D expenditure increased by 13.1% year-on-year again, and the number of R&D teams accounted for more than 50% of the number of employees.
In terms of R&D investment, spending money may not necessarily solve the problem, but without spending money, it is likely that the problem will not be solved. Looking at the world, excellent companies are always making the same choice, while maintaining market leadership while increasing investment in research and development, the same is true of Smore - at present, its R & D expenditure year-on-year growth rate is at the same level as Top technology companies such as Google, Apple, and Huawei.
From the current perspective, the market value of Apple, Tesla and NVIDIA has repeatedly reached new highs. But if we push the timeline back 10 years, it is not difficult to find that the high points we once thought were just their halfway points.
Now, Smore is at such a stage. Take a look at what the continued high R&D investment has brought to Smol.
In terms of patents, as of December 31, 2021, Smol has applied for 3326 patents, including 1549 authorized patents, 1526 invention patent applications, and 299 invention patents.
In terms of automation, As early as 2019, Simmer launched a full-process automatic atomizer production line, and the current single-line equipment production capacity has reached 7200UPPH, the one-time pass rate has reached more than 99%, and the direct labor cost savings have exceeded 90%. Not only that, Simmer also realized the automated production of battery rods in 2021, becoming the only enterprise in the industry to achieve full-process, full-process automated production. Judging from the market news, British American Tobacco has adopted Thermor's fully automatic manufacturing production line, and Yueke is also discussing with Thermol to jointly build an exclusive smart factory.
In terms of market share, according to Frost & Sullivan's latest report, in 2020, Smore's share of the global electronic atomization market reached 18.9%, ranking first, far exceeding the combined market share of 2nd-5th place. In addition, Simar's mature PMTA-level detection strength (once a brand owner's e-cigarette product passes the PMTA, it means that the parameters of the product are fixed and the supply chain cannot be easily replaced) is also enough to persuade the brand to continue to maintain a deep binding relationship with it. Today's Simar is to e-cigarettes as the Ningde era is to new energy vehicles, which is an irreplaceable existence of major brands.
The increase in technical barriers requires the future to be based on the present, which is also the common choice of excellent technology companies. Just like The "application generation, reserve generation, pre-research generation" technology strategy of "application generation, reserve generation" is good now, but the future is always better.
FEELM Air, image from Thermor press conference promotion
On January 18 this year, Smore launched a new generation of electronic atomization solution FEELM Air in London, England, leading the industry into the era of ultra-thin and broadening the growth space for the development of the industry. It is reported that FEELM Air adopts nano-scale vacuum lamination process, which has greatly improved in harm reduction, taste reduction, leakage rate and energy efficiency ratio, and is known as the global ultra-thin atomization solution.
At present, the global e-cigarette industry is still in the early stage of development, and the concentration is still increasing. Based on this, we can boldly judge that The market share of Smore will increase steadily in the future. And it is only a matter of time before it is re-favored by investors – in fact, since the release of the FEELM Air solution, brokers such as CICC and Huatai Securities have given it a "buy" rating. Huatai Securities also pointed out in the research report that The new generation of Simmer's solution has opened a new era of atomization technology, which is expected to further enhance the company's product strength and consolidate its market dominance and competitive barriers.
Compared with the NINGD era, which is also a top technology and manufacturing solution provider, the value of Smore is far from being demonstrated in the secondary market. According to the report of SNE Research, catheter era's market share in the power battery market reached 31.8% from January to November last year, and the market value was 1.33 trillion yuan so far; while Smol occupies 18.9% of the electronic atomization market, its market value since its listing is only 500 billion Hong Kong dollars. It is not difficult to imagine that when the other potential of the atomization industry is tapped, the market is bound to re-examine the investment value of the atomization technology giant.
Atomization industry midfield moment
Admittedly, Smore already has enough position in the field of e-cigarettes, and most investors cannot ignore it when studying the e-cigarette industry. But in fact, the growth potential of Smore is not limited to the field of e-cigarettes - from the perspective of market trends, electronic atomization technology has begun to play a more important value in all walks of life.
A typical example is that inhalation nebulizers are often used in the treatment of patients with respiratory and lung diseases such as asthma, which of course includes the new crown pneumonia that is currently raging around the world. On June 3 this year, Chen Wei, an academician of the Chinese Academy of Engineering, publicly stated that the vaccine can not only be injected subcutaneously, but also inhaled through nasal spray, compared with subcutaneous injection, nasal spray / inhaled new crown vaccine requires only one-fifth of the former, and can form mucosal immunity.
According to a report by the China Commercial Industry Research Institute, in 2019, the global market size of inhalation therapy nebulizers has reached 6.5 billion US dollars, and by 2026, this market is expected to reach 10.1 billion US dollars, with a compound annual growth rate (CAGR) of about 6.5%; in China, the size of this market in 2019 is 1.728 billion yuan, an increase of 22.12% year-on-year. In the report, the China Commercial Industry Research Institute predicted that the domestic suction atomizer market will reach 2.501 billion yuan in 2021.
It is worth mentioning that Smore has already accumulated some accumulation in the medical and big health markets. In April 2020, it signed a Material Transfer and Research Agreement (MTA) with AIM ImmunoTech to conduct studies in China on the efficacy of the nebulized inhalation dosing device for AIM's flagship drug, Ampligen. From this cooperation, it may be possible to see the future development route of Smore - to carry out deep bundled cooperation with pharmaceutical companies in the form of pharmaceutical and medical integration.
In January 2021, Smore entered into a placing and subscription agreement with Aletech Holding Limited and CITIC Lyon to raise HK$4.446 billion by placing 60 million shares at a discount of 7% of the old and then new placements. Judging by the documents disclosed, one of the uses of the money is to "make more investments in R&D in electronic atomization equipment in the healthcare and pharmaceutical industries."
Other tracks worth noting include medical aesthetics, which have a high demand for atomization instruments. Nowadays, medical aesthetics generally use invasive methods such as injection, such as switching to a transdermal absorption scheme similar to medical nebulization inhalation, which can effectively reduce consumers' fear of pain and helplessness about the invasive recovery period, and give consumers effective and convenient new choices for medical aesthetics.
Looking at the world, the medical aesthetic market is still a vast world. According to Markets & Research, the global medical beauty market, which currently covers injections, energy devices, topical medications and other products, is $12 billion and is expected to grow to $25 billion by 2028, with a compound annual growth rate (CAGR) of 11%. In this market, the energy-based beauty device category is currently estimated to be close to $4 billion and is expected to grow to $8 billion by 2028, with a compound annual growth rate (CAGR) of 12%.
Niu Finance noted that one of Thermo's factories, "Dongguan Sier Technology Co., Ltd.", applied for a cosmetics production license on August 20 last year, and obtained the production qualification of two units of skin care water and cream cream. Some analysts believe that this may mark that the research and development of Simar beauty atomization products has reached the final stage of batch verification.
So, how much growth can Smore get from the tracks of medical treatment and medical aesthetics?
On this issue, perhaps the medical device giant Omron from Japan can give us some inspiration. The company's product array includes blood pressure monitors, nebulizers, low-frequency treatment instruments, etc., and its market value is as high as 1.91 trillion yen. According to its fiscal year 2019 (fiscal year ended March 31, 2020), the medical hardware business generated 112 billion yen in revenue for it, and medical nebulizers accounted for 11% of this revenue, or 12.3 billion yen (about 681 million yuan).
Another example to refer to is Candela Medica, a veteran supplier of aesthetic devices that was ready to go public last October, with a valuation of $1.7 billion. According to the prospectus, its adjusted EBITDA was $38 million for the six months ended June 30, 2021.
It is foreseeable that the market growth space in the fields of atomization medical equipment and medical beauty is vast. As one of the atomizer manufacturing giants, The entry of Simar can bring more possibilities for the development of enterprises.
When our understanding of new industries and new giants is still relatively vague, we may wish to look at history. In 2011, when the electric vehicle market was still unclear, Tesla, BYD and other pioneers were too bad to find the north, Zeng Yuqun believed that the power battery would have great prospects, and even willing to leave the "comfort zone" ATL to establish the Ningde era. It is precisely because of his high gamble that he has the legend of "trillion Ning King" in the secondary market today. After that, the Ningde era, which is sitting on the trillion throne, is still not willing to be satisfied with itself - on the same day that Simar released a new generation of atomization technology solutions on January 18, ningde times of times also released its own power exchange brand EVOGO, announcing that it has entered the power exchange market.
Just as Zeng Yuqun gambled on the new energy track in the past, and now the Ningde era enters the power exchange track, Simar also has his own "gambling" - with technology investment and patent accumulation as chips, the manufacturing giant may also be able to open up a new world based on the promising pharmaceutical equipment, medical beauty and other markets, leaving its own legend of the science and technology industry in the secondary market.