On June 12, China Tobacco International (06055.HK) was listed on the main board of the Hong Kong Stock Exchange, and its share price soared nearly 20%. Per capita income is more than HK$250 million, and the per capita annual salary is nearly HK$1 million. How does China Tobacco International (HK) do it?
Backed by more than 300 million smokers in China, the almost monopolistic business has strong bargaining power over the upstream and downstream, which may be the key.
China Tobacco International (HK) has an issue price of HK$4.88 per share and a net fundraising amount of approximately HK$735 million. According to media reports, at the listing ceremony, Zhao Jianmin, general manager of China Tobacco Hong Kong, expressed his gratitude to investors for their recognition of the company’s value and its stock’s favor. Listing on the market means that China Tobacco has taken a solid step toward overseas development and opened up more financing channels.
According to public information, China Tobacco International (HK) is the designated overseas platform of China Tobacco International for capital market operations and international business development. China Tobacco International is a wholly-owned subsidiary of China National Tobacco Corporation, responsible for the management and operation of China Tobacco Corporation’s international business. China National Tobacco Corporation (CNTC) Group is the only entity in China engaged in the production, sales and import and export of tobacco monopoly products under the National Tobacco Monopoly System.
According to the prospectus, as of the end of 2018, China Tobacco International (HK) has only 28 employees in Hong Kong, including 5 senior management personnel. The total cost of employees is approximately HK$25.914 million, and the annual salary per capita is nearly HK$ million. Based on operating income of HK$7.033 billion, per capita revenue generated exceeded HK$250 million.
When talking about “competitive advantage” in the prospectus, China Tobacco Hong Kong said: “We are currently engaged in an exclusive operating entity in the business area.” “We have strong bargaining power for suppliers and customers, and we also have sufficient cash flow.”
According to the prospectus, the exclusive business of China Tobacco Hong Kong includes “the import business of tobacco products”: “We mainly purchase tobacco products such as tobacco leaves from the countries or regions of origin around the world (such as Brazil, USA, Argentina, Canada, Zambia, etc.) and sell them to China tobacco international for resale to other Chinese cigarette manufacturers.”
“Tobacco products export business”: “We are the exclusive operating entity of tobacco products export business in Southeast Asia, Taiwan, Hong Kong and Macau.” Includes cigarette products exported to Thailand, Singapore and other duty-free shops, new tobacco products exported to international market.
From 2016 to 2018, the revenue of China Tobacco Hong Kong was approximately HK$6.31 billion, HK$7.807 billion and HK$7.033 billion, respectively. The profit attributable to equity holders of the company was approximately HK$335 million, HK$344 million and HK$259 million respectively. Net cash generated were HK$53.9 million, HK$359 million and HK$758 million respectively; return on equity was 21.1%, 15.9% and 18.2%.
Li Yunyi, an analyst Essence International, said that the global tobacco market is currently dominated by traditional tobacco products such as cigarettes, pipe tobacco and cigars. Emerging tobacco products such as E-cigarette and heat-not-burn products are becoming more and more popular around the world. In recent years, the global tobacco control campaign has become increasingly high, putting pressure on the consumption of tobacco products. China has the largest number of smokers in the world, with 306 million people in 2018 and cigarette sales of ￥1,440.5 billion, accounting for 44.6% of global cigarette consumption. As the disposable income of residents continues to increase, the consumption of tobacco products in China is upgraded, and the structure of the tobacco market is optimized. The consumption of high-end tobacco products continues to grow.
Only the China National Tobacco Corporation and its affiliated companies are eligible to monopolize tobacco trading in China, subject to the national tobacco monopoly system. Although tobacco control campaigns have been strengthened in various parts of the world in recent years, the number of smokers is sufficient, forming a just-needed demand in China, and the monopoly position is stable, and market competition is not seen in the short term.
However, with the listing of China Tobacco International (HK) to drive some tobacco-related businesses to rise, e-cigarette may become its most powerful competitor, and therefore it is particularly concerned. These concerns, on the one hand, came from the suppression of various mainstream media. The most representative of the 315 incident this year, the major media in the wind rudder ignored the research results of the British Ministry of Health and Japan and other developed countries to reduce the harm of E-cigarettes to traditional cigarettes, and In the absence of systematic data demonstration, all were targeted at E-cigarettes. Mr. Lu Xun once said: “I have always tried to speculate on the Chinese with the worst malice. However, I did not believe that I would be murderous to this point.”
On the other hand, relative to the maliciousness of the media, capital with an international perspective has seen the future more calmly. Since the beginning of this year, many E-cigarette companies have announced the completion of financing, and the investment and financing boom of the E-cigarette industry has increased significantly.
Multiple E-cigarette companies have completed financing
According to IT Orange data, as of June 20, 14 E-cigarette companies have completed financing in China, with a total financing amount of about ￥574 million, higher than the investment amount of the whole year last year. Among them, FSLOW is an enterprise that is more concerned about. On May 24th, the company announced the completion of two rounds of angel and Pre-A financing, with a cumulative amount of $10.89 million. It is reported that the Flow E-cigarette brand was founded by Zhu Xiaomu, the vice president of the former Smartisan technology products, and its founding team members are from Smartisan Technology, Motorola, Huawei, Ogilvy & More.
Low penetration rate
According to the “China’s Tobacco Products Industry Market Demand Forecast and Investment Strategy Planning Analysis Report” published by Prospective Industry Research Institute, China is the world’s largest production center for E-cigarettes but not the largest consumer market. The current E-cigarette market in China is about ￥4 billion. The penetration rate of E-cigarettes in China is extremely low, and the consumption scale is less than 15% of the size of the US market, the largest consumer of E-cigarettes. The development of the global E-cigarette market has also provided tremendous opportunities for the development of E-cigarette manufacturing in China. The report also shows that it is estimated that in 2017, global E-cigarette consumers reached 35 million, and E-cigarette sales were about $12 billion, a 13-fold increase over 2010, and the annual compound growth rate was about 45%. The global E-cigarette market is developing rapidly. Among them, the United States is the largest consumer market for E-cigarettes. In 2017, US E-cigarette sales were around $4.63 billion, far ahead of other countries.
Some institutional analysts believe that this year’s national standards for E-cigarette manufacturing and supervision are expected to fall, and small and medium-sized brands that are not up to standard production will be eliminated, which is beneficial to leading enterprises with R&D technology and production standardization. In addition, at present, domestic E-cigarette manufacturing enterprises are still mainly export-oriented. For export-oriented enterprises, the introduction of domestic manufacturing standards will increase the production cost of enterprises, and in the future, manufacturing exports alone may lose competitiveness. Enhancing the brand value of E-cigarettes may become the way out for the development of domestic E-cigarette enterprises in the future, build their own brands, increase the added value of products to hedge the standardization costs, and improve the international competitiveness of domestic products.