Smoore International (6969.hk) 1H 2023 results - through the lens of a BAT shareholder
Smoore International is a company based in China - Shenzhen, known for being the key supplier (many believe Smoore to be the sole supplier) of pod-based vaping equipment and cartridge to BAT (Vuse), JTI (Logic) and Altria (Njoy). I just attended its 1H 2023 results announcement investor presentation. Here are some numbers and Smoore management guidance that may be relevant to BAT.
Vaping
Corporate client oriented (ODM) business - U.S.
Revenue from export to the U.S. increased by 27.7% to RMB2.06bn from RMB1.61bn in 1H 2022.
Impacted by other non-compliant products in the U.S. vaping market. Sales of disposable synthetic nicotine products were more than 50% of the U.S. vapor market.
Helped a key customer maintain its top-ranked market share and achieve further market share gains
Innovative atomisation products for special purposes to be launched
Corporate client oriented (ODM) business - Europe and other regions
Revenue from export to the Europe and rest-of-world increased by 32.0% to RMB2.35bn from RMB1.78bn in 1H 2022.
Successful launch of FEELM Max, an upgraded disposable ceramic core technology platform, which achieved scale in shipments
Successful launch of disposable products in Europe and beyond, with expansion into additional markets
Here are the immediate questions I have in my mind after learning the above, and below are answers to such questions based on feedback from management team as well as my assessment.
Why is there a large discrepancy between export revenue to the U.S. (up by 27.7%) and the sales volume of Vuse in the U.S. (down by 6.5%)?
It is not indicative of a more optimistic sales forecast for 2H 2023, but rather a movement in inventory by BAT.
Due to ineffective enforcement by the U.S. FDA, proliferation of illicit disposable synthetic nicotine products is expected to continue in 2H 2023. Therefore pod-based vaping sales volume may decline sequentially in 2H 2023.
The competitive landscape of pod-based vaping is more or less stabilisied in the U.S.
The pricing of Smoore’s ODM service is “strategic” when it comes to BAT. They maintain a very close relationship and Smoore will continue to support the growth of BAT.
With Altria’s acquisition of Njoy, will there be substantial growth of their procurement volume?
Njoy acquisition was only completed in June. It is a US$2.75bn business so Altria will take it seriously for sure. Altria remains confident of vaping business in the U.S.
Altria used to be Smoore’s customer, but their commercial relationship ended after Altria’s acquisition of 35% stake in Juul.
Following Altria’s acquisition of Njoy, Altria became a customer of Smoore again. Altria management recently visited Smoore and both sides are excited to rekindle the relationship.
So far there has not been significant increase in procurement volume from Altria, but a lot of discussion still goes on.
How is the competitive landscape of disposable vape in Europe? Is it similar to pod-based vape which is dominated by a few big players with relatively stable market share? Will it be fragmented? Will it be concentrated but leading brand relatively short-lived (i.e. 1-2 leading brands first dominate the market, but soon replaced by another 1-2 brand which will then dominate the market, sort of like Puffbar → Elfbar → Lost Mary)?
It is hard to ascertain the industry landscape of disposable vape in Europe, but it is definitely a huge market. In many countries it is more popular than pod-based vape.
The key benefit of disposable vape is hassle-free. Customers don’t need to recharge the battery. Substantially more puff per device.
As various countries enforce maximum liquid volume in disposable vape, Smoore is working towards increasing the puff per device given such volume constraint, which will represent cost saving for customers. Customers in this segment remain very price sensitive. (i.e. 30% increase in puff per device means 30% decrease in cost per puff, assuming same selling price.)
Heat-not-burn
Smoore has successfully developed a portfolio made of a number of new heating technology solutions for its Heat-not-burn Products and expects to be able to provide customers and consumers with competitive differentiated products to meet the diversified needs of different customers.
According to Smoore, they have made “breakthrough” in heat-not-burn technology which will allow them to offer differentiated products. They are actively engaging various “high quality” customers in product testing. (unable to reveal identity of such customers due to confidentiality) They have invested several hundred of million RMB in R&D of heat-not-burn, while they acknowledged that Philip Morris International has spent more than US$9bn on R&D, capex and commercialisation. Smoore believe their R&D efficiency is substantially higher than PM, which will allow them to gain their fair share of the market in this area despite much lower investment amount.
I think it is too early to tell whether they will make any traction, but it is worth monitoring. They claim that their technology roadmap is totally different from IQOS so patent dispute won’t be an issue down the road. It is more about customer satisfaction and whether their products are good enough to address customer demand.
Conclusion
The message by Smoore is quite consistent with what I have learnt from BAT with respect to vaping in the U.S. and Europe. There’s not much surprise. Law enforcement will never be effective when there’s enormous incentives to profit from breaking the law. That not only affected the China market, but it affected the U.S. market as well. Apparently illicit products have huge advantage as they contain rich variety of flavours, and in the case of China, not taxed at all while pod-based products are subject to 36% excise tax.
With the vaping business in the U.S. unlikely to improve in 2H 2023 and intense competition of disposable vape in Europe, BAT will need other segments to perform better in order to deliver the full year result. Let’s see how that goes.