Following the investor frenzy on China Tobacco International HK (6055), Smoore International, the world's largest e-cigarette manufacturer, is eying an initial public offering on the Stock Exchange of Hong Kong.
The global vaping market is large and competitive, with more than 1,200 vaping device manufacturers, most of which are small to medium-sized enterprises.
The top five players accounted for 31.9 percent of the entire market share in terms of revenue, and Smoore had a market share of 10.1 percent in 2018, according to Frost & Sullivan.
The group uses its own research and development platform to market its technology and expand brand awareness. Smoore says around 1,300 patents had been applied for in China and overseas, of which more than 600 patents had been granted.
Smoore sells and markets products directly through its sales and marketing team of 198 people.
Most of its customers are internationally recognized leading tobacco industry companies, including tobacco firms, independent vaping companies, and distributors for its self-branded advanced personal vaporizers, APV, and a portion of vaping components.
The company warns that a majority of its revenue was derived from a limited number of customers. Its five largest customers accounted for 54 percent of its total revenue for the first six months of 2019, while its largest customer took up 13.1 percent of total revenue. About 80 percent of its revenue was from corporate clients.
Geographically, 30.5 percent of the total revenue was from the United States, and 18.6 percent from China, and 20.3 percent from Hong Kong. Smoore explains that revenue generated from Hong Kong is on re-export or transhipment basis and none of its products is distributed or sold in Hong Kong.
In contrast, most of Smoore's suppliers are raw material suppliers in China.
The group's revenue increased significantly by 121.3 percent from 2016 to 1.57 billion yuan (HK$1.77 billion) in 2017, and further by 119.4 percent to 3.43 billion yuan in 2018, driven by new product offerings introduced by its corporate clients, a broader corporate client and APV distributor base.
For the first six months last year, Smoore's revenue grew by 178.4 percent year-on-year to 3.27 billion yuan, due to growing orders from corporate clients for vaping devices with its ceramic heating technology and raising the market awareness of its self-branded APV. Meanwhile, net profit jumped by 410 percent to 921 million yuan.
Smoore cautions that it operates in an industry with evolving regulatory changes.
While new tobacco products and vaping devices may provide end consumers with better experiences, the health risks remain unclear and have resulted in regulatory hurdles, particularly in the US, its largest export market.
For example, on July 12, 2019, the United States District Court for the District of Maryland ordered to move forward the deadline for submitting premarket tobacco applications from August 8, 2022 to May 12, 2020 for existing devices that heat e-liquid to create vapor. As a result, Smoore's customers and itself are at greater risk of not being able to submit applications for some of its products in time and may be prevented from selling some of the products in the US.
In addition, from September 2019, the governors of several states announced temporary emergency flavor bans for devices that heat e-liquid to create vapor. Moreover, the group says that if the medical profession determines that vaping devices pose long-term health risks, the market demand may decline significantly.
The group plans to use the net proceeds to expand production capacity, including the establishment of industrial parks in Jiangmen and Shenzhen. Part of the funds will be used to implement automated production and invest in R&D, as well as acquisition. The rest will be used for working capital and other general corporate purposes.
