Maiden vaping maker draws heavy interest

money-glitz | Staff reporter 6 Jul 2020

E-cigarette device maker Smoore International plans to raise HK$7.1 billion after pricing its Hong Kong initial public offering at the top end of the indicative price range, local media reported, becoming the first vaping product maker to trade on the stock exchange.

The Shenzhen-based company has attracted 10 cornerstone investors to subscribe to shares worth HK$2.64 billion. And in the retail portion, investors have placed more than HK$30 billion in IPO orders by margin financing, equivalent of around 35 times oversubscription.

That came after the investor frenzy on China Tobacco International (HK) (6055), the international unit of the world's largest cigarette producer China National Tobacco Corporation, whose shares quintupled its offer price in two months in August 2019, before falling back to HK$15.48, that is still 217 percent higher than its IPO price of HK$4.88.

Smoore ranked the world's largest vaping device manufacturer by revenue last year, accounting for 16.5 percent of the total market share, according to commissioned report by Frost & Sullivan.

It mainly sells e-cigarette devices to 50 markets, mainly the United States, Hong Kong, Japan, and Europe.

Most of its customers are international 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.

Smoore generated 26.4 percent of total revenue from Hong Kong, 21.8 percent from the US, and 20.9 percent from China last year. 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.

The raw material suppliers are mainly from China.

Revenue increased significantly by 121.3 percent from 2016 to 1.57 billion yuan (HK$1.72 billion) in 2017, and further by 119.4 percent to 3.43 billion yuan in 2018.

Last year, revenue grew by 1.22 times to 7.61 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 1.96 times to 2.17 billion yuan in 2019.

Its gross profit margin also surged 9.3 percentage points to 44 percent last year.

However, 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. The deadline has been extended to September 9 due to the Covid-19 pandemic.

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 US 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.

And in mainland China, there are currently no laws or regulations targeting the manufacture of vaping devices and components. However, e-cigarettes products are banned from being sold online in the country.

Smoore plans to use half of the net proceeds to expand production capacity, including setting up industrial parks in Jiangmen and Shenzhen. About 25 percent of the funds will be used in new production bases and to upgrade existing factories, 20 percent will be invested in research and development, and the rest will be for working capital and other general corporate purposes.

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