Why is Yueke, the “banknote printing machine”, anxious to be listed

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Author Hou min editor Ming Fei
Source: new entropy (ID: Baoliao Hui)
“If I can only hold two shares in my life, I hope it will be Guizhou Maotai and China tobacco.”
China tobacco has no chance, but its “replacement stock” e-cigarette leader, Wuxin technology, is about to go public in the United States.
One year and two months have passed since the most severe “e-cigarette online channel sales ban” storm in Chinese history, and the market has not heard of e-cigarettes for a long time. Until the last day of 2020, the parent company of Yueke, a Chinese e-cigarette brand that has repeatedly denied listing plans, formally submitted a prospectus to the US Securities Regulatory Commission.
This brings the low-key business of e-cigarettes back to the public eye again.
For more than a year, the e-cigarette industry has been in the hot and cold. On the one hand, the track is still crowded, and countless new brands are pouring into Nuggets; on the other hand, a large number of small and medium-sized enterprises are breaking out of business An e-cigarette practitioner disclosed to “new entropy” that “many small companies that can’t survive have switched to selling masks and thermometers, and the brand made by Netcom has finally faded away.”. According to the statistics of tianyancha, up to now, 105838 e-cigarette brands have cancelled or revoked their business licenses, and nearly 90% of the players have withdrawn from the e-cigarette market.
China’s e-cigarette market is undergoing a period of rapid reshuffle, but in any case, Yueke, who is about to go to the United States to ring the bell, has always been ranked first by an overwhelming advantage, and this kind of overwhelming is almost “crushing”.
“The first place is too strong. From the second place to the 18th place, there is no first place to play. According to the prospectus of Wuxin technology, the leader of e-cigarette industry, Yueke, its core brand, once had a market share of 62.6% in the first three quarters of 2020. At present, there are 5000 offline stores. There are more than 100000 retail stores, with a net profit of 2.2 billion in the last nine months alone.
But dismantling the prospectus will find that there are many uncontrollable risks and hidden worries behind the e-cigarette leader. I’m afraid that the business is not a good one, even if it is said by Wuxin technology itself.
Worthy of the line boss
Tobacco is a very lucrative industry. Even under the strict supervision of policies, Yueke is still a very profitable company.
If not according to the accounting standards of the United States, the e-cigarette company will make profits in its first year.
From the perspective of financial data, in 2018, 2019 and the first nine months of 2020, the company’s revenue was 133 million yuan, 1549 million yuan and 2.201 billion yuan respectively, the growth rates in 2019 and the first nine months of 2020 were 1068.33% and 93.28% respectively, and the net profits in the same period were 6.515 million yuan, 100 million yuan and 382 million yuan respectively, with the year-on-year growth rates of 1442.01% and 169.79% respectively.
In terms of cash flow, the company’s operating cash flow in 2018, 2019 and the first nine months of 2020 were – 977000, 338 million and 1299 million yuan respectively, which has improved significantly and can provide stable support for the distribution of offline channels. In the first nine months of 2020, the company’s cash investment expenditure reached 2.642 billion yuan, with a rapid pace of expansion. As of September 30, 2020, the cash, cash equivalents and restricted cash on account amounted to 547 million yuan.
In the first nine months of 2018, 2019 and 2020, the company achieved net income of 132 million yuan, 1.549 billion yuan and 2.201 billion yuan respectively. The net profit under GAAP was – 2.87 million yuan, 47.75 million yuan and 109 million yuan respectively, but the adjusted net profit was 6.52 million yuan, 100 million yuan and 382 million yuan respectively.
For today’s e-cigarette industry, there is only a glimmer of hope of “turning over” when it moves offline. Forced to switch to off-line Yueke, from the perspective of growth results, it has opened up the Growth Logic of alternative FMCG products.
Li Gang, one of Yueke’s channel distributors in Central China, told New entropy that before the online ban on e-cigarettes was issued, the development progress of Yueke’s offline channels was generally 30 stores a quarter. However, after the ban was issued, the development speed of offline channels was significantly accelerated. The development speed of exclusive stores + agency outlets had doubled by 20 times, and the offline layout became household appliances Ziyan brand is the key to win.
“In private, e-cigarettes are learning from miyue ice city, opening a store every 1500 meters.”
The relx Yueke e-cigarette store on the street is just one store away from the miyue Ice City store.
The business logic of e-cigarettes is unconsciously highly overlapping with famous brands and ice city. The threshold for opening e-cigarette stores is not high. To find places with large flow of people and more young people, the store covers an area of 5-10 square meters, with a deposit of 2000-20000 yuan. All the costs add up to 50000-100000 yuan, so there is no need to press the goods.
“It looks like an electronic hardware product, but it’s actually a FMCG product.”
Yueke adopts the same distribution mode as other FMCG industries, with the number of distributors increasing from 41 in 2019 to 110 in 2020. At present, there are more than 5000 Yueke stores, covering 310 cities in 32 provinces. Just like the famous and excellent products, there are only 20 Direct stores.
In addition to franchised stores, e-cigarette brands also set up online and offline outlets, such as supermarkets, convenience stores, bars, Internet cafes, KTV, beauty shops, E-sports hotels and other places where young people often gather. “As long as there are cigarettes in the future, there will be e-cigarettes.”
“Now the consulting agents have been arranged for several months, and each colleague has dozens of customers in his hand.”. Li Gang told “new entropy” that the reason why offline channels can be fully opened is not only the strong channel ability and preferential policies of dealers, but also the strong repurchase power of e-cigarettes.
Judging from the shipment volume announced in the prospectus, Yueke’s cigarette rods sold 8.6 million sets from 2018 to September 30, 2020. However, in the three months of the third quarter of 2020 alone, 61.9 million cigarette bombs were sold, with a net profit of 2.2 billion yuan in nine months.

When the market generally thinks that the prospect of e-cigarette industry is bleak, Yueke proves that e-cigarette is still quite profitable.
In the face of such an attractive tobacco business, the offline fight is still in a white hot state. Not only Yueke, but also yooz, Xuejia and Bode have more than 100000 offline retail terminals. Platinum Germany announced on the Internet, open a shop 2-5 months back; Xuejia is claimed that a product franchisee can achieve 50% profit. However, for Yueke, the leader of the industry, the current competition of peers may be far from enough to worry about.
Worries and variables that may come at any time
The base number of domestic smokers is large. According to the data, the number of adult smokers in China will be about 280 million in 2019, and the sales volume of national tobacco products will reach US $242.5 billion. As a substitute for traditional tobacco, e-cigarette naturally has a broad “money scene”.
However, under the tobacco monopoly law, e-cigarettes represented by Yueke are essentially “competing with the state for profits”, and the sword of supervision is always hanging on the head. No one knows when to fall? As a well deserved leader in the industry, Yueke is now on the market, putting its “earning power” on the table, and the regulatory switch may be speeded up. Yueke is also likely to become a “typical” focus.
Since November 2019, the State Tobacco Monopoly Bureau and the state market supervision bureau have issued the notice on further protecting minors from e-cigarette infringement, which requires all Internet online channels to stop selling e-cigarette products and prohibit online advertising of e-cigarette. The introduction of this regulatory policy has shocked e-cigarettes, and e-cigarette enterprises have to withdraw their advertisements from online and offline products.
This policy directly led to the change of the growth trend of Yueke’s revenue in the fourth quarter of 2019, which declined month on month. The revenue in the third quarter and the fourth quarter of 2019 were RMB 556 million and RMB 410 million respectively. At that time, because the costs and expenses were still in a high position, Wuxin technology lost 50.3 million yuan in the fourth quarter of 2019, which stopped the previous momentum of rapid development.
This experience shows us the “terrible” influence of policy factors on the company, and supervision is always a knife hanging on the head.
In addition, at the policy level, the risk of tax increase can not be ignored. At present, China’s e-cigarettes are not defined as tobacco products, and the tax rate is still the same as that of general commodities, with only 13% value-added tax.
However, in the traditional cigarette production, the tax rate of class a cigarettes with a price of more than 70 yuan is as high as 56% of the sales, and the consumption tax of class B cigarettes with a price of less than 70 yuan is 36%. At the same time, 0.6 yuan will be levied on each cigarette. When it comes to wholesale, it will be charged at 11% of the price, and a specific tax of 0.005 yuan will be levied on each piece.
In the United States, e-cigarette has become a special commodity and an important means to control the market. In October 2019, the United States introduced the first e-cigarette tax act, which approved the tax on nicotine liquid. The bill will increase federal taxes by $9.9 billion over the next decade.
“It’s no use worrying now. We can only follow the policy.”. A person in charge of an e-cigarette brand department in Shenzhen believes that with the explosive growth of the e-cigarette market, it is estimated that the tax will be adjusted in the next five years, and the profit margin of e-cigarettes will also be greatly affected.
In addition to policy risks, Yueke’s position in the industrial chain also makes it look less “beautiful”. According to the prospectus, the gross profit rate of Wuxin technology has fallen from 44.7% in 2018 to 37.5% in 2019, and remained relatively stable at 37.9% in the first three quarters of 2020.
Yueke’s gross profit rate is lower than expected because it is squeezed by upstream suppliers and downstream distributors. On this point, we should start from the industry chain of offline e-cigarettes. In the e-cigarette industry, there are three types of enterprises: upstream, midstream and downstream. Yueke is a midstream enterprise, which is mainly responsible for the design and development of e-cigarettes, but its products have to be produced by the OEM, that is, the upstream enterprise of Yueke SIMORE for processing and production. The downstream enterprises are mainly responsible for sales and channel construction.
Yueke’s prospectus explains that the reason why the gross profit margin is lower than expected is mainly due to the significant increase in the proportion of offline dealers. When the company sells in this channel, the pricing is more relaxed to ensure that dealers and retailers can obtain sufficient profits.
In this way, how to balance the profit distribution with upstream and downstream manufacturers in the future is particularly critical. At present, SIMORE still has a high bargaining power in the industrial chain. As a cooperative manufacturer and exclusive production plant of Yueke, one of the major sources of income of SIMOL international is to manufacture electronic cigarettes for Yueke, and master the core technology of the ceramic core of fleem. However, if there is an accident in the cooperation between the two sides, it will be a fatal blow to the products. Therefore, Yueke also bought a factory in September last year, covering an area of 20000 square meters, but the current production capacity is far less than that of SIMOL mole.
How long can the story of e-cigarette be told?
In 2018, when the penetration rates of atomized e-cigarettes in the United Kingdom and the United States reached 50.4% and 32.4% respectively, the domestic penetration rate was only 1.2%.
In the blink of an eye, in addition to the highly controlled traditional tobacco industry, e-cigarettes have lived up to the expectations of the public and opened up a savage growth world. Yueke, the leader of the industry, is about to go public in the United States. There are tens of thousands of brand offline stores, but it also brings all-round challenges to public health, production and sales, and tax policies.
One of the most troublesome regulatory issues has become a sharp sword hanging over the e-cigarette industry. Juul, an e-cigarette giant in the United States, is a good example.
Juul, the most famous e-cigarette brand in the United States, once surpassed many Internet technology companies such as SpaceX and airbnb within three years of its establishment. After the government issued a series of e-cigarette bans, Juul, which once occupied more than 70% of the U.S. e-cigarette market, had a sales of $2 billion and a loss of $1 billion in 2019, and only $394 million in the first quarter of 2020 , a loss of $46 million.

There are also some views that the most terrible “harm” of e-cigarette is that it is underestimated as a substitute for traditional tobacco. The e-cigarette is creating a new and expanded user use scenario unconsciously.
“I know a lot of technology media reporters who didn’t smoke at all, but they smoked the e-cigarettes in their manuscripts. This is a profound understanding of why the capital market is flocking to e-cigarettes.” A we media practitioner once joked in the video.
The harm of e-cigarette to human body is still uncertain, but because it is easy to use and hidden, it will consume more nicotine than traditional tobacco in the long run. Although the propylene glycol and glycerol are non-toxic for external use, their impact on human respiratory system after long-term use is still unknown in medicine.
Whether it is regulatory policies, product standards, health and safety, e-cigarette industry is facing thorny problems. Many problems have gone beyond the control of Yueke. The only thing we can do now is to seize the time before the boots fall to the market, strive for more room for maneuver, and realize the withdrawal of investors by the way. When the “knife switch” has not yet come down, we should get the maximum benefit.
(Li Gang is a pseudonym)
(statement: This article only represents the author’s point of view, not Sina’s position.)