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Article / IPO channel
Source: node Finance (ID: jiedian2018)
After Seymour International (06969. HK), another e-cigarette brand is about to enter the capital market.
At the end of December 2020, relx’s main company, Wuxin technology, submitted a prospectus to the SEC, seeking to be listed on the US New York Stock Exchange, raising $932-1176 million for product and technology development, improving distribution and retail network, enhancing supply chain capacity and replenishing liquidity.
As a major customer of SIMORE international, Yueke’s listing plan has improved the market’s performance expectation and valuation of SIMORE international to a certain extent. On January 19, the share price of SIMORE international rose 8% during the day and continued to set a record high, with the total market value exceeding HK $450 billion.
However, as the saying goes, “it’s only when the mule is pulled out by the horse.”. Node Finance (ID: jiedian2018) will comprehensively explore the strength of Wuxin technology from the historical evolution, profitability, cost, sales channels and other dimensions.
Looking at the historical evolution:
Take advantage of the market “east wind” to start
In 2003, Han Li, a pharmacist in China, invented and founded the world’s first e-cigarette brand in the same year, e-cigarette industry is in the ascendant, with the number of users rapidly rising from about 7 million in 2011 to 40 million in 2018.
During this period, the supervision of various countries has been gradually strengthened, but the new thing is still spreading like a prairie fire, resulting in the birth of many industrial chain related enterprises such as SIMORE international, Borg, Grandia and Heyuan ismk.
It is in this context that Du Bing founded Wuxin technology, and Wang Ying, a former executive of Uber China, joined as CEO. Wuxin Technology launched Yueke generation in early 2018, and then launched Yueke alpha, Yueke phantom and other product series in the next two years, catering to the new consumption ecology of the market through the “five yuan” product matrix.
In an industry that is considered to have broad market space and promising prospects, Wuxin technology has received a lot of capital pursuit. It has obtained seven rounds of financing, with the amount of financing exceeding US $440 million. The investors include source capital, IDG, Sequoia first round, DST, etc.
Photo source: Research Report of Zhongtai securities
After several rounds of dilution, before the IPO, in the equity structure of Wuxin technology, 58.7% of shares were held by the founding team and employees, 10.7% by deep technology linkage fund of source capital, and 4.9% by Sequoia Capital. Wang Ying is the controlling shareholder and actual controller of the company, and also serves as the chairman of the board of directors.
Look at profitability:
Performance growth rate fell
The gross profit rate declined as a whole
Since its launch in 2018, Yueke, owned by Wuxin technology, has been promoted to the number one player in the domestic e-cigarette market in just over two years. At present, the brand market share is 62.6%, far more than the total market share of the second to fourth brands.
In terms of performance, in 2018, 2019 and the first three quarters of 2020, the company achieved operating revenue of 133 million yuan, 1.549 billion yuan and 2.201 billion yuan respectively, corresponding net profit of – 287000 yuan, 47.748 million yuan and 109 million yuan. In 2019 and the first three quarters of 2020, the year-on-year growth rate of revenue was 1064.66% and 93.28%, and the year-on-year growth rate of net profit was 16736.93% and 11.22%.
Tuyuan: Research Report of Tianfeng securities
From the perspective of data growth, the performance of Wuxin technology increased steadily, but the growth rate began to fall after the peak, especially the net profit showed signs of stagnation.
In terms of products, compared with SIMOL international in the upstream of the industrial chain, the revenue source of fog core technology is too single, mainly for cigarette guns and cigarette bombs; SIMOL international includes providing OEM e-cigarettes to downstream customers, selling its own brand of e-cigarettes, OEM heating non combustion equipment, and selling atomizing appliances to hemp manufacturers, with more diversified revenue sources.
Quarter, the player is not a smooth journey.
In the fourth quarter of 2019, due to the national restrictions on e-cigarette online sales, Yueke’s high-speed growth rhythm was interrupted, its revenue shrank significantly, and its net profit lost 50.3 million yuan.
In the third quarter of 2020, Yueke’s net profit was not optimistic, with a revenue of 1.12 billion yuan, the highest in a single quarter since its establishment, but the net profit was only 07.8 million yuan, the lowest in a single quarter since 2019.
Data source: Wuxin technology prospectus
In terms of gross profit rate reflecting profitability, it is more difficult for Wuxin technology to look at SIMORE international. From 2018 to 2019, the gross profit rate of Wuxin technology dropped from 44.7% to 37.5%. Although it rebounded slightly to 37.9% in the first three quarters of 2020, compared with the same period last year, the gross profit rate still dropped by 2.4%.
Data sources: Wuxin technology prospectus, Oriental Fortune choice
As shown in the figure above, the trend of gross profit rate of the two is not only contrary, but also the gap is widening year by year. As of the first half of 2020, the gross profit rate of SIMORE international is more than 10 percentage points higher than that of Wuxin technology.
It is worth noting that tobacco has always given the market the stereotype of huge profits, but it is far from being reflected in the fog core technology.
From the perspective of value distribution in the industrial chain, upstream enterprises such as Seymour international are often able to grab more profits by virtue of their technological advantages, while Yueke, as a brand, can get relatively limited value. The net interest rate in the first three quarters of 2020 is only 5%, while Seymour International’s net interest rate is close to 30% in several reporting periods.
Look at the period cost:
The rate of sales expenses decreased
Rising R & D cost rate
In terms of cost, the main cost of fog core technology is product cost, which accounts for more than 96.8% of the total cost of the company.
On the expense side, including sales expense, management expense and R & D expense, the three expenses have different performances.
In terms of sales expenses, affected by the restrictions on online channels imposed by the policy ban in 2019, Wuxin technology reduced its marketing expenses on online platforms. In the first three quarters of 2019 and 2020, the sales expenses were 539 million yuan and 246 million yuan, and the sales expense rate was 23.2% and 11.2%, with a year-on-year decrease of 2.6% and 10.1%.
As the company is in the initial stage of expansion, the expenses of salary, welfare, share remuneration for general and administrative personnel and professional service fee are relatively large. This led to a significant increase in its administrative expenses: 325 million yuan in the first three quarters of 2020, a year-on-year increase of nearly 300%, and the rate of administrative expenses increased from 7.2% to 14.8%.
Data source: Wuxin technology prospectus
In terms of R & D expenses, in the first three quarters of 2020, fog core technology invested 90.4 million yuan in R & D expenses, an increase of nearly 73 million yuan compared with the same period in 2019, and the R & D expense rate increased from 1.5% to 4.1%. Compared with 2018, the R & D expense rate increased by 2.6 percentage points.
In the foreseeable future, Wuxin technology said that with the increase of employees and per capita salary, continuous progress in technology and product development, and further expansion of its product portfolio, management expenses and R & D expenses will continue to rise.
Look at the sales channel:
Lose the line, move to the offline
From the second half of 2018 to 2019, in the face of e-cigarettes in full swing, the State Administration of market supervision and administration and the State Tobacco Monopoly Bureau have issued the notice on banning the sale of e-cigarettes to minors and the notice on further protecting minors from the infringement of e-cigarettes, which set up the target range and online channels of e-cigarettes A “hoop curse”.
When the shock wave hit, the e-cigarette industry suffered a big earthquake, and some brands with online e-commerce platform as the main sales channel were even completely out, such as Luo Yonghao’s Ono e-cigarette. In desperation, Yueke has to vigorously expand its offline channels.
According to the prospectus, from 2018 to the first three quarters of 2020, the proportion of sales revenue of Wuxin technology to end users through the third-party e-commerce platform decreased from 33.5% to 0, and the proportion of sales revenue to offline distributors increased from 60.2% to 98.2%.
This rise and fall reflects the great action of fog core technology in channel. Without online channel, offline network becomes the most important. From the first three quarters of 2019 to the first three quarters of 2020, the number of authorized distributors of Wuxin technology increased from 41 to 110, with more than 5000 stores. The net sales revenue from offline distributors increased by 176.3% from 780 million yuan to 2.162 billion yuan.
The rush to the beach line is bound to be a capital contest. Opening a large number of stores means burning a lot of money, which leads to the high debt ratio of Wuxin technology.
In 2018, 2019 and the first three quarters of 2020, the asset liability ratio of Wuxin technology was 93.7%, 92.64% and 87.42% respectively. As of September 30, 2020, the total liabilities of Wuxin technology reached 3.492 billion yuan, of which the accumulated current liabilities reached 2.798 billion yuan, and the balance of cash and short-term deposits at the end of the period was 1.808 billion yuan. The book cash could not cover the current liabilities, so it was more urgent to be listed.
Data source: Wuxin technology prospectus
On the other hand, in order to open the offline market in a short period of time, the offline channel of Wuxin technology adopts a loose pricing strategy, so as to bring sufficient profits to distributors and retailers, which directly lowers the company’s gross profit margin. As mentioned above, from 2018 to 2019, the gross profit margin of Wuxin technology decreased by 7.2 percentage points.
Look at quality control
Frequent quality problems
Repeated consumer complaints
According to the volume of shipment announced in the prospectus, from 2018 to September 30, 2020, Yueke cigarette rods sold 10.4 million sets and cigarette bombs sold 204.4 million pieces. In the three months of the third quarter of 2020, cigarette rods and cigarette bombs sold 3 million sets and 61.9 million pieces respectively.
Data source: Wuxin international prospectus
The significant growth of shipping volume has brought a lot of revenue, but it can not cover up the company’s management and quality oversight. In the past few years, Yueke has been criticized by consumers for the proliferation of counterfeit goods and product quality problems.
Searching for Yueke on black cat complaints, the company’s satisfaction is only 3 stars, and there are more than 90 complaints. The problems focus on the leakage of smoke and bombs, abnormal power, and some strange tastes. Some consumers also report that there are problems after sales.
In May 2020, Shenzhen tobacco control office, together with Nanshan Market Supervision Bureau and other relevant functional departments, found that Yueke e-cigarette store on the second floor of Shenzhen Nanshan Tianli famous city had illegal tobacco control activities. They put the store on file for investigation, and then imposed an administrative penalty of 2000 yuan in July 2020. It is reported that this is the first “ticket” in the national e-cigarette market.
Look at regulatory risk:
It is the general trend that e-cigarettes should be included in the examination system
E-cigarette industry has always been controversial.
Who believes that e-cigarettes are destructive and addictive, and have potential health hazards. It urges all countries to accept its suggestions on the control of e-cigarettes. Countries such as the United States, India, Spain and the Philippines have strongly controlled the e-cigarette market, while many countries deny that it is too dangerous, and only make some restrictions on e-cigarettes.
In spite of this, e-cigarette industry is still regarded as an emerging consumer industry with great development prospect. According to the CIC report, in terms of retail sales, China’s e-cigarette market will reach US $1.5 billion in 2019, accounting for 0.6% of the total tobacco market. It is expected to reach US $11.3 billion in 2023, with a compound annual growth rate of 65.9%.
Photo source: Research Report of Zhongtai securities
At present, there is no clear national law for electronic atomization products in China. However, from the past trend, it was initially clear that heating non combustible products belong to tobacco products, and it was forbidden to sell HNB products such as iqos in China. In July 2019, the National Health Commission disclosed that it planned to legislate on the supervision of electronic cigarettes, and so on, the regulatory attitude is not only “tough”, but also more and more strict.
It is expected that in the future, e-cigarettes will be included in the review system. For Yueke, the “knife” of policy supervision will eventually fall down, just a matter of time.
(statement: This article only represents the author’s point of view, not Sina’s position.)