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China’s e-cigarette industry’s super unicorn, running IPO.
On the evening of January 22, Yueke relx, an e-cigarette company, was officially listed on the New York Stock Exchange of the United States with the code “RLX”. The opening share price soared by 104%, which directly triggered the circuit breaker suspension and resumed trading five minutes later. The highest rise in share price reached 158% and the closing share price rose by 145.9%, with a market value of US $45.8 billion. Wang Ying, the founder, holds 58.7% of the shares, which translates into a market value of 26.9 billion US dollars, becoming a 100 billion millionaires.
This is the first e-cigarette brand listed in China. Previously, SIMORE, known as “the first share of e-cigarettes”, was listed on the Hong Kong Stock Exchange in July 2020, but SIMORE is an e-cigarette manufacturer, which provides OEM production for e-cigarette brands such as Yueke. Yueke’s successful listing means the birth of “the first share of China’s e-cigarette brand”.
According to the prospectus, the revenue of Yueke in 2018, 2019 and the first three quarters of 2020 are 133 million yuan, 1549 million yuan and 2.201 billion yuan respectively. According to this speed, the annual revenue of 2020 will exceed 3 billion yuan. In terms of sales, Yueke is the largest e-cigarette market in China, accounting for 62.6% of the market share.
What attracts the most attention of the market is its profitability. The net profit of Yueke in 2019 is 47.75 million yuan, which will increase to 109 million yuan in the first three quarters of 2020. After removing the influence of employee options and other factors, the adjusted net profit is 382 million yuan, with a net profit margin of 17%. Tobacco is a profiteering business in the eyes of many people. With the “electronic” concept of e-cigarettes, the profitability has not let the market down.
The development speed of Yueke is amazing. It was founded in January 2018 and received investment from IDG, source capital and Sequoia Capital. In July of the next year, it was valued at US $2.4 billion, which took only 17 months, even faster than lucky coffee, which took 22 months. From the establishment to the submission of listing application, Yueke only took three years, which is faster than most of the listed companies.
Because of regulatory problems, the e-cigarette industry will start to keep a low profile in 2020. Yueke’s financial data disclosure provides a perspective for the outside world to observe the e-cigarette industry. We may find the answers to the puzzles left by the previous events, such as the entry of online entrepreneurs, the capital craze, 315 roll call, online sales ban, etc.
With an annual income of 3 billion, e-cigarettes really make money
The rise of domestic e-cigarette industry began in 2018. That year, the industry was not lively. Now the active brands in the market, such as yooz, Xuejia, Fulu and Ono, have not been established. Luo Yonghao and Cai Yuedong entered the market. That’s what happened later. Yueke was founded in January that year.
In 2018, Yueke sold 500000 cigarette sticks and 5.9 million cigarette bombs, with a revenue of 133 million yuan. In the first year of starting a business, the revenue exceeded 100 million yuan, so it was easy to start. By 2019, the revenue of Yueke will soar to 1.549 billion yuan, reaching 2.201 billion yuan in the first three quarters of 2020.
Quarterly revenue and net profit of Yueke / Shenzhen Fuel Co., Ltd
What’s more amazing is profitability. The gross profit rate of Yueke is maintained at about 40%, the net profit rate is 3% in 2019 and 5% in 2020. In addition to the initial loss of 287000 yuan in 2018, Yueke began to make money in the second year, with a net profit of 47.75 million yuan in 2019 and 109 million yuan in the first three quarters of 2020. This is still under the impact of online ban and offline epidemic of e-cigarettes.
According to the survey data of CIC report, the market share of Yueke was 48% by the end of September 2019, and it will increase to 62.6% by the end of September 2020. Yueke has won half of the domestic e-cigarette market. In terms of brand awareness, Yueke’s user awareness is 67.6%, ranking first.
Compared with the revenue scale and growth rate of Yueke, investors are more interested in the huge and potential domestic e-cigarette market.
China is the world’s largest tobacco market, with more than 280 million smokers. The number of smokers ranks first in the world, more than the total number of the last nine. However, the penetration rate of e-cigarettes among Chinese smokers is very low, which is lower than the other nine markets in the top ten in terms of the number of smokers. So many investors believe that China is the world’s largest potential market for e-cigarettes.
Top 10 markets for global smokers
Yueke quoted CIC report data: in 2016, China’s e-cigarette market size was US $600 million, which has grown to US $1.5 billion in 2019, and is expected to reach US $11.3 billion in 2023, with a compound annual growth rate of 65.9%.
It is such an industry with huge potential, high-speed growth and rich profits that has attracted star entrepreneurs such as Luo Yonghao and uncle Tong Dao. Yueke is the one with the fastest development and the most profits.
But people wonder if e-cigarettes are tobacco? Where does the profit come from?
Selling cigarettes for drainage, selling cigarettes for money
There are two core components of e-cigarette: cigarette rod and cigarette bomb. The cigarette rod is reusable and a hardware product. The cigarette cartridge is disposable and consumable, which needs to be purchased again. This is like a printer. If you buy a printer, you need to buy an ink cartridge. The machine can be used all the time, but the ink cartridge needs to be replaced after a period of time.
Printer manufacturers make money by selling ink cartridges. In the same way, e-cigarette manufacturers also make money by selling cigarette cartridges.
Yueke’s tobacco pole and cigarette ejection volume in each quarter
Yueke disclosed detailed shipment data in the prospectus. In 2018, 500000 cigarette poles were sold in the whole year, 700000 in the first quarter of 2019, and 1.5 million in the third quarter. In the fourth quarter, the shipment volume declined due to online sales ban. In the second quarter of 2020, the number rose rapidly, and 3 million in the third quarter. Cumulatively, Yueke’s total shipment of cigarette poles is 10.4 million. Excluding the situation that some of them purchased several cigarette poles at the same time and the dealers hoarded goods, the number of users of Yueke is also in the order of millions.
The sales of cigarette bombs are the big ones. In the second quarter of 2019, it will exceed 10 million for the first time, 20 million in the third quarter, 40 million in the second quarter of 2020 and 60 million in the third quarter. This means that in the third quarter of 2020, the average monthly shipment of Yueke cigarette bombs will be about 20 million.
The biggest difference between e-cigarettes and ordinary electronic products is that they are addictive. Nicotine is an addictive substance, which exists in cigarette bombs. Therefore, users of e-cigarettes need to repeatedly purchase cigarette cartridges in order to continue to use e-cigarettes. All e-cigarette practitioners know that the core of e-cigarette business is the re purchase of cigarette bombs. Therefore, in the first half of 2020, when the e-cigarette industry is fighting a price war to grab the market, many brands will launch the activity of giving away free cigarette sticks, selling cigarette sticks with money, in order to obtain users, and then earn back by selling cigarette bombs.
Therefore, no matter how intelligent and high-tech the appearance of e-cigarette products, how exquisite the packaging, in essence, it still belongs to the deformation of tobacco. In fact, many e-cigarette brands have publicized their cigarette replacement function. When investors calculate the market space, they should also look at the penetration rate of e-cigarette to the traditional cigarette market.
But the interesting point is that although it has the characteristics of cigarettes, e-cigarettes are not clearly divided into tobacco categories, and they are taxed according to ordinary commodities. So the e-cigarette companies in the market are doing tobacco business and enjoying the treatment of technology companies.
Online sales banned
E-cigarette business is not cool
The most uncertain factor of e-cigarette industry is policy supervision.
At the end of October 2019, the state Market Supervision Bureau and the State Tobacco Monopoly Bureau jointly issued the notice on further protecting minors from e-cigarettes, which prohibited the sale and advertising of e-cigarettes on the Internet. Subsequently, all e-commerce platforms were banned, online stores were closed, and e-cigarettes were taken off the shelves. E-cigarettes are forced to switch to offline channels.
According to the data disclosed in Yueke’s prospectus, the e-cigarette industry is not cool when online after-sales services are banned. On the contrary, it is still living well.
In the quarter when the sales ban policy was introduced, Yueke’s revenue declined month on month for the first time. In the first quarter of 2020, it fell again due to the impact of the epidemic. However, it began to rebound in the second quarter, broke the 1 billion mark in the third quarter, and soon recovered from the online sales ban and the epidemic.
Yueke’s sales channels are divided into four categories: offline dealers, e-commerce platform, online stores opened by dealers, and direct selling stores. In 2018, the sales revenue of e-commerce channels such as tmall Jingdong accounted for 33.5% of the overall revenue of Yueke, and offline distribution channels accounted for 60.2%. Here is a very important message: the offline channel is the most important channel of Yueke at the beginning. Although Yueke was first known through e-commerce channels, and online is the best in the industry, offline is the basic dish of Yueke.
Before the ban of online channels in the fourth quarter of 2019, the sales revenue of Yueke’s overall online channels accounted for 31.1%, and the proportion of offline channels increased to 68.7%. After the online ban policy was introduced, Yueke online returned to zero, and the sales proportion of offline channels increased to 98.2%.
Like most players in the industry, online after-sales is banned, Yueke began to vigorously layout offline, crazy shop. At the end of September 2019, the number of authorized dealers of Yueke is 41, and it will increase to 110 by the end of September 2020. The number of Yueke’s stores has also increased rapidly, reaching more than 4000 in July 2020.
In fact, not only Yueke, but also other players have recovered from the ban and epidemic, and the offline market has found new growth space.
Yooz grapefruit is still another active player in the e-cigarette market. Founder Cai Yuedong told shenran that now there are more than 3000 offline stores in yooz, mainly opened in the past six months. In the fourth quarter of last year alone, yooz opened nearly 1800 new stores, and plans to open 10000 new stores this year. In addition, according to Cai Yuedong, now yooz can sell more than 1 million pieces of equipment and 10 million pieces of smoke bombs every month.
Platinum also developed rapidly. Wang Zeqi, CEO of platinum, told shenran that the number of stores that platinum has entered has doubled in the past year, and the total number of convenience stores and exclusive stores that platinum has entered is about 110000. In addition, platinum Germany has submitted an application for PMTA in the United States last year, and continues to invest in the United States, the largest single market of e-cigarettes in the world. PMTA is similar to the U.S. e-cigarette market access, only through the PMTA audit, e-cigarette products can be sold in the U.S. market. In January this year, platinum received a notice from the US FDA that its application has passed the preliminary review and entered the substantive scientific review stage. It is the only Chinese funded e-cigarette enterprise that has entered the substantive scientific review stage of the FDA.
In the past year, the number of active brands of e-cigarettes nationwide has decreased by 90%, and most of the small and medium-sized players have been eliminated. Some of the surviving but inactive brands are either herding sheep or shrinking into a regional brand. China’s e-cigarettes have entered the era of “the rest is the king”.
Yueke’s listing will open a new way for other domestic e-cigarette players to embrace the capital market.
Listed after three years of establishment
What’s the future of Yueke?
From the perspective of development speed, Yueke is undoubtedly one of the most explosive entrepreneurial projects in recent two years.
IDG and source capital invested in Yueke’s angel round and a round of financing, and Sequoia Capital entered the a + round. In public reports, Yueke’s valuation remained at July 2019, at $2.4 billion. Online ban after-sales, e-cigarette players are trying to keep a low profile, no longer VC access, valuation is no longer updated.
But we can still see some clues from Yueke’s prospectus. In February 2019, Yueke completed round B financing at the price of US $7 per share. In April and may 2019, Yueke completed round C financing at the price of US $18.7 per share. In August, Yueke increased the amount of round C financing to US $22.5 per share. In September 2020, Yueke completed round D-1 and D-2 financing, and the price has risen to US $29 and US $36.2 per share. The fair value of Yueke’s common stock increased from $11.3 per share at the end of 2019 to $19.6 at the end of September 2020. This means that Yueke’s valuation has almost always doubled.
Equity structure of Yueke
According to the prospectus, Wang Ying, founder and CEO of Yueke, is the largest shareholder of Yueke, holding 58.7%, CO founders Jiang long and Wen Yilong holding 9.9% and 6.5% respectively, source capital holding 10.7% and Sequoia holding 4.9%.
In July 2019, Yueke’s valuation was less than $3 billion, and a year and a half later, it was more than $40 billion. Those investment institutions that participated in Yueke’s financing in the early stage have obtained dozens of times of financial returns.
Most of the members of Yueke’s team came from the Internet. There are seven members in the founding team, including six former core employees of Uber China. Wang Ying, founder and CEO of Uber China, was the general manager of the central region before the merger of Uber China by Didi, and led the Uber team after the merger.
Wang Ying herself is a heavy user of e-cigarettes. The idea that she started her business as an e-cigarette was that during her stay in Uber and Didi, she was overworked and smoked a lot of e-cigarettes.
This has led to a strong trace of the Internet in the past. When Yueke was founded in early 2018, the most eye-catching operation was Jingdong crowdfunding. The first product raised 1.08 million yuan in more than one month, accumulated the first wave of seed users, and launched the first shot of domestic e-cigarette brands. Later, relying on the laying of online and offline channels, Yueke quickly opened up a new situation in the Chinese market, seizing the emerging blank market and occupying the first mover advantage.
Of course, behind the surge in performance and valuation is still unclear policy regulation.
In 2019, CCTV called 315 e-cigarettes and banned them online in November 2019. On the whole, the domestic regulation of e-cigarettes has not been relaxed. The discussion on whether e-cigarettes are toxic has been going on, and the protection of minors from e-cigarettes has always been the high-voltage line of e-cigarettes industry. This is the fundamental reason for investors to leave the industry.
Yueke’s listing not only raises more development funds for itself, but also takes the lead in providing samples for the listing of e-cigarette companies. However, the possible tightening of supervision at any time still makes the industry full of variables.
(statement: This article only represents the author’s point of view, not Sina’s position.)