Major clients are optimistic about the sales feedback of new products, how can SMOORE INTL (06969) leverage new opportunities in the global HNB market?

According to the latest data from the National Bureau of Statistics, the upgrade category of consumption is showing an accelerating growth trend, with significant increases in some high-end consumption areas. Analysis points out that with the continuous innovation of consumption patterns, new consumption forms represented by "self-enjoyment consumption" and "emotional consumption," as well as personalized and diversified consumption demands, are thriving. In this context, the consumption of tobacco and alcohol has attracted attention. It has been observed that the electronic cigarette sector has been continuously rising since mid-April. Taking the industry-leading company in the electronic cigarette industry, SMOORE INTL (06969), as an example, the company's stock price has been steadily increasing in the second quarter, with a growth of up to 100% compared to the beginning of the year. Recently, the company's major client British American Tobacco released outstanding performance, causing the company's stock price to rise again, and SMOORE INTL's development prospects are once again anticipated by the market. Good performance from major clients The financial report shows that in the first half of this year, British American Tobacco's revenue from new tobacco products was 1.651 billion pounds, a year-on-year increase of 2.4%, with adjusted gross profit of 1.006 billion pounds, a year-on-year increase of 6.8%, and an adjusted gross profit margin increasing by 2.5 percentage points to 59.5% year-on-year. This product category contributed a profit growth of 39%, reaching 179 million pounds. Among them, the company's Heat not Burn (HNB) business's new product performance was outstanding, with revenue of 440 million pounds, a year-on-year increase of 0.8%, and sales volume reaching 10.1 billion units, a year-on-year increase of 1.6%. It is worth mentioning that the company's new product Hilo was test-marketed in Sendai, Japan in June, and consumer awareness, innovation, and product design capability of Glo had significantly improved due to Hilo, according to the company's market research. Within a few weeks of its launch, Hilo's market share had already increased to 1.5%. The company recognized the successful trial of Hilo and plans to promote it throughout Japan in September and expand to more core markets in the second half of the year. In this context, British American Tobacco raised the company's revenue guidance, expecting a 1-2% increase in revenue for the 2025 fiscal year, with the annual growth rate of new tobacco revenue to be in the mid-single digits. At the same time, the company has also increased its stock repurchase program to boost market confidence. Promising Future for SMOORE INTL It is understood that SMOORE INTL is the core supplier of British American Tobacco's Glo Hilo product, operating on a "contract manufacturing income + sales revenue sharing" model. Recently, the company's interim report announcement indicated that the company's revenue in the first half of this year was 6.013 billion yuan, an 18% year-on-year increase; pre-tax profit was 629-769 million yuan, a 5%-23% year-on-year decrease; and post-tax profit was 443-541 million yuan, a 21%-35% year-on-year decrease. Some analysts pointed out that thanks to the continuous introduction of innovative products and the continuous improvement of competitiveness in major global markets, both the company's own brand business and enterprise customer business have achieved remarkable revenue growth, driving a corresponding increase in gross profit. However, profit performance was affected by share payment expenses, distribution and sales expenses, and increased legal service costs. The increase in distribution and sales expenses was mainly due to the company's further efforts to expand its own brand product market, especially in overseas markets. It should be emphasized that since 2010, the company has been developing HNB products with forward-looking strategic vision, demonstrating outstanding technological foresight. In 2017, the company established a strategic cooperation relationship with Japan Tobacco, formally entering the HNB market by providing core electronic vaporization components. This collaboration bore fruit in 2018, with the joint launch of the Ploom Tech product, achieving a significant technological innovation by successfully applying oil vaporization technology to hybrid HNB devices, setting a new benchmark for industry development. To further enhance its strategic layout in the HNB field, the company has established the METEX business unit, which has accumulated solid technological barriers through continuous technological research and innovation. The company not only possesses multiple independent HNB technology patents but has also developed diversified heating technology solutions, demonstrating the depth and breadth of its technological innovation. In 2024, the company made significant progress with the glo Hilo series of products developed in collaboration with British American Tobacco, not only designing and manufacturing electronic vaporization components but also participating in the research and development of cigarette support patent technology, transitioning from a component supplier to a core technology partner and playing a more important role in the industrial value chain. Huge Potential in the HNB Market These strategic layouts and technological breakthroughs fully demonstrate the company's technical strength and market influence in the HNB field, laying a solid foundation for its future development. Since 2024, the company has continued to strengthen its research and development efforts in the areas of heating without burning (HNB) and medical atomization, with research and development investment achieving a 6% year-on-year growth in 2024 despite a high base. Of note is that the company has increased its research and development investment in medical atomization and cosmetic products to 390 million yuan, a significant increase of 41.3% year-on-year, highlighting the company's strategic focus and determination in the HNB business. Caitong pointed out that the company now has a significantly differentiated and competitive portfolio of heating without burning products, with innovative products gaining customer acceptance. By supporting customers to introduce heating without burning products globally in 2025, the HNB business is expected to gradually contribute more revenue to the company. The company is actively investing in research and development, accumulating more technology and product solutions, and actively seeking cooperation with other industry leaders, laying the foundation for the landing of the second growth curve. Sinolink's research report stated that the global HNB market is still in a period of continuous growth, and the opening of the HNB market in the United States is expected to contribute significantly to growth. With full restrictions on disposable cigarettes in Europe and a severe crackdown on illegal products in the US, and accelerated approval of compliant products, the legal refillable market is expected to continue to expand. Previously, Philip Morris and British American Tobacco had set targets for the proportion of future new tobacco revenue to exceed 50%, indicating that the development of new tobacco products overseas is a prevailing trend. The FDA director stated that currently, 85% of electronic cigarettes on the market are illegal products, with the crackdown on illegal electronic cigarettes becoming a top priority. The FDA has begun crackdowns on illegal products with customs across departments and has begun to seize large quantities of illegal products. There is still significant room for expansion in the compliant market. The FDA crackdown on illegal products and the gradual release of compliant product sales licenses are proceeding in parallel, indicating a clear trend of expanding the compliant atomization market in the United States. Caitong stated that stricter regulation of overseas non-compliant products will benefit leading brands, and the company is expected to fully benefit from the increasing demand for new tobacco products overseas, expanding its large customer business. The long-term growth of the vapor industry, represented by SMOORE INTL, is promising. In summary, SMOORE INTL has gradually evolved from a core component supplier to a strategic partner in the HNB field thanks to its forward-thinking technological layout and strong industrial chain synergy. The breakthrough performance and market expansion of major clients such as British American Tobacco not only validate the commercial value of the company's technological route but also open up broader growth opportunities for SMOORE INTL. Despite short-term profit being affected by expense investment, the company's advantages in core HNB technology, patent reserves, and global production capacity, combined with the continued expansion of compliance markets under stricter regulations worldwide, will drive the long-term value release of the company. In the future, with the global launch of innovative products such as glo Hilo, SMOORE INTL is expected to further consolidate its leading position in the new tobacco industry revolution, experiencing a dual increase in performance and valuation.