Cinda Securities: HNB has broad development space and China Tobacco's open market logic is smooth

The Zhitong Finance App learned that Cinda Securities released a research report saying that HNB's overall industrial chain has broad space, and that Chinese suppliers are expected to participate in all aspects. HNB is similar to the underlying logic of innovative cigarettes. The harm reduction effect is widely recognized, and the average price of overseas terminals can be compared to mid-range cigarettes. Therefore, HNB conforms to China Tobacco's basic logic of innovation and bonded taxes, and China Tobacco's market opening logic is smooth. New types of tobacco have gradually affected the basic market of traditional cigarettes. Until IQOSILUMA is listed in the US, the bank expects cigarette sales to be further pressured. In this context, British and American Tobacco has further increased its emphasis on HNB R&D and products. The new GLOHILO product will be released at the end of 2024. The product strength is close to IQOSILUMA. With a broad global channel layout, it is expected to reverse the decline in the future.

Cinda Securities's main views are as follows:

The core logic of the new type of tobacco is to replace tobacco, and HNB has broad development space

The global market size of HNB smokes/atomization/atomization disposable in 2023 was US$323/135/5.4 billion, respectively. The CAGR for HNB cigarettes reached 21.3% in 2019-2023, and 2.9%/83.7% for atomized/disposable, respectively. HNB started late, but it produces smoke by heating tobacco flakes (raw materials are tobacco leaves), which is close to the taste of real smoke, and is more effective in replacing tobacco; in addition, HNB has a high usage threshold, is rich in flavor, and less portable to use than atomized products, so it itself is less attractive to young people (according to the FDA, few non-smokers choose to use IQOS). With strong cigarette replacement effectiveness and low compliance risk, according to Euromonitor estimates, the HNB market CAGR is expected to reach 13.5% in 2023-2028, while the vaping exchange/one-time CAGR is 5.5%/-0.3%, respectively.

China and the US are expected to become core markets

1) US: IQOS returned to the US in 2024, but is still in the consumer education stage. The bank expects the new ILUMA product to officially expand into the US market after passing PMTA on 25H2. Referring to the Japanese rhythm, assuming that the HNB penetration rate in the US reaches 30% in 2030 (HNB smokers/smoke+atomization+HNB), the annual cigarette consumption is expected to increase to 80-90 billion (global cigarette consumption is 160 billion in 2023), which is expected to become a core market comparable to Japan.

2) China: In recent years, China's high-end cigarettes have come under pressure. China Tobacco has successively launched various innovative cigarettes in various provinces, aiming to benefit social health, increase prices, and guarantee taxes. HNB is similar to the underlying logic of innovative cigarettes. The harm reduction effect is widely recognized, and the average price of overseas terminals can be compared to mid-range cigarettes. Therefore, HNB conforms to China Tobacco's basic logic of innovation and bonded taxes, and China Tobacco's market opening logic is smooth.

The general trend in the smoke-free era is accelerating the deployment of tobacco leaders

In the 2024 global nicotine market, cigarettes, HNB/atomized/oral tobacco accounted for about 86%/7%/6%/1%, respectively. New types of tobacco have changed the usage habits of nicotine consumers, thereby forcing the transformation of leading tobacco industries. In the latest reporting period, Fimo International/British Tobacco/ Japanese Tobacco/ Imperial Tobacco's new tobacco revenue share has reached 38%/13%/3%/4%, respectively.

Looking ahead, 1) Fimo International plans to basically become a smoke-free enterprise by 2030, with more than 2/3 of its total net revenue coming from new tobacco products; 2) British and American tobacco expects 50 million new tobacco users in 2030, accounting for 50% of revenue in 2035; 3) Japanese tobacco is expected to account for more than 1/2 of the sales volume of heated tobacco products by 2035 (currently accounting for about 2% of sales); 4) Imperial Tobacco has proposed a five-year “focus on new tobacco” strategy to firmly promote the transformation to the next generation of products (new types of tobacco).

The battlefield of giants, the competitive landscape is expected to change at an accelerated pace

In 2023, traditional smoke/atomization/HNB global CR5 was 83.1%/50.4%/96.9%, respectively. HNB raw material procurement and channel construction barriers are high, and the main players are led by traditional tobacco groups. Fimo International launched the epoch-making product IQOSILLUMA in 2021, and IQOS already has a market share of over 70% in the global HNB market; unlike Pimo's focus on HNB, British American Tobacco insists on trying to provide a multi-category tobacco product portfolio, and its HNB share has continued to decline in recent years.

In 2024, tobacco sales in the UK and the US fell 5.5% (the US fell 10.1%). New types of tobacco have gradually affected the basic market of traditional cigarettes. Until IQOSILUMA is listed in the US, the bank expects cigarette sales to be further pressured. In this context, British and American Tobacco has further increased its emphasis on HNB R&D and products. The new GLOHILO product will be released at the end of 2024. The product strength is close to IQOSILUMA. With a broad global channel layout, it is expected to reverse the decline in the future.

Risk factors: Stricter regulations, lower global penetration than expected, and increased competition.