A series of smoking bans in public places means that Chinese investors have turned their attention to the business of electronic cigarettes.
Five electronic cigarette manufacturers have raised funds recently. Shenzhen-based Doo said, on Monday, that it had raised at least $1.5 million. Two others, Jemiu and HOPO, have also completed more than $1.5 million in early-stage funding. And Shenzhen-based YouMe secured $10.7 million for its Angel round.
But the highlight is the $40 million investment in e-cigarette brand Snowplus – the largest in the industry for the past six months.
This is only the tip of the e-cigarette iceberg. E-cigarette company Vaporesso has said that it intends to delist from China’s NEEQ board and a listing in Hong Kong is rumoured. And with China Century Group's investment in US-based Enki last week, Chinese investors are even expanding their influence across the Pacific.
E-cigarettes used to be a minority interest subculture. At first, young people tried them because they look “cooler” than normal cigarettes. “But it tastes very different from normal ones,” one smoker told FinanceAsia.
Traditional tobacconists began to take e-cigarettes seriously after governments introduced a series of smoking bans. Most countries, including China, have banned smoking in public places in major cities. And the country's tobacco tax has been raised to about 40%. The government also hiked the ad valorem tax from 5% to 11% in 2015.
Cigarette sales have decreased around the world since 2013, as more people shun them. E-cigarettes, sold as a substitute for tobacco, have become popular in the meantime.
“Most of the e-cigarette manufacturers are attracting non-smokers as new customers,” explained one financial advisor who looks at e-cigarette investments. “Some imitate the taste of traditional cigarettes to attract smokers.”
With its cheap and comprehensive supply chain, China is the world's largest manufacturer of e-cigarettes. But most are sold overseas thanks to extremely strict domestic regulations. This hasn't detered investors. “A lot of private equity firms are laying the groundwork by investing in e-cigarettes,” the financial advisor said. “Some GPs are not allowed to invest as their LPs are government funds or educational funds. But the interest is definitely there.”
Although smokers face high taxes and tightening regulations, China still has the biggest tobacco consumption in the world – one-third of the world’s total tobacco sales. “Top players are trying to educate Chinese smokers about the benefits of e-cigarette,” the advisor said. “But everyone is fighting to become the rule-maker in the e-cigarette market.”
That could be one explanation for investor fever, but the industry still expects further regulation.