Stricter US And European Vaping Rules Will Shrink Margins

Key Takeaways

• Intensifying regulatory pressures and societal opposition threaten Smoore's market size, profitability, and brand reputation in core vaping segments.
  
• Heavy client concentration and rising competition raise risks of revenue loss, margin erosion, and diminished impact of R&D investment.
  
• Diversifying into new technology and markets, regulatory compliance, and strategic partnerships are strengthening Smoore's margins, revenue stability, and global market presence.

Catalysts

An investment holding company, engages in the provision of vaping technology solutions.

• The expanding wave of global regulatory crackdowns on vaping, particularly recent bans and stricter controls on disposable e-cigarettes in key markets like Europe and the United States, is set to sharply curtail Smoore's addressable market and could drive multi-year revenue stagnation or decline, especially as over 90 percent of sales are derived from nicotine-related vaping products.
  
• Rising societal opposition to both tobacco and vaping in developed economies, along with shifting health priorities, continues to undermine consumer adoption, leading to eroding sales volumes and forcing Smoore to devote extra resources to marketing and compliance, lowering future net margins.
  
• Persistent overreliance on a few large international clients, such as British American Tobacco, results in significant customer concentration risk that, if realized (for example, through regulatory-driven business loss at a key OEM partner), could precipitate a sudden tumble in both revenues and earnings.
  
• Escalating entry by low-cost competitors and rapid commoditization of vaping technology threaten Smoore's ability to sustain premium pricing; this will likely drive meaningful, long-term contraction in gross margins and stall the anticipated positive effects of R&D investment.
  
• Growing frequency and scale of legal actions against the vaping industry for alleged health risks and youth usage are poised to further increase operational and compliance costs, while also risking reputational damage that can constrict margins and deter customers on both the technology and branded product fronts.

Smoore International Holdings Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Smoore International Holdings compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Smoore International Holdings's revenue will grow by 7.7% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 8.7% today to 14.9% in 3 years time.
• The bearish analysts expect earnings to reach CN¥2.4 billion (and earnings per share of CN¥0.39) by about September 2028, up from CN¥1.1 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 26.5x on those 2028 earnings, down from 95.3x today. This future PE is lower than the current PE for the HK Tobacco industry at 96.6x.
• Analysts expect the number of shares outstanding to grow by 0.53% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.56%, as per the Simply Wall St company report.

Smoore International Holdings Future Earnings Per Share Growth

Risks

• Smoore has demonstrated strong capability in technological innovation and R&D, especially with its 10-year investment in HNB products and proprietary atomization technology, which can drive high-margin product cycles and support long-term margin and revenue growth.
  
• The company is successfully diversifying beyond traditional e-cigarettes, expanding into growth areas such as inhalation therapy and beauty atomization, which can open up new recurring revenue streams and reduce reliance on the vaping market.
  
• Smoore is experiencing global regulatory clarity and acceptance-especially in the U.S. and Europe-where its compliance and innovation allow faster, smoother entry of new products, enhancing its ability to capture market share and sustain sales momentum.
  
• The self-branded business, especially the VAPORESSO open system, is gaining significant market share and global recognition, improving Smoore's pricing power and stabilizing earnings while building a direct relationship with consumers.
  
• Increased investment in localized production, strong partnerships with key tobacco companies, and successful technical service contracts with major clients are providing both operational resilience and additional high-margin sources of revenue, which can mitigate risks to net margins and underpin earnings growth.

Valuation

• The assumed bearish price target for Smoore International Holdings is HK$8.74, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Smoore International Holdings's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of HK$27.12, and the most bearish reporting a price target of just HK$8.74.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be CN¥15.9 billion, earnings will come to CN¥2.4 billion, and it would be trading on a PE ratio of 26.5x, assuming you use a discount rate of 7.6%.
• Given the current share price of HK$18.72, the bearish analyst price target of HK$8.74 is 114.2% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.