Japan Tobacco (JTI) released its 2022Q2 quarterly report: 2022H1 achieved revenue of 1.27 trillion yen (about 11.604 billion US dollars), a year-on-year increase of 10.7%; net profit of 264.1 billion yen (about 2.413 billion US dollars), a year-on-year increase of 17.3%, of which the decrease The revenue of the harmful products segment was 39.1 billion yen (about 357 million US dollars), an increase of 1.4% year-on-year, and the sales volume of harmful products was 4 billion, an increase of 14.5% year-on-year.

According to the company's announcement, in 2022H1, its harm reduction product segment revenue was 39.1 billion yen (about 357 million US dollars), a year-on-year increase of 1.4%, mainly driven by product sales growth: 2022H1, including heat not burn, atomized electronic cigarettes, etc. The sales volume of harm reduction products was 4 billion, a year-on-year increase of 14.5%; of which, in 2022Q2, the sales volume was 2.1 billion, a year-on-year increase of 13.6%.

Sales of harm reduction products continued to expand, and cigarette sales continued to decline

In terms of industry, according to the company's estimates, the total sales of cigarettes in Japan in 2022H1 will drop by about 8.0%, partly due to the increase in the penetration rate of harm reduction products among consumer groups; as of the end of the second quarter of 2022, Japan's overall harm reduction products market size accounts for about 8.0% of the tobacco industry. 33.4% of the total.

In 2022H1, the company's sales of all cigarette products in Japan decreased by 8.6%, but its harm reduction products achieved positive growth driven by Ploom X. In 2022H1, the sales volume of harm reduction products in the Japanese market was 2.9 billion, a year-on-year increase of 34.0%; among them, Heat-not-burn pods including Ploom X achieved a sales volume of 1.7 billion, a significant increase of 122.3% year-on-year. In terms of market share, as of 2022H1, the company's market share in the Japanese harm reduction product sector was 12.0%, a year-on-year increase of 2.1 pct; among which, the market share of heat-not-burn pods expanded to 7.4%, a year-on-year increase of 3.7 pct.

Raise the full-year revenue forecast, the complex international environment may lead to pressure on the cost side

Company CEO Masamichi Terabatake said that based on the favorable trend of the yen exchange rate, the company raised its full-year revenue forecast by 171 billion yen to 2.49 trillion yen (about 22.751 billion U.S. dollars), an increase of 6.9% year-on-year; adjusted operating profit forecast It is raised by 14 billion yen to 625 billion yen (about 5.711 billion US dollars), and is expected to increase by 2.4% year-on-year. However, under the constant exchange rate caliber, the adjusted operating profit is expected to be lowered by 31 billion yen to 604 billion yen, down 1.1% year-on-year in 2021, mainly due to the negative impact of the increase in import costs on the company's supply chain.

We believe that, benefiting from the fact that Japan is the world's largest market for HNB products and has a broad space for development, and Japan Tobacco is focusing on its layout in the field of harm reduction products, Ploom X will also be launched around the world one after another, and its HNB equipment sales are expected to continue increase. As a manufacturer of electronic atomization components for the company's heat-not-burn products, Smol International is expected to continue to benefit from its technological advantages.

Investment suggestions: 1) Atomization industry chain: Key recommendation - Smol International (a leading manufacturer of atomization equipment in the world); Suggested attention: Fog Core Technology, Jincheng Pharmaceutical, Rundu Co., Ltd. 2) Tobacco supply chain: It is recommended to pay attention to: China Tobacco Hong Kong, Jinjia Co., Ltd., Huabao International, China Bolton, Jiyou Co., Ltd., Shunhao Co., Ltd., Dongfeng Co., Ltd.

Risk warning: Risk of changes in new tobacco policies, less-than-expected sales/enterprise development, and increased market competition.

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