Sinolink: The domestic HNB industry is opening up or may have become a major trend, emphasizing the opportunities for related supply chain layout.

Sinolink released a research report stating that, referring to the development experience of the overseas tobacco industry, the development of new tobacco products is a trend, and if HNB is introduced domestically, it is expected to further support the high-quality development of China Tobacco. It is recommended to actively pay attention to the supply chain companies that have already accumulated technology and product reserves in the field of heated tobacco products, and are expected to fully benefit from the global trend of HNB development. Sinolink's main points are as follows: International tobacco giants are shifting towards new tobacco products, with HNB being an important growth driver for leading tobacco companies. The global cigarette market contraction is an irreversible trend, with the global smoking rate decreasing from 30.75% in 2005 to 21.74% in 2022. The cigarette market size has slowly declined from 53.908 billion sticks in 2018 to 51.561 billion sticks in 2024, with a CAGR of -0.74%. In light of this, international tobacco giants, including Philip Morris International, are positioning new tobacco products as a core driver of long-term company growth, accelerating their presence in the areas of aerosol electronic cigarettes, heated tobacco products, and oral tobacco products. Philip Morris International plans for more than two-thirds of its revenue to come from new tobacco products by 2030, and British American Tobacco plans for new tobacco products to account for 50% of its income by 2035. Various tobacco giants are accelerating the transition from traditional tobacco products to new tobacco products. Among them, HNB is the core category of new tobacco products, with Philip Morris's smoke-free products (mainly IQOS HNB products) accounting for 39% of revenue in 2024, making heated tobacco products the core engine driving the company's performance growth. Referring to the development process of the Japanese market, the role of new tobacco products in safeguarding tax revenue is prominent. Since 2019, the penetration rate of heated tobacco products in the Japanese market has rapidly increased, with the market size of heated tobacco products growing from 37.280 billion sticks in 2019 to 64.496 billion sticks in 2024, with a CAGR of 11.59%. The penetration rate of heated tobacco products has increased from 23.54% in 2019 to 43.40% in 2024. Since 2018, the Japanese government has begun to tax HNB products, with an overall tax rate comparable to traditional cigarettes. In 2024, Japan's national tobacco tax revenue was 489.3 billion yen, an increase of 4.76% from 467.1 billion yen in 2019. As the size of the cigarette market continues to shrink, its contribution to tobacco tax revenue is expected to decline, while the rapidly increasing penetration rate of heated tobacco products will contribute a large part of the revenue increase. Therefore, in Japan, where the penetration rate of heated tobacco products is the highest around the world, the vigorous development of heated tobacco products will not only have an impact on tobacco tax revenue but will actually contribute to the stable growth of overall tobacco tax revenue by encouraging traditional cigarette consumers to switch to heated tobacco products, reducing harm to consumers in the process. As the growth of the domestic traditional cigarette market gradually comes under pressure, China Tobacco's high-quality development can refer to the development path of overseas tobacco groups, and urgent attention is needed towards product innovation and expansion into international markets. In recent years, the growth of the national traditional cigarette consumption scale has gradually come under pressure, with the national cigarette production increasing slowly from 23.642 billion sticks in 2019 to 24.655 billion sticks in 2024, with a CAGR of 0.84%. Cigarette sales have increased from 23.631 billion sticks to 24.507 billion sticks, with a CAGR of 0.73%. Although cigarette production and sales have not declined, the growth rate has significantly slowed down, making growth more difficult, and from 2010 to 2024, the inventory of tobacco industry enterprises above a certain scale in the country has increased from 150 billion yuan to 439.4 billion yuan, with overall inventory levels remaining high. Against this backdrop, it can be seen that by referring to the development path of overseas tobacco giants, accelerating product innovation, developing new tobacco products, and expanding into international markets may be the optimal solution, promoting harm reduction for smokers while achieving high-quality development for China Tobacco. Heated tobacco products have outstanding harm reduction properties, and the overseas regulatory framework is already clear, providing a sample for reference for the domestic China Tobacco system. Currently, the main and potential consuming countries for heated tobacco products, such as the United States, Japan, and Europe, have already clearly defined core terms such as product listing procedures, flavor boundaries, sales channels, and usage locations, and the compliance roadmap for the HNB industry is basically clear. At present, there is no comprehensive regulatory framework for HNB products in China, but by looking at the changing regulatory trends of overseas countries towards HNB, it can be seen that the positioning and regulatory frameworks for HNB in major overseas consumer markets can fully explain the harm reduction properties of HNB, providing some reference value for the regulation of HNB in China. China Tobacco has already accumulated a certain reserve of products in the field of HNB, laying a solid foundation for the development of related industries domestically. Since 2017, several companies including Sichuan China Tobacco, Yunnan China Tobacco, Guangdong China Tobacco, Shandong China Tobacco, among others, have successively launched domestic HNB devices and cartridges, using different heating technologies and providing various flavors of cartridges for the Southeast Asian market. Yunnan China Tobacco, Hubei China Tobacco, Zhengzhou Tobacco Research Institute, and Hunan China Tobacco have obtained more than 50 invention patents in the field of heating non-combustible tobacco, indicating a rich technological reserve. Especially in the core area of heating technology, several companies have independently developed different heating technology paths. China Tobacco has already laid out initial products and technical reserves in the field of heated tobacco, providing relatively complete supply chain support for the domestic development of HNB. Risk warning The development of domestic HNB may not meet expectations; the progress of heated tobacco products may not meet expectations; competition in the domestic new tobacco industry may intensify.