全球烟草业：iQOS与JUUL

1、Global TobaccoiQOS vs JUULGlobal Research29 March 2019TobaccoTobaccoGlobalEquitiesNumber 1 pushback to our heated tobacco growth outlook: JUULGlobalEquitiesThe key push back to our PMI upgrade last month was that JUUL would take share fromiQOS( HYPERLINK /shared/d2Q41MAxyOgKsh Whendeathandtaxesbecom

2、elesscertain).Weviewtheriskassociated with this as limited: 1) vaping products (pre-JUUL) are not an impediment to heated tobacco uptake, 2) current evidence suggests iQOS does a better job of converting smokersthanJUULtypeproducts,and3)ifwearewrong,weseelimiteddownsideto PMIsneartermgrowth,andviewB

3、ATasthebestplacedforvapoursharegains.The current generation of vapour products is not an obstacle to iQOS growth Looking across 20 markets where we have sufficient data, we find no statistical relationshipbetweenvapingpenetrationandthereceptivenessofconsumerstoheated tobacco.Onacountrybycountrybasis

4、,foreveryJapan(novaping,lotsofiQOS)and UK(lotsofvaping,noiQOS),thereisaCzechRepublic(lotsofboth),andaSpain(not much of either). This is also true when we run the analysis in combination with other factors; vaping just does not seem to explain the variance between different levels of consumerreceptiv

5、eness.Givenbotharecigarettealternatives,thismightseemcounter- intuitive; however this suggests they appeal to differentconsumers.Limited evidence to suggest the new JUUL-type products will change thisJUUListheleadingexampleofthehighstrength,nicotinesaltbasedpodproductsthat weseeasasignificantinnovat

6、ionforthevapourcategory.However,whenitcomesto competing with iQOS for smokers, the evidence we have so far suggests that the conversionratesarenotasgood.Weviewaco-existenceofthetwotypesofproducts as the most likely outcome, with heated tobacco appealing to a different type of nicotineuserthanvapourp

7、roducts.Themostimportantcatalystforinvestorperception here will be the launch of iQOS in the US (we assume2H).BAT is the best hedge for PMI if we are wrongWhat if we are wrong and JUUL is a direct and effective competitor for iQOS? We wouldnotexpectthistohaveanimpacton1-2yearsalesgrowthduetotheheads

8、tart and high restrictions on vapour outside the US. Furthermore, we view BAT as best placed to capitalise from vapour growth; it is taking share from JUUL in the US, growingvapourrevenueglobally,yetstilltradesatadiscount: HYPERLINK /shared/d2L5zyMvTqA BATtotheFuture.Robert Rampton HYPERLINK mailto:

9、robert.rampton +44-20-75682014Nik Oliver, ACA HYPERLINK mailto:nik.oliver +44-20-75684982Robert Krankowski AssociateAnalyst HYPERLINK mailto:robert.krankowski +44-20-75681152Satsuki Kawasaki HYPERLINK mailto:satsuki.kawasaki +81-3-52086265JenniferHan HYPERLINK mailto:jennifer.han +82-2-37028802Jihyu

10、n AssociateAnalyst HYPERLINK mailto:jihyun.lee +82-2-37028810PinarErgun,CFA HYPERLINK mailto:pinar.ergun +44-20-75686885Charles Eden,ACA HYPERLINK mailto:charles.eden +44-20-75689622Kate Rusanova HYPERLINK mailto:kate.rusanova +44-20 75689285 HYPERLINK /investmentresearch /investmentresearchThis rep

11、ort has been prepared by UBS AG London Branch. ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ONPAGE21. UBSdoesandseekstodobusinesswithcompaniescoveredinitsresearchreports.Asaresult,investorsshouldbe aware that the firm may have a conflict of interest that could affect the objectivity of this

12、report. Investors should consider this report as only a single factor in making their investment decision.Contents HYPERLINK l _TOC_250014 iQOSvsJUUL3 HYPERLINK l _TOC_250013 Executivesummary4 HYPERLINK l _TOC_250012 iQOSadoptiondoesnotappearimpactedbyvaping6 HYPERLINK l _TOC_250011 Vapingdoesnotexp

13、lainiQOSadoption6Marketbymarket;vapourdoesnotseemtocompetewithheatedtobacco7 Why mightthisbe? HYPERLINK l _TOC_250010 What about JUUL?10 HYPERLINK l _TOC_250009 WhymightJUULbedifferent?10 HYPERLINK l _TOC_250008 UKconsumersprefervapour11 HYPERLINK l _TOC_250007 ButconversionratesforiQOSarestillbette

14、r12 HYPERLINK l _TOC_250006 NicotinecapsmaybeanimpedimenttoJUUL13 HYPERLINK l _TOC_250005 What if its not a competition?14 HYPERLINK l _TOC_250004 Marketstowatch15 HYPERLINK l _TOC_250003 What if wearewrong?16 HYPERLINK l _TOC_250002 JUULunlikelytoslowneartermheatedtobaccogrowth16 HYPERLINK l _TOC_2

15、50001 Expectationsarelowercurrently18 HYPERLINK l _TOC_250000 BATisbestpositionedtotakeadvantageofvapourcategorygrowth19Robert Rampton HYPERLINK mailto:robert.rampton +44-20-75682014Nik Oliver, ACA HYPERLINK mailto:nik.oliver +44-20-75684982Robert Krankowski AssociateAnalyst HYPERLINK mailto:robert.

16、krankowski +44-20-75681152Satsuki Kawasaki HYPERLINK mailto:satsuki.kawasaki +81-3-52086265JenniferHan HYPERLINK mailto:jennifer.han +82-2-37028802Jihyun AssociateAnalyst HYPERLINK mailto:jihyun.lee +82-2-37028810PinarErgun,CFA HYPERLINK mailto:pinar.ergun +44-20-75686885Charles Eden,ACA HYPERLINK m

17、ailto:charles.eden +44-20-75689622Kate Rusanova HYPERLINK mailto:kate.rusanova +44-20 75689285GlobalTobaccoUBSResearchiQOS vs JUULRanked by consumer receptiveness1JapanCzechRepubli3CzechRepubliMorereceptiveMorereceptive 5GreeceRussia7UkrainePortugalSouth Korea9South KoreaSouthSouthColombiaSwitzerlan

18、dca13ca15SpainItaly PolandMorevapersvapersR = 0.0291iQOSUnited R = 0.0291iQOSReceptiveness to iQOS / heated tobacco (HT) does not appear correlated to vaping penetration at the moment17Israel1921GermanyCanada0%10%20%30%40%50%Number of vapers as % of smokersJUUL type productsiQOSJUUL type productsiQO

19、SiQOS SouthiQOS Japan Vuse Alto ePen3 (UK) JUUL (UK) korea(US)Purchase to Ever usedtoregularPurchase touseuse100%0%iQOSCould this change with JUUL? Maybe, but iQOS smoker conversion rates look better than this new generation of product4Q18 market shareJapan (Feb-19)South Ukraine(1Q18)JUUL Czech Repu

20、blicFrance CanadaiQOSshareJUULHeated tobacco (and PMI) has a head start meaning its unlikely to be impacted in the next 1-2 years by JUUL given all markets are more restrictive than the US0%5%10%15%20%Current overlap is in markets not receptive to iQOS, so which markets to watch? Italy, South Korea

21、and the USUBSUBSestimateofiQOSconsumerreceptivenessrelativetoJapan 1009080706050403020100NoJUULExpectedJUULlaunchRecentJUULlaunchJUUL6monthsSourcesforabove:Companydata,UBSestimates,UBSEvidenceLab.Unlessotherwisestated.*Basedon$400mn4Q18netrevenueforJUULandBATsestimates for 2018 US net revenue (/4)Ex

22、ecutive summaryKey pushback: what if consumers prefer JUUL?We expect the heated tobacco user base to grow significantly over the next few years HYPERLINK l _bookmark0 (Figure1);webasethisonourassessmentoftheappealofheatedtobacco to onumers aros 40 ountres ( HYPERLINK /shared/d2QSS4HndVqh Php orrs nt

23、ernaton: hn dath and HYPERLINK /shared/d2QSS4HndVqh taxesbecomelesscertain;upgradetoBuy).Asaresultweexpectheatedtobacco to drive net revenue pool growth HYPERLINK l _bookmark1 (Figure 2).Figure 1: We expect heated tobacco users to growFigure 2: growing the tobacco net revenuepoolNet manufacturer mar

24、gin$bn Prevalence(%)Prevalence(%)20%18%16%14%12%10%8%6%4%2%0% ForecastCigarettes and/or heated tobaccoCigarettesHeated tobaccoFcast2015201620172018201920202021202220232024202520262027202820052006201520162017201820192020202120222023202420252026202720282005200620072008200920102011201220132014201520162

25、01720182019202020212022202320242025202620272028CigarettesHeatedtobaccoTotalCigaretterevenueHeated tobaccorevenueSource:UBSestimates.Top40marketsexUSandChina.Source: UBS estimates. Top 40 markets ex US andChina.ThisanalysisunderpinsourviewthatPMIcandeliverbestinclassorganicgrowth HYPERLINK l _bookmar

26、k2 (Figure3),andBATcanbeatitsnextgenerationtargets HYPERLINK l _bookmark3 (Figure4),supportingour Buy ratings on both.Figure 3: driving PMI to best in class growthFigure 4: and BAT to beat its next generationtargetsFcastOrganic growth (%) Fcast10%9%8%7%6%5%4%3%2%1%0%20152016201720182019E2020E2021EUB

27、SheadlineestimateConsensus UBSinventoryadjusted* PMI guidance (5%)Net generation product revenue (bn)Fcast4.9Fcast2.31.6 0.90.5 5.04.03.02.01.0201720182019E2020E2021E2022E0.0201720182019E2020E2021E2022E5.7Heat not burnVapourModern oralTotal2023/242023E2024Etarget2023E2024ESource: UBSestimatesSource:

28、 UBS estimates, companydata.But what if the consumers we have identified as being receptive to heated tobacco go for JUUL instead?With JUUL having achieved growth on the same order of magnitude as iQOS in Japan, despite no backing from a large tobacco company, this was the key pushback to our PMI up

29、grade.Some might, but it wont derail the investment casesAttimeofwriting,thereisnomarketwhereiQOSandJUULpenetrationoverlaps sufficiently to draw any conclusions for 1 market, let alone the world. We therefore we separate this question out into two parts:How does the vapour category impact heated tob

30、acco? It doesntIn our view, the vapour products currently widespread in most markets are not a serious impediment to iQOS. We base this on:Looking across 20 markets for heated tobacco, we find no statistical relationship between vaping penetration and heated tobaccouse.Runningtheanalysisincombinatio

31、nwitharangeofotherfactors,vapingdoes notseemtoexplainthedifferentlevelsofconsumerreceptivenesstoiQOS.Given both are cigarette alternatives, this might seem counter-intuitive. In our view,thisisbecauseiQOSisoverwhelminglyatoolforconvertingsmokers(andit isbetteratit),whileBATindicates50%ofvapourusersa

32、renewentrants.However,consumerperceptionsofvapourhavesofarbeenformedbytheseolder products. In our view, the high strength, nicotine salt, pod based products best embodied by JUUL represent a step change in the consumer proposition. As a result,weaskwhetherthefindingsabovewillholdforthisnewgeneration

33、.Will JUUL change this? Limited evidence to supportthatHowever, at this point we are inclined to believe that these new products are unlikely to derail expectations of iQOS growth as:iQOS smoker conversion rates are higher (and even more so in markets with nicotine strength limits)JUULandiQOSappeard

34、ifferentintheirsourcesofdemandWealsonotethatJUULspecificallyisattractingadverseregulatoryattentionfrom regulatorybodiessuchasthe HYPERLINK /2019/02/11/e-cigarettes-single-handedly-drives-spike-in-teen-tobacco-use-cdc.html CDC,whichishavingspilloverimpactsonitsability to launch in new markets (such a

35、s HYPERLINK /politics/policy/health-ministry-calls-for-blocking-e-cig-maker-juul-s-entry-into-india-1552662975625.html India).Thisisadevelopingsituation.Whiletherehasbeen6monthsofoverlapbetween iQOS and JUUL in Canada, Israel, and the UK, these are not markets where the consumerisreceptivetoiQOS(whi

36、chlaunchedfirst).TheUSwillbethefirstmajor testcaseifiQOSlaunchesthisyear,andwealsolooktoItaly(JUULlaunchedearlier this year) and South Korea (1H JUUL launch HYPERLINK /view.php?ud=20190312000675 planned).Downside limited, and BAT is the better hedgeSo our view is that JUUL will not slow the growth o

37、f heated tobacco. What if we are wrong and JUUL is a direct and effective competitor for iQOS?iQOS has a sufficiently large head-start that it should not impact sales growth till 2020 at the earliest, and the impact of a gradual loss of share in a strongly growing category does not materially impact

38、 the group growth trajectory. Also, PMI does have advantages in vaping that should keep it competitive.Furthermore, at the current valuation we do not envision a JUUL-competition related catalyst that would drive a de-rating similar to what we saw at the start of 2017. Finally, if we are wrong, we s

39、ee BAT as best placed to capitalise.Vapour products do not seem to impact iQOS at the momentcould JUUL change that? Maybe, but limited evidence to support thatEither way, limited near term impact and BAT is a good hedge against share loss to vapouriQOSadoptiondoesnotappear impacted byvapingVaping do

40、es not explain iQOS adoptionOne explanation posited by investors for the growth of iQOS in South Korea and Japanwastheabsenceofcigarettealternativesinthosemarkets.InJapan,nicotine containing e-liquids are banned, while in South Korea, a history of exploding devices has constrainedadoption.When we co

41、mpare vaping penetration to our estimation of how receptive the consumers are heated tobacco HYPERLINK l _bookmark4 (Figure 5), we do find that in isolation it does appeartobeabarrier,ifnotaninsurmountableone.Thepictureisbroadlysimilar whencomparingtovapoursalesasa%ofsmokers.Smokelesstobaccospendis

42、not material in any of these countries.Figure 5: Vaping penetration does this explain something?Taken in isolation, vaping does not seem to drive differences in iQOS receptivenessRanked by consumer receptiveness *Rom13Rom5P7P911Slovakia ania RussiaUkraine GreeceortugalSouthSouthitzerlandSwitzerlandC

43、zech RepublicCzech Republic =0.0291Rorea =0.0291Rorea13Colombia South15SpainUnited KingdomnadaCa17IsraelnadaCa1921France manyGer0%5%10%15%20%25%30%35%40%45%GerNumber of vapers as % of smokersSource: UBS estimates, Euromonitor except for Canada. *See below for an explanationHowever, when we tested al

44、l the factors HYPERLINK l _bookmark5 (Figure 6 shows the process) in every combination, we found the presence of alternatives was not part of the combination that best explained the differences between markets.Figure 6: Vaping penetration did not survive the screening processOur quant screen takes i

45、t into account along with other factors; % population that vapes % population that vapes HEET price vs average price HEET price vs Marlboro Variablestested Mentholshare% % low/ultra low tar Smoking prevalence% who tried to quit last12m Neuroticism scoreMenthol useCigarette strength Smoking stigma Cu

46、ltural traits Alternatives Affordability Variables examined Mentholshare% % low/ultra low tar Smoking prevalence% who tried to quit last12m Neuroticism score Conscientiousnessscore Vapespend%oftotal % population that vapes HEET price vs average price HEET price vs Marlboro Device affordability Premi

47、um share Variables that matter %low/ultralowtar Smokingprevalence%whotriedtoquitlast12m Neuroticism scoreagain vaping does not appear to be a driverWe dont include all of these in our regression workSource: UBS Only some variables were useful in explaining varianceMarket by market; vapour does not s

48、eem to compete with heated tobacco HYPERLINK l _bookmark6 Figure 7 shows a measure of e-cigarette regulation (credit: to the HYPERLINK / Nanny State HYPERLINK / Index),asaproxyfortheaffordabilityandaccessibilityofe-cigarettescomparedto consumerreceptiveness.Thebubblesizesrepresentsthenumberofvapersa

49、sa% of the number of smokers.Figure 7: Freedom index for these countries comparedRanked by consumer receptivenessGreeceSlovakCzechGreeceSlovakCzechRomaniapublicl ItalyMoreptive to iQOSPolandUnitedKingdomMore free e- cigaretteSpainGermanyFrancemarket51015ForeveryJapan,thereisaCzech Republic.ForeveryU

50、Kthereisa Spain2510.08.06.04.02.00.0E-cigarette freedomSource: UBS estimates, Nanny State Index. Bubble size = vaping population %We note no real relationship here. For instance, in the Czech Republic, iQOS in 4Q18 had a 4.2% share (+3.2% yoy) nationally, and a 10.0% share of the capital (+7.0%yoy).

51、However,vapingpenetrationasa%ofsmokersissecondonlytothe UK, and it has a similarly free vaping market. On the other hand, the UK has a similarlyfreee-cigarettemarket,buttheconsumerdoesnotappeartobereceptive to the proposition.Side note: What do we mean by consumer receptiveness?Ifweareaimingtoassess

52、whatsortofmarketshareheatedtobaccocaneventually reachinagivencountry,inourviewitisinsufficienttojustcomparemarketshares by country, or even the rate of share gains. While this forms one part of the assessment, the cross country comparison will be distorted by differences in regulation and how hard P

53、MI pushed iQOS (among otherfactors).Rfetng ths, onumer reeptene s meant to refet a hpothtal situationwhereeverysmokerroughlyunderstoodthedifferencesvscigarettesand had the ability to try the product. We then rank 20 countries (where we have enoughdatatotakeaview)bywhatvolumesharethiswouldresultin.Th

54、is approach has borne out so far. For example, back in August-18, heated tobacco had a 2% share in Italy, versus 10% in South Korea, and the rate of sharegaininKoreawasmuchfaster.However,ouranalysisinOctoberindicated thatactuallytheItalianconsumerwasasreceptivetoheatedtobaccoproposition as the Korea

55、n one (see HYPERLINK /shared/d2Tg53LfQx PMI: Life after Japan (and South Korea). We took the viewthatgrowthwouldslowinSouthKoreaandcontinueinItaly,asithas.See pages 21-25 of our HYPERLINK /shared/d2shvlttTR PMI upgrade for further detail/explanation.Why might this be?GivenbothiQOSande-cigarettesarec

56、igarettealternatives,weacknowledgethat thisisasomewhatcounter-intuitiveconclusion.Surelytheyshouldcompete?iQOS is better at converting purchasersiQOStargetssmokers,andbasedonconversionratesamongthosewhopurchased the device, it appears to be better than normal vapour products at converting them. HYPE

57、RLINK l _bookmark7 Figure 8 shows the conversionrates.Figure8:Theseconversionratesaremuchbetterthananyliteratureindicatesis the case for vapourproductsPurchase to 95% use conversionMore of iQOS demand comes from smokers90%80%90%80%70%60%50%40%30%20%10%0%Purchaseto95%useconversionSource: UBS estimate

58、s, company dataVapour demand is more weighted to new entrantsAt its investor day (see our note: HYPERLINK /shared/d29iP2VU7O BAT to the future), BAT provided new information on the category that confirmed this differing source of demand.Figure 9: Tobacco heating consumers are overwhelming smokersSou

59、rce: BAT2019-03CMD.Originalfootnotes:*Splitofconsumersenteringnewcategories:Switchingfrom Csts ad cte (A) Erts Etrs: + r er eterg te atry Sce: Consumer TrackingresearchTheUBSEvidenceLabsurveysconductedofsmokers(includingheatedtobacco) usersinJapanandSouthKoreadoesnotprovideevidencetorejectthisconclu

60、sion. HYPERLINK l _bookmark8 Figure 10 shows that relative to cigarettes, very few primary users of heated tobacco cited none when asked about their previous brand (a none answer would imply they start with heated tobacco).Figure10:Veryfewcurrentprimaryusersofheated tobacco were formernon-smokersFig