That old saying that there’s no smoke without fire will have extra meaning at the moment for Zhu Linyao, the founder of Huabao, a fragrance and flavourings firm headquartered in Shanghai.
WiC first mentioned Zhu more than a decade ago (see WiC60). She founded the forerunner of Huabao in 1996 and took it public 10 years later in Hong Kong. In 2018, there was another spin-off for a unit on the stock exchange in Shenzhen.
Part of Huabao’s profits come from sales of its flavours to tobacco manufacturers and e-cigarette firms. Its shares have run up impressively for much of the last two years, increasing by a factor of seven to their peak last November. Zhu was then worth at least $7.6 billion, putting her in 122nd position nationally, according to the Hurun Report.
As of early this week she was making other headlines, however, following news that she is featuring in an investigation into “unspecified suspected disciplinary violations”, a catch-all for corruption cases. The announcement on Monday triggered a slump in the company’s shares in Hong Kong, which dropped more than two-thirds.
Chinese media outlets have been linking the investigation to the firings of senior officials at state behemoth China Tobacco’s provincial units in Hunan and Yunnan, both of which were significant customers of Huabao’s. Graftbusters have been looking closely at the tobacco sector for months, with notable scalps including Zhao Hongshan, a former deputy head of the industry’s regulatory body. There were further revelations that Pan Jihua, a long-retired head of a ‘discipline inspection’ team tasked with uncovering improper behaviour, had been taking bribes for years himself.
Huabao’s shares had already been dropping for much of the last six weeks, more on signs that a shake-up of the tobacco sector had started to take formal shape. The authorities in Beijing signalled some time ago that vaping firms would come under the direct supervision of the tobacco regulator, for instance – and were not tech companies as they tried to position themselves.
Shares in the biggest e-cigarette maker RELX Technology plunged more than 40% when regulators announced draft laws that finally classified e-cigarettes as tobacco products last summer. A consultation phase for a series of new licencing processes was launched towards the end of the year, triggering further falls in share prices.
China’s cigarette sector is an incestuous place, with the State Tobacco Monopoly Administration and the China National Tobacco Corporation (commonly known as China Tobacco) sharing much of the same leadership. But China Tobacco – which sells about 40% of the world’s cigarettes – was never going to grant the vaping firms freedom to do their own thing, especially when tobacco sales deliver more than a fifth of China’s total tax revenues. Sales of vaping products have been taxed at about 13%, the Financial Times reckoned this week, significantly below levies of as much as 70% on traditional cigarettes.
That gap now looks likely to be closed, although firms in the vaping sector have been trying to make a positive of the new regime by arguing that the government has incentives to keep the e-cigarette trend moving forward, because domestic manufacturers make about 90% of the world’s supply. Exports could become a priority area, especially as the leading firms (many of which are based in Shenzhen) hold patents for advanced technology.
Previous government action against vaping has restricted brands from selling online and prevented retailers from selling e-cigarettes at stores close to schools and colleges. The ban highlights fears that young people could be more susceptible to taking up vaping because of the sweeter, fruitier flavours on offer. But proponents of e-cigarettes counter that China has more to gain than any other country in embracing them, especially in switching more of its 300 million traditional smokers to choices with lower nicotine levels.
The debate on the health-related implications of vaping is a complicated one. Maybe the government will look at it closer once the vaping firms are paying similar taxes to the rest of the sector.
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