Nolato: Permit needed to play in China - ABG

Stricter regulation of VHP in China


Q4 Integrated sales SEK 0.5bn (40% vs. ABGSCe)


CEO expects permit within near future


Lack of permit in China to hurt Nolato in Q4

As of October, Chinese authorities have implemented new regulatory requirements on certain tobacco products, including Nolato’s VHP production. Nolato has not produced any VHP products so far this quarter, and now expects Q4 sales in Integrated Solutions to be SEK 500m (-40% vs. ABGSCe 833m). This would almost certainly also have a negative margin effect, meaning EBITA revisions for the segment may be closer to ~50% if assuming a 2.5pp margin drop (which would equal ~15% on group EBITA for Q4 and ~5% on ’22 EBITA).



Will they get the permit?

We spoke with CEO Christer Wahlquist, who assesses that managements best estimation is that the permit will be granted within the near future, but that the risk for not getting the permit is not zero. In a worst case scenario, Nolato would have to look to other geographies for its VHP production if the permit is not gratned. Assuming, however, that Nolato does get the permit as management believes, it is likely that its customer will need inventory restocking and that we instead could see pent-up demand going into 2023.



VHP market – geographical spread

There are two big brands on the VHP market: British American Tobacco’s “Glo” and Philip Morris International’s “IQOS”. To our understanding, IQOS production is more geographically spread out, while Glo production is mostly focused in China, which we believe could lead IQOS to gain market share in a scenario where Glo production is halted.

Länk till analysen i sin helhet: https://cr.abgsc.com/foretag/nolato/Equity-research/2022/10/nolato---permit-needed-to-play-in-china/