Shifting Investor Sentiment in China's E-Cigarette Market

For several years, institutional investors generally avoided Chinese e-cigarette manufacturers. This reluctance stemmed from the prevalence of substandard production facilities and a notable absence of comprehensive regulatory controls within the industry.

New Regulations Spur Investment

However, this perspective is undergoing a transformation as China implements its most stringent regulations to date concerning electronic cigarettes. These evolving rules are reshaping the investment landscape.

Myst Labs, a Chinese e-cigarette company established in 2019, recently secured “tens of millions of dollars” through a Series B funding round. Chenyue Xing, a chemist formerly with Juul and instrumental in the development of nicotine salts – a vital component in vaping technology – co-founded the company.

The financing was spearheaded by existing investor, IMO Ventures. Notably, Thomas Yao, CEO and also a co-founder of Myst, serves as a founding partner at IMO Ventures.

Regulatory Changes and Industry Impact

In March, a leading Chinese tech policymaker unveiled draft regulations that would subject e-cigarettes to the same oversight as traditional tobacco products. This means vaping companies will be required to obtain licenses for all aspects of their operations – production, wholesale, and retail – within the world’s largest producer and exporter of e-cigarettes.

Fang Wang, Myst’s head of marketing, explained to TechCrunch that these changes will significantly impact smaller producers lacking robust quality control measures. The industry is anticipated to consolidate, leaving only a select number of established, compliant companies.

Challenges and Costs of Compliance

Standardizing production processes will be a substantial financial undertaking, Wang stated. Every component and ingredient, from ceramic coils and batteries to flavoring agents, will need to adhere to rigorous standards.

Furthermore, e-cigarette companies will be obligated to remit tobacco taxes, representing a significant revenue stream for the Chinese government.

Another key challenge lies in reducing nicotine content. Currently, many products contain nicotine concentrations of 3-5%. If China aligns with the European Union’s standard of 1.7%, numerous smaller brands may be forced to cease operations due to their inability to formulate low-nicotine vapes that still satisfy consumer demand, as suggested by Li.

Increased Investor Interest

“We have observed a considerable increase in investor inquiries over the recent months,” Wang added. “Previously, professional and institutional investors frequently avoided e-cigarette companies, but they are now demonstrating greater willingness to invest as the regulatory framework becomes clearer.”

While Myst declined to disclose all its investors, they confirmed the inclusion of prominent figures associated with the e-bike sharing service Lime, Facebook, and the bitcoin sector.

Market Presence and Expansion Plans

Currently, the majority of Myst’s sales originate from China, where the company operates 600 stores and intends to expand its retail footprint to 1,000 stores in the coming quarters.

Internationally, Myst has established a retail presence in Malaysia, Russia, Canada, and the United Kingdom, selling its products in over 30 shopping malls and select hospitals through its distribution partner, Ecigwizard.

Research and Development Focus

The new funding will facilitate further expansion of Myst’s sales network and bolster its research and development efforts. The company emphasizes its products’ 1.7% nicotine content, asserting it delivers a comparable effect to products containing 3% nicotine.

Xing is currently engaged in developing e-liquids with “natural tobacco contents” and excluding organic acids, additives that enhance nicotine salt vaporization and absorption, at her laboratory.

Future Outlook and Market Potential

Although Myst Labs remains a smaller player compared to China’s market leader, Relx – which went public in New York earlier this year and is pursuing a license to sell in the U.S. – Yao is optimistic about the company’s prospects.

He highlighted that vaping represents one of the fastest-growing consumer categories in China, with Myst’s recent sales tripling every three months.

“In other consumer sectors, it’s uncommon to see a single company controlling 60-70% of the market share, indicating substantial growth potential for the top 10 players,” the CEO concluded.