Industrial Hemp II: Provenance Is the Cornerstone, And Purification Technology Builds A Moat

From the perspective of the industrial chain structure of the cannabidiol industry, the upstream industry of the cannabidiol industry is the cannabis planting industry, the midstream is the extraction and processing manufacturer, and the downstream industries are mainly the medical industry and the food industry.

Upstream: Provenance Is the Cornerstone with High Barriers to Entry

Different industrial hemp seeds have different CBD content in flowers and leaves. Provenance is the starting point for the development of the industrial chain, and it is also the core element to check and balance the development of the industry. The higher the CBD content of industrial hemp mosaic, the higher the benefit per unit planting area. Whoever masters the provenance with high CBD content in Mosaic will take the leading position. Companies that layout the entire industrial hemp industry chain attach great importance to the research and development of seeds. And under natural circumstances, the THC content and CBD content in industrial hemp flowers and leaves are positively correlated. The CBD content is high, and the THC is also high, so it is difficult to cultivate seeds with low THC and high CBD.

The low CBD content of mosaic leaves is a pain point for the development of China's industrial hemp industry. At present, the seed with the highest content of CBD in Chinese industrial hemp mosaic leaves is "China Hemp No. 1", whose CBD content can only reach 3.19%, while the seeds in North American countries can reach more than 10%-20%.

The difficulty of obtaining permits is high and the barriers to entry into the industry are high. Due to the particularity of the types of hemp, China has strict control over the industrial hemp industry. At present, there are four major processing licenses related to the industrial chain of industrial hemp, including scientific research planting, multiplying planting, industrial raw material planting, and flower leaf processing. In terms of the materials submitted, the four types of permits all have requirements for basic conditions such as relevant application forms, business licenses or unit registration certificates, management system texts, relevant equipment. In particular, scientific research planting requires the approval of relevant institutions, that is, the scientific research planting project approval document issued by the project authority or higher-level authority. Besides, the validity period of the industrial hemp planting and processing license is 2 years; the planting ledgers and processing ledgers should be kept for more than 3 years and subject to verification by the public security organs. Since it is difficult for companies to obtain planting/processing licenses, domestic companies holding industrial hemp planting and processing licenses are scarce. The difficulty of applying for approval increases the threshold for industry entry.

Midstream: High Purification Technology Builds A Moat

Production costs account for approximately 19% of the total selling price. Data shows that 1 gram of CBD oil sells for about US$117, and its production cost is about US$22.5, accounting for about 19%. Among the terminal products, retailer costs account for about 50% of the terminal selling price.

The higher the extraction purity of CBD, the more expensive the price. The data shows that the price of CBD with a purity of about 95% is between 4 to 14 US dollars per gram, while the price of CBD with a purity of 99.99% can reach the price of 100 US dollars per gram. The improvement of purity depends on the purification technology of the processing company, and good purification technology creates a solid moat for the company.

As CBD extraction and production technology are difficult, at present, only HMI can mass-produce CBD in China. And there are two mainstream CBD extraction processes in the world, one is the solvent extraction process to extract the CBD, and the other is the continuous soaking process to extract the CBD. Solvent extraction is the mainstream technology for extracting plant components around the world, which is also a relatively common extraction method in China.

HMI is a unicorn in the domestic industrial hemp industry, which has made great achievements in setting industry standards and industry norms. HMI is currently the only legal company in China based on the layout of the entire industrial hemp industry chain and biopharmaceuticals. HMI continues to deepen industry analysis and industrial layout, actively carry out technology and product iteration, expand sales network, and steadily enter the global market.

At the same time, there are a number of outstanding industrial hemp manufacturers in the international market, the main representatives are Canopy Growth Corporation, Tilray, ACB, and APHA. Among them, Canopy Growth officially entered the cannabis industry in 2014. It is the world's largest legal medical marijuana company and the first company to launch a diversified cultivation platform. It is known as the first unicorn in the cannabis industry and its leading position. From 2016 to 2018, the company's gross profit margin remained above 90%. In 2018, it reached a cooperation with Constellation Group, the world's largest-selling beer company, with broad prospects for development. Tilray is an early leader in the development of the global medical cannabis market and has a complete cannabis industry chain. Tilray has not only become the preferred supplier of active cannabinoid ingredients for pharmaceutical companies but also cooperates with brewers to develop non-alcoholic beverages containing cannabidiol.

Downstream: Derivative Applications, Broad Market

Industrial hemp is growing rapidly, and the prospects for downstream applications are very broad. In addition to applications in the traditional paper industry and packaging industry, new application opportunities also include cosmetics, tobacco, and biodiesel energy. At present, China is mainly concentrated in the two fields of textile fiber and daily chemical products. It is expected that in 2022, global legal cannabis consumption will reach 32 billion US dollars, of which medical cannabis will reach approximately 12 billion US dollars, and CBD global sales will exceed 600 million US dollars.

With the maturity of the CBD industry chain, supporting services other than breeding, planting, processing and extraction, and derivative applications are playing an important role.