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CANNABIS CORNER: 2019: The Year of Canna-Conversion

Traders Magazine Online News, February 13, 2019

Vivien Azer

In the report, Azer and her associates wrote that in 2019, they continue to be constructive on the global cannabis opportunity. We expect continued growth in newly established U.S. states, and more robust growth in Canada as more supply comes online and new form factors hit the market. Maintain Outperform on WEED, TLRY and KSHB, with WEED as our Top Pick.

U.S. on Track for an Even Brighter Future:

Category Re-engagement on the Rise

We are raising our forecast for U.S. cannabis sales to $80 bn by 2030, up from $75 bn. Our increased confidence reflects the bigger than expected increases that we continue to see for reported cannabis incidence among adults. And, that national data is supported by our own Cowen Consumer Survey that shows a growing level of category re-engagement.

Specifically, in September 2016, roughly 30% of lifetime cannabis consumers reported also being past month consumers, which climbed to ~39% in just 27 months. With continued growth in access to legal cannabis (with MA coming online now), we would expect to continue to see more consumers return to the cannabis category.

Cannabis Continues to Weigh on Alcohol

2018 looks to have been the worst year for beer sales in the near decade we have been covering the alcohol industry, and we continue to believe that growing cannabis use is a factor. Our Cowen Consumer survey shows that among both current and former Cannabis users, beer is the most popular alcoholic beverage with both cohorts (at 32% and 28%, respectively). And, we continue to see that among both cohorts a large portion of consumers across all alcohol types report that they do or anticipate they would drink less (60-70%). As we look ahead to 2019, with more medical and adult use cannabis markets coming online (e.g., MA, OH, WV, ND, among others), we would expect another challenged year for beer, driven by cannabis substitution.

Canada Poised to Offer Expanded Choice

The launch of adult use in Canada got off to a rocky start, with a retail framework that was far from ready (e.g., no stores in Ontario) and inadequate supply available (with roughly ~50% of SKUs consistently unavailable). While Canadian CEOs expect rolling out of stocks over the next 12-24 months as new form factors get approved (e.g., vape and beverages), stated capacity ramp plans would suggest that supply deficiencies should be less apparent relative to 2018. We also see evidence of higher use frequency and growing levels of category engagement (from survey data prior to October 2018). With the market set to expand to include novel form factors, and with expanded retail access, we remain encouraged at the market's potential for growth in 2019, where we expect adult use sales (at retail) to total C$3.1 bn (including taxes).

Outperform: WEED, TLRY and KSHB

Given our outlook for continued strong growth in North American cannabis in 2019, we remain constructive on all three of our publicly traded cannabis stocks (WEED, TLRY and KSHB). For WEED and TLRY we should finally start to see the true benefits of adult use sales, and the lapping of upfront investments made in calendar 2018 to scale up ahead of adult use. For KSHB, we expect a 5th consecutive year of triple digit growth as the company benefits from continued strong growth in CA and NV, in addition to the new market opportunity in MA.

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