BY: STEVE HAWKINS, PRESIDENT AND CEO, HORIZONS ETFS
July 9, 2018
It’s summertime in Canada, but the Canadian Marijuana industry clearly has its sights set on the fall. That’s because October 17, 2018 has been officially set as the date for the legalization of recreational marijuana in Canada.
Most of the unbridled excitement about Canadian marijuana producers is tied to the recreational marijuana market and its potential to rival other revenue-rich vice industries such as alcohol and tobacco.
The multi-billion dollar question then is: Are Marijuana companies appropriately valued for the potential size of the recreational market? The short answer is, no one knows. Certainly, marijuana sales will only go up from here. There will be a viable market for recreational marijuana in Canada, but some of this is already priced-in on the lofty valuations of the stocks.
Most of the big Marijuana-producer stocks trade at a negative price-to-earnings. However, what is positive is their revenue growth. The two largest producers in Canada – Canopy and Aurora – have shown strong year-over-year growth in sales. Canopy reported Q4 2017 earnings that were 55% higher than the previous year, as did Aurora, which in its last quarterly earnings, reported 211% year-over-year growth.
This is purely revenue growth in terms of medical marijuana. A report by Deloitte last quarter noted it expects CAD $7.17 billion in cannabis products in 2019 – more than a fourth of alcohol sales in 2016, according to StatsCan (CAD $22.1 billion). Of that, CAD $4.34 billion is expected to come from legal recreational sales. The full extent of leverage in revenue from recreational sales has yet to be seen.
This is why the diversified approach offered by Horizons ETFs’ Marijuana-focused ETFs – the Horizons Marijuana Life Sciences Index ETF (HMMJ) and the Horizons Emerging Marijuana Growers Index ETF (HMJR) – is so crucial, because we don’t yet know who will win or lose the battle for recreational marijuana. Ostensibly, companies with strong distribution partnerships with the provincially regulated marijuana retailers would seem to be in better positions. But again, it’s a big unknown. As it stands, dispersion amongst stocks in the space has been large, and will likely continue to be so, until there is actually a fundamental way to value these companies.
Global Sales
This is often another source of revenue overlooked by many investors that are focused on the recreational opportunity. Many of the larger Canadian marijuana producers, all of which are well-established providers of medical marijuana, have used the money raised from the Canadian capital markets to become global investors.
Indeed, as big as the recreational opportunity is in Canada, it pales in comparison to the global medical marijuana opportunity, which Grandview Research estimates could be as big as a USD $55.8 billion market by 2025.
We are already seeing broad medical marijuana legalization efforts underway in major markets such as Germany and Australia.
Some key highlights:
• Canopy Growth: Has investments in Germany via the MedCann acquisition in 2016, South America through Spectrum Chile and Bedrocan Brasil, as well as a minority ownership in Australia-based AusCann, one of Australia’s largest marijuana producers
• Aurora: owns Germany based Pedanios, importer/exporter of medical cannabis to EU, owns 51% of Aurora Nordic, constructing greenhouse in Denmark
• Aphria: Aphria International has international assets in Germany, Italy, Malta, Australia and Lesotho
• Cronos: Cronos has international production platforms in Israel and Australia and an exclusive strategic distribution partnership with G. Pohl-Boskamp, which has access to 12,000 German pharmacies
Consolidation
The other big opportunity for Marijuana equity investors is consolidation. The last quarter already witnessed the biggest takeover yet occurring in May, following the announcement that Aurora Cannabis would buy MedReleaf for CAD $3.2 billion.
Takeovers are an easier way for both existing and new entrants in the space to instantly create scale, without having to build up the expensive infrastructure of building new facilities and going through the extensive process of ACMPR licensing for a new start-up.
We expect that more companies will become takeover targets, not only from bigger rivals but also from bigger industries, such as Alcohol, Tobacco and Pharmaceutical companies looking to get a strong foothold in the space. The smaller-cap space saw quite a bit of activity as well, with the April takeover of WeedMD by HIKU Brands and the takeover of CanniMed by Aurora.
New Addition to Horizons Marijuana Life Sciences Index ETF (HMMJ)
HMMJ is an index (or passively managed) ETF, which seeks to replicate, to the extent possible, the performance of the North American Marijuana Index, net of expenses. This index is designed to provide exposure to the performance of a basket of North American publicly listed life sciences companies with significant business activities in the Marijuana industry. In order to be included in the Index, a stock must have a market capitalization of at least CAD $75 million and an average monthly trading volume of 250,000 shares per day. Given the rapid ascent of the Marijuana sector as a whole, it’s no surprise that a lot more stocks became eligible for inclusion in the Index, and by extension, the ETF.
The HMMJ portfolio recently expanded to include the following constituents:
| Name | Ticker | Exchange |
| Hempco Food & Fiber | HEMP | TSX Venture Exchange |
| Lexaria Bioscience Corp | LXX | Canadian Securities Exchange |
| Green Organic Dutchman | TGOD | Toronto Stock Exchange |
| Village Farms International | VFF | Toronto Stock Exchange |
Company Highlights
• Hempco Food: One of the world’s leading manufacturers of hemp-based foods, which include hemp oil, hulled hemp seed nuts and even hemp protein powder.
• Green Organic Dutchman (TGOD): TGOD is a leading a provider of organically grown marijuana. The company was by far the largest marijuana IPO year-to-date when it started trading in May.
The Company carries out its principal activities producing cannabis from its facilities in Ancaster, Ont. The company grows high-quality, organic cannabis with sustainable, all-natural principles. TGOD’s products are laboratory tested to ensure patients have access to a standardized, safe and consistent product. TGOD has a funded capacity of 116,000 kg and is building 970,000 sq. ft. of cultivation facilities in Ontario and Quebec.
• Village Farms International: Village Farms International is a leading greenhouse cultivator of vegetables in North America. The company has extensive exposure to the marijuana market through a joint-venture with Emerald Health Therapeutics, where they jointly run a 250,000 square foot greenhouse marijuana cultivation facility in Delta, British Columbia.
The Greenhouse facility is targeting production of dried cannabis of approximately 7,000 to 8,000 kilograms in 2018, 46,000 to 52,000 kilograms in 2019, and more than 75,000 kilograms in 2020 when the facility reaches full production. Health Canada issued a cultivation license for the Delta 3 greenhouse in March.
HMJR Rebalance
Horizons ETFs also completed the first rebalance of the portfolio of HMJR. HMJR seeks to replicate, to the extent possible, the performance of the Emerging Marijuana Growers Index (the “Index”), net of expenses. The Index is designed to provide exposure to the performance of a basket of primarily North American publicly-listed small-capitalization companies primarily involved in the cultivation, production and/or distribution of marijuana.
HMJR has four key differences compared to HMMJ. HMJR invests in smaller market-capitalization companies than HMMJ, its portfolio is 100% invested in marijuana producers and distributors, and it can have exposure to companies outside of North America. In addition, HMMJ is listed on the Toronto Stock Exchange, while HMJR is listed on the NEO Exchange.
The HMJR portfolio recently expanded to include the following constituents:
| Name | Ticker | Exchange |
| Heritage Cannabis Holdings | CANN | Canadian Securities Exchange |
| Supreme Cannabis Inc. | FIRE | TSX Venture Exchange |
| Invictus MD Strategies Corp. | GENE | TSX Venture Exchange |
| Golden Leaf Holdings Inc. | GLH | Canadian Securities Exchange |
| Newstrike Resources Ltd. | HIP | TSX Venture Exchange |
| Liberty Health Sciences Inc. | LHS | Canadian Securities Exchange |
| Matica Enterprises Inc. | MMJ | Canadian Securities Exchange |
| Friday Night Inc. | TGIF | Canadian Securities Exchange |
| THC Biomed Intl. Ltd. | THC | Canadian Securities Exchange |
HMJR also had to eliminate a few holdings from its initial portfolio due to the fact they no longer qualify for index inclusion.
| Name | Ticker | Exchange |
| Canada House Wellness Group | CHV | Canadian Securities Exchange |
| Liberty Leaf Holdings Ltd. | LIB | Canadian Securities Exchange |
| Marapharm Ventures Inc. | MDM | Canadian Securities Exchange |
| PUF Ventures Inc. | PUF | Canadian Securities Exchange |
| Hydropothecary Corporation | HEXO | Toronto Stock Exchange |
HMJR should have a slightly higher turnover than HMMJ, since it can hold stocks with smaller market capitalizations, but it will also be required to sell stocks that exceed a certain market capitalization. Companies that graduate out of HMJR could likely be in the HMMJ portfolio, so between the two ETFs, an investor would have a relatively comprehensive exposure to the investable universe of listed marijuana securities in Canada.
It is important to note that both HMMJ and HMJR may not hold all of the constituent names in their respective indices. The manager of the ETFs, through the use of a stratified sampling strategy, may invest in securities that closely match the investment characteristics of the ETFs’ respective indices, provided they are consistent with the ETFs’ investment objectives and strategies.
The views/opinions expressed herein may not necessarily be the views of Horizons ETFs Management (Canada) Inc. All comments, opinions and views expressed are of a general nature and should not be considered as advice to purchase or to sell mentioned securities. Before making any investment decision, please consult your investment advisor or advisors.
The financial instrument is not sponsored, promoted, sold or supported in any other manner by Solactive AG nor does Solactive AG offer any express or implicit guarantee or assurance either with regard to the results of using the Index and/or Index trade name or the Index Price at any time or in any other respect. The Index is calculated and published by Solactive AG. Solactive AG uses its best efforts to ensure that the Index is calculated correctly. Irrespective of its obligations towards the Issuer, Solactive AG has no obligation to point out errors in the Index to third parties including but not limited to investors and/or financial intermediaries of the financial instrument. Neither publication of the Index by Solactive AG nor the licensing of the Index or Index trade name for the purpose of use in connection with the financial instrument constitutes a recommendation by Solactive AG to invest capital in said financial instrument nor does it in any way represent an assurance or opinion of Solactive AG with regard to any investment in this financial instrument.
Certain statements may constitute a forward looking statement, including those identified by the expression “expect” and similar expressions (including grammatical variations thereof). The forward-looking statements are not historical facts but reflect the author’s current expectations regarding future results or events. These forward-looking statements are subject to a number of risks and uncertainties that could cause actual results or events to differ materially from current expectations. These and other factors should be considered carefully and readers should not place undue reliance on such forward looking statements. These forward-looking statements are made as of the date hereof and the authors do not undertake to update any forward-looking statement that is contained herein, whether as a result of new information, future events or otherwise, unless required by applicable law.