By Kim Da-ye
Korea’s largest tobacco manufacturer KT&G’s shares skyrocketed more than 18 percent in just one month, but it is not an indication that the fundamentals of the firm have improved, sources said Thursday.
The stock price rose from 55,000 won on April 12 to 65,100 won Thursday as foreign tobacco makers, British American Tobacco (BAT) and Japan Tobacco International (JTI), raised their price for a pack of cigarettes by 200 won to 2,700 won.
Mostly foreign investors picked up KT&G shares for the firm’s potential benefits from the price hike and partly for the announcement on April 21 of a plan to repurchase 2 million treasury stocks, said Park Ju-bi, an analyst at Mirae Asset Securities. Foreigners also like the shares because it has paid high dividends.
Analysts say, however, that KT&G’s share in the tobacco market is actually decreasing and the firm has yet to find new sound businesses for future growth.
The domestic tobacco maker currently enjoys a 58 percent market share here ― down from 68 percent in 2007 due to brisk expansion by foreign brands ― compared to BAT’s 18 percent, Philip Morris’ 17 percent and JTI’s seven percent.
“KT&G’s cigarettes are favored by the older generation while young smokers prefer foreign brands. Consumption by older generations has not changed much, but young consumers of tobacco products are increasing,” said Judy Kim, analyst at Woori Investment & Securities.
“Korea’s tobacco industry, in general, is shrinking, and KT&G is seeking to diversify its line of products because boosting profits from cigarettes is becoming a real challenge.”
Kim said that KT&G’s profits from the price hike by BAT and JTI would be limited because the 200-won difference wouldn’t discourage smokers and the 500-won increase in 2004 did little to cut tobacco sales.
Furthermore, foreign tobacco products tend to replace each other _ the total market share of foreign tobacco companies rarely goes down.
“KT&G benefits only when it raises the prices or boosts sales and operating profit. But doing so won’t be easy because of the government’s policy to stabilize prices,” Kim said.
KT&G officials said that the company won’t follow the suit, but analysts say that the firm could in the second half of the year.
Another way to improve profits is reducing its dependence on domestic tobacco leaves from 25 percent to 20 percent by 2015. That could, however, face resistance from local farmers who have been protesting against BAT and JTI for not using Korean leaves at all. The Korean-grown ones are about three times as expensive as those imported.
KT&G has to ultimately foster other types of businesses, but it will be a thorny path.
Its affiliate Korea Ginseng Corp. (KGC) grew fast thanks to its popular ginseng products and boosted its market share to 70 percent. But the growth has slowed down as the firm faces more competition.
KGC’s revenue grew 13.8 percent to 231.7 billion won in the first quarter from 203.6 billion won a year ago, but the operating profit dropped 1.4 percent from 60.7 billion won to 59.8 percent.
During the same period, KT&G’s revenue dropped 0.6 percent from 540.4 billion won to 537 billion won and the operating profit by the same margin from 190.5 billion won to 189.3 billion won.
The firm is exploring opportunities in skincare based on oriental-medicine, but its ultimate contribution is expected to be small.
“We hear KT&G is considering entering the oriental-medicine skincare market in the second half and targets middle-aged women in their 40s and 50s because they do not mind the distinct smell. The firm is likely to do door-to-door sales, and, because of the limited target customers, growth in the sector is not expected to be as dramatic as the ginseng sales,” Mirae Asset’s Park said.
Park said that KT&G has signed a preliminary deal with Somang Cosmetics, a local skincare manufacturer, which owns the oriental medicine skincare Danahan brand, to strengthen its distribution channels and marketing strategies.