KT&G goes downhill on tax hike

By Park Si-soo

Share prices of Korea’s leading tobacco maker KT&G plunged Wednesday on fears that the 2,000 won ($1.80) tax increase on a packet of cigarettes will undercut its profitability.

Its stock price closed down 4.72 percent or 4,300 won at 86,800 won. The benchmark KOSPI closed at 1,969.91, up 4.08 points or 0.21 percent.

Several institutional stock traders revised down their target price for the company as the new tax will be applied from Jan. 1.

The Korea Institute of Public Finance cast a dismal outlook, suggesting that the new tax will slash domestic demand for cigarettes by 34 percent.

KT&G has a dominant market share of 62 percent, maintaining a comfortable lead over Philip Morris, British American Tobacco and Japan Tobacco International.

“The tax hike will put immense pressure on KT&G to raise the price of its products. This will eventually force many smokers to stop consuming its products,” said Yang Il-woo, a senior analyst at Samsung Securities. “Particularly those who currently consume the lowest-priced products (2,500 won a packet) may feel an economic burden to continue to smoke.” An estimated 20 percent of KT&G customers smoke 2,500 won-priced products.

Roh Kyung-chul, an analyst at IM Investment and Securities, voiced a similar view, suggesting the tax increase is nothing but bad for KT&G.

“The company will have no benefit from the new tax,” he said. “The amount of loss caused by reduced smokers may be bigger than gains driven by increased prices.”

Analyst Shim Eun-joo from Hana Daetoo Securities said the domestic demand for cigarettes fell 15 percent in 2004 when tobacco companies raised prices by 500 won, adding the new tax raise will produce a bigger drop in the long run.

Prices undecided

A KT&G spokeswoman said the company has yet to decide its pricing policy to cope with the new tax. The company has to announce revised prices by the last week of the year.

“Nothing has been decided yet,” the spokeswoman said. “We will decide after taking into account the overall situation we face.”

Last year, the company earned 1.9 trillion won from the domestic sales of cigarettes. Of its products, ESSE priced from 2,500 to 4,000 won was the biggest contributor to the bottom line, followed by The One (2,500 won) and Raison (2,500 won).

The three foreign tobacco makers also have yet to set their new prices, saying they are communicating with their headquarters on the issue.