KT&G will avoid anti-graft law fallout: Nomura

By Park Si-soo

Korea’s new anti-corruption law will not cool KT&G’s growth momentum, Nomura Financial Investment says in a report.

The Japanese brokerage firm set aside concerns that the sweeping anti-graft law, which comes into force later this month, will affect the bottom line of Korea’s biggest tobacco and ginseng maker, retaining a “buy” position and setting its per-share target at 160,000 won.

KT&G shares closed at 118,500 won on Tuesday, up 500 won, or 0.42 percent, from the previous day. The benchmark KOSPI closed up 6.45 points, or 0.31 percent, at 2,066.53.

Under the new law, people working for the government, media outlets and schools -- public and private -- are banned from receiving meals priced higher than 30,000 won, gifts exceeding 50,000 won, or congratulatory and condolence money over 100,000 won. Violators could face heavy fines or even jail. More than 40,000 public and private organizations are affected.

“We remain positive on KT&G, as we anticipate that structural export growth momentum will continue,” the report said. “Export earnings grew swiftly in all KT&G’s divisions and look likely to record a 21.7 percent gross profit contribution in FY18F (financial year 2018).”

Nomura said orders from new markets such as China and the United States are growing rapidly and higher-margin product sales growth is quicker in these markets.

Nomura expects the anti-corruption law will slightly reduce the demand for KT&G’s pricy red ginseng gifts, slashing earnings by 2.6 percent in 2016 and 2017 -- the red ginseng business accounts for 10 percent of KT&G’s operating profit. But the drop will be offset with increasing exports and recovering domestic demand, Nomura forecasts.

Last year, KT&G sold more products abroad than at home, the first time since 1999 when the firm began exporting. The Middle East accounted for 48 percent of overseas sales, followed by Latin America and Europe with 14 percent and Central Asia with 11 percent.