[Click eStock] "KT&G, Tobacco Sailing Smoothly, KGC Slump Continues"

Shinyoung Securities Report

[Asia Economy Reporter Minji Lee] Shin Young Securities maintained a buy rating and a target price of 110,000 KRW for KT&G on the 13th. This is based on the assessment that this year's performance will slightly decline compared to last year due to KGC's sluggishness.

In the first quarter, KT&G recorded sales of 1.2639 trillion KRW and operating profit of 317.7 billion KRW, representing increases of 7.3% and 1.2% respectively compared to the same period last year. Sales exceeded market expectations by 2.1%, but operating profit fell short by 3.1%.

Researcher Jeongseop Kim of Shin Young Securities explained, "Despite the sluggish duty-free channel due to the prolonged COVID-19 pandemic, sales of heated tobacco and electronic cigarettes performed well, and global tobacco exports and real estate sales significantly increased. Operating profit slightly improved compared to last year due to the effect of increased sales prices at overseas tobacco subsidiaries in the U.S., Indonesia, and the CIS."

KT&G's standalone sales amounted to 785.7 billion KRW, up 14% from a year earlier, while operating profit decreased by 0.8% to 353.6 billion KRW. The total domestic heated tobacco market demand was 14.9 billion sticks, similar to last year. However, as the market share of low-irritation and odor-reducing products expanded, KT&G's market share in the heated tobacco segment improved by 0.5 percentage points year-on-year to 64.5%. Overseas sales volume increased by 30% to 9.5 billion sticks during the same period, driven by normalization of exports to the Middle East and increased sales in key markets such as the U.S. and Indonesia. Operating profit slightly declined due to exchange rate depreciation and rising export cost ratios.

KGC's sales and operating profit recorded 380.2 billion KRW and 53.3 billion KRW respectively, down 2.8% and 25.8% from a year earlier. Road shop sales increased by 9.6% year-on-year due to increased demand during the Lunar New Year holiday, but the overall scale shrank due to sluggish duty-free channels (-11%) and decreased home shopping sales. Operating profit sharply declined due to a base effect from last year's first quarter results, which were minimally affected by COVID-19, and changes in channel mix.

This year, KT&G's expected consolidated sales are 5.4614 trillion KRW, and operating profit is 1.4566 trillion KRW, with operating profit expected to decrease by 1.7% compared to last year. This is due to rising cost ratios from the expansion of the electronic cigarette market, decreased real estate sales, and delayed performance recovery caused by KGC's sluggish duty-free channel.

However, the normalization of Middle East export tobacco sales, strengthening dominance in the domestic heated tobacco and electronic cigarette markets, and the trend of expanding sales volume in the U.S. and key markets are expected to remain valid this year as well. Researcher Jeongseop Kim stated, "We are currently exporting electronic cigarettes to three countries?Russia, Ukraine, and Japan?and plan to expand to more than 10 countries within the year."