[Click eStock] "KT&G, Stable Growth Expected in the Second Half"

Hi Investment & Securities Report

[Asia Economy Reporter Minji Lee] Hi Investment & Securities maintained a buy rating and a target price of 100,000 KRW for KT&G on the 31st.

KT&G's sales and operating profit growth rates for the second half of the year are estimated at 1.8% and 3.9% year-on-year, respectively. The current estimates are based on conservative assumptions regarding duty-free sales performance, so additional growth is possible depending on the pace of recovery. Considering that KT&G is relatively free from raw material price increases compared to other companies, it is expected to demonstrate strong stability amid external variable fluctuations.

The trend of expanding market dominance in domestic conventional cigarettes and heated tobacco products remains solid. KT&G's domestic conventional cigarette market share continues to rise, reaching 65.7% in the first quarter, up 1.2 percentage points year-on-year. The robust volume flow compared to the overall market demand decline is also notable. Heated tobacco products maintain an upward trend by improving penetration rate and market dominance within the domestic HNB market. Despite the slow recovery in the duty-free segment, strengthening dominance and potential future expansion of the duty-free ratio could lead to additional profit improvements.

The Gwacheon real estate consolidated subsidiary is expected to contribute to both scale and operating profit through this year. It can partially offset the decline in Suwon real estate business performance, with an expected contribution of 220 billion KRW in annual sales this year.

Growth in exports and overseas subsidiaries' conventional cigarettes is predicted to reflect positively the recovery in the Middle East and Asia-Pacific regions, as well as significant volume expansion in the Indonesian subsidiary. Researcher Kyungshin Lee of Hi Investment & Securities analyzed, “Despite some ongoing export gaps in the U.S. region and logistics congestion related to COVID-19, performance remains solid.”

Global heated tobacco products showed an increase in device and stick exports as well as stick sales royalties. New market entries centered in Europe are also expected to proceed smoothly. Researcher Lee explained, “Although a temporary rise in cost ratio may occur due to increased device exports aimed at expanding the market base, it will lead to local stick market establishment, thereby increasing the company's overall profit contribution.”

Considering external variables, KGC is unlikely to experience a rapid surge in demand. However, steady growth is predicted as the duty-free ratio recovers following the expansion of overseas travel fees after the second quarter, and increased interest in immunity and health-related matters continues to drive demand beyond short-term issues.

Researcher Lee stated, “Given the shift in the domestic and international tobacco market weight from conventional cigarettes to heated tobacco products, KT&G’s rapid structural business response and its stability amid increased external variable volatility make a buy strategy valid.”