[Click eStock] K Tobacco Captures Indonesia... "KT&G, Exchange Rate Effect" Target Price Up

[Asia Economy Reporter Ji Yeon-jin] KT&G is expected to see further improvement in its performance, supported by the high exchange rate effect.

On the 30th, Hi Investment & Securities maintained a buy rating on KT&G and raised the target price to 120,000 KRW. Lee Kyung-shin, a researcher at Hi Investment & Securities, said, "Although there are burdens related to volatility in overseas markets, slow recovery in duty-free channels, and ongoing structural improvements in the red ginseng segment, the possibility of additional issues arising compared to the conservative market conditions reflected in the estimates is limited," adding, "rather, the operating performance is expected to further improve due to the exchange rate effect."

The researcher explained, "Considering the current valuation and stock price level, a buy strategy that takes into account KT&G's stability amid increased external variable volatility and the speed of structural business response to the partial shift of the domestic and international tobacco market's focus from conventional cigarettes to heated tobacco products is valid, along with the shareholder return policy."

Next year, KT&G's sales and operating profit growth rates are expected to be -1.2% and 2.5%, respectively, compared to the previous year. In particular, for the first half of next year, when the exchange rate effect is additionally reflected, growth rates are expected to be 1.5% and 5.5%, respectively. Despite the slow recovery trend in duty-free and red ginseng demand, tobacco exports based on the exchange rate effect, growth of overseas subsidiaries, and expansion of total market dominance in domestic and international tobacco markets are expected to continue prominently.

The researcher forecasted, "KT&G's domestic conventional cigarette market share is expected to expand by 0.2 percentage points to 65.6% next year, and despite demand shifts considering the high growth of heated tobacco sticks, further market dominance expansion is anticipated," adding, "If the duty-free proportion expands in the future, additional scale and profit improvements are possible."

The growth of exports and overseas subsidiaries' conventional cigarettes is analyzed to stem not only from the KRW-USD exchange rate effect but also from significant volume expansion centered on the new market of the Indonesian subsidiary. In particular, Indonesia shows strong operating performance improvement based on new product price increases and expanded distribution coverage.

The researcher said, "Global heated tobacco products are increasing device and stick exports as well as stick sales royalties with additional countries entering the market, and a smooth trend is expected to continue next year," adding, "Although the contribution of the real estate business segment and consolidated real estate-related subsidiaries to performance will shrink compared to the previous year, if the core business stability is secured, it is not considered a risk factor, and additional projects can be expected to have an effect of upwardly revising the company's overall operating performance."