China Tobacco’s IPO Will Be Far From Smoking Hot

(Bloomberg Opinion) -- The Hong Kong IPO of China Tobacco International (HK) Co. is looking like a hard sell.

The offshore unit of China National Tobacco Corp. is not only in a sunset industry that’s been under attack globally because of smoking’s link to cancer, it’s also found itself in the crosshairs of the U.S.-China trade war. Add to that a forecast slump in revenue and a struggling Hong Kong stock market, and there’s enough to give most investors a coughing fit.

On the plus side, China Tobacco’s state-owned parent is by far the biggest cigarette maker in the world, holding a monopoly in a country with more than 300 million smokers. Tobacco revenues added $160 billion in profit and tax to government coffers in 2016, according to the latest available data, a contribution that’s helped to insulate the industry from the anti-smoking campaigns that have assailed cigarette makers elsewhere.

China Tobacco’s IPO Will Be Far From Smoking Hot
China Tobacco is a minor sliver of the business, though. The offshore unit procures tobacco from overseas and sells it to the parent at a fixed 6 percent markup. 

The U.S. supplied 33.5 percent of the company’s tobacco leaf import revenue in the nine months to Sept. 30, China Tobacco said in a stock exchange filing this week. However, the unit has stopped buying from the U.S. after the Trump administration imposed 25 percent tariffs on Chinese products from machinery to robotics in July. Beijing retaliated with an equal tariff on 106 categories of U.S. goods, including tobacco leaf.

China Tobacco predicts a “significant decline” in its tobacco leaf import business revenue for 2019.

China Tobacco’s IPO Will Be Far From Smoking Hot

The unit has smaller operations exporting Chinese tobacco to Southeast Asian countries including Indonesia, and selling cigarettes in duty-free outlets in Hong Kong, Thailand, Singapore and Macau. Exports — largely from the provinces of Yunnan, Guizhou and Sichuan — have been decreasing in recent years, while the duty-free business is dependent on continued growth in Chinese tourists, who are the main consumers, the company notes.

Hong Kong was the world’s busiest venue for initial public offerings last year, beating New York and Shenzhen. But many of the year’s biggest listings, such as Xiaomi Corp., are trading underwater. The city’s benchmark Hang Seng Index sank into a bear market in September, marking a decline of more than 20 percent from its January peak.

Most major tobacco stocks have performed poorly in recent years. Japan Tobacco Inc., a former government monopoly, lost 24 percent in the past five years, Philip Morris International Inc. is down 21 percent and British American Tobacco Plc dropped 23 percent. Altria Group Inc. has risen 31 percent.

China Tobacco offers a rare chance for investors to access a nation where cigarette sales have bucked the global trend of declines. Yet even in China, health concerns have been starting to weigh. Last year, lawmakers in the National People’s Congress called for higher taxes on cigarettes to deter smoking among the young. And some cities have sought to impose bans on smoking in public places. China adds more than 4 million new cancer patients each year.

Investors tempted by the waft of monopoly profits should be warned: Cigarettes can damage your financial health, too.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Nisha Gopalan is a Bloomberg Opinion columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

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