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China National Tobacco plans to list international unit in Hong Kong

Chinese tobacco monopoly China National Tobacco Corp., the world's largest producer of tobacco products, plans to list its international unit in Hong Kong.

The disclosure came Jan. 2 in a preliminary filing to the Hong Kong Stock Exchange that offered little information on the planned IPO of China Tobacco International (HK) Co. Ltd. Many details were redacted, including the size and timing of the proposed listing. It comes at a time when demand for cigarettes is declining although the use of e-cigarettes is on the rise.

China Tobacco International is a wholly owned subsidiary of China National Tobacco, which, in turn, is owned by the Chinese government. China National Tobacco and its entities are the only companies in China permitted to produce, sell, import and export tobacco commodities.

China had 306.1 million smokers in 2017, according to the filing, making it the world's largest market for tobacco products. Disposable income in China has increased over the past few decades. Analysis by research firm Frost & Sullivan, cited in the filing, showed domestic sales of premium cigarettes in 2017 increased 8.6% year over year to 145.0 billion sticks from 133.5 billion in 2016.

China Tobacco International manages and operates China National Tobacco's international businesses. It procures tobacco leaf products from countries including Brazil, the U.S., Argentina, Canada and Zambia, and sells imported tobacco leaf products to China National Tobacco's Beijing-based subsidiary, China Tobacco International Inc., for sale in China.

It also manages the export business of China National Tobacco in Southeast Asia, Taiwan, Hong Kong and Macau. China Tobacco International exclusively operates the Chinese brand cigarettes export business of China National Tobacco to duty-free outlets and cigarette wholesalers for sales in Thailand, Singapore, Hong Kong and Macau.

According to the stock exchange filing, described as an application proof, China Tobacco International's growth prospects are closely linked to demand for cigarettes and other tobacco products from Chinese tourists and overseas Chinese.

Duty-free cigarette exports from China in 2017 were worth US$687.2 million versus US$590.8 million in 2013, a compound annual growth rate of 3.9%. Over the same period, the number of outbound trips by Chinese travelers jumped to 131 million from 83 million, according to the Frost & Sullivan analysis.

The analysis projected that outbound trips by Chinese travelers increased to 144.8 million in 2018 and would escalate to 215.8 million in 2022, pushing demand for Chinese exported duty-free cigarettes to US$697.9 million in 2018 and to US$742.2 million in 2022, a compound annual growth rate of 1.6%.

For the years ended Dec. 31, China Tobacco International reported 2017 revenue of HK$7.81 billion, up from HK$6.31 billion in 2016. For the nine months ended Sept. 30, 2018, the international business reported HK$5.08 billion in revenue and HK$222.3 million in net profit.

China International Capital Corp. Hong Kong Securities Ltd. and China Merchants Securities (HK) Co. Ltd. are acting as joint sponsors of the potential listing.