Japan Tobacco Inc (2914)

Source: JTI website

I did some pretty intensive and detailed research on the tobacco industry and was pretty impressed with the stock performance of the big boys such as British American Tobacco ("BAT"), Philip Morris  International ("PMI") and last but not least Japan Tobacco Inc ("JTI"). Among the three, PMI was out as its on NYSE and the hours are totally opposite from ours. BAT was also considered but the charges are absolutely exorbitant and ACCICB has been going on and on about how much we spent on charges and how we should never do UK stocks anymore.

I don't mind since it means one less exchange to monitor and I don't have to comb through it to find suitable stocks. Seriously, you need a lot of money to make a little money on the stock market, assuming that you don't screw things up. Thus, I don't advocate quitting your day job to do this full time unless you have some serious experience to do so.

ACCICB had major concerns as this industry has always been at the receiving end of increased scrutiny and endless new regulations that could potentially upset the stock price if the implications are not handled properly and wisely. I differ as my opinion is that while cigarettes are harmful, people have a choice to decide whether to smoke or not. I do agree though that the introduction of regulations to commoditize cigarettes by restricting ingredients and emissions and on use of additives such as menthol, is a major bitch for the top 4 tobacco big boys namely PMI, BAT JTI and lastly Imperial Tobacco.

It's common knowledge nowadays that smoking is bad for your health and accessibility has been limited to prevent the young ones from getting at it. Thus it is really a matter of demand and supply that decides whether cigarettes have a future in our world. Of course, now e-cigarettes is the rage and it is not yet subjected to very stringent regulation as yet so JTI's acquisition of Zandera Ltd earlier this year was a move that would help them make inroads into this lucrative segment. 

JTI dominates in Japan with about 61% market share and surprisingly it is the 2nd largest revenue contributor (29.6%) as international sales is the top earner at 52.9%. The remaining 17.5% of revenue comes from their beverage, processed food, pharmaceutical and others business. While sales volume has dropped, revenue has grown so it all boils down to whether the increase in price would offset  declining volume. This becomes a delicate issue as you don't wish to increase the price of your product to the point that it causes your consumers to switch to another brand.

In the mature markets, there is a trend of down-trading whereby consumers seek more affordable cigarettes and the opposite is true for emerging markets whereby consumers would trade up to higher priced products as their incomes increase. Excluding China which is mainly dominated by the monopoly China Tobacco, global industry volume has been on the decline while the value continues to see growth which is fuelled by consumer demand.

It was interesting to read that Abe has asked the government to consider selling it's remaining stake in JTI to raise funds for the government so that they can afford a corporate tax cut. It was just last year that they had sold a percentage of their holdings in JTI in order to have reconstruction funds for  the aftermath of the 2011 earthquake and tsunami in Fukushima. Concerns about whether JTI when fully privatized would continue to support local tobacco farmers was asked and left unanswered. I would make a guess that local tobacco farmers and JTI have a contract farming agreement so it's anybody's guess what could happen to the farmers. We've invested in stocks that cater to the 7 sins and for JTI ,we employed a quick in and out trading strategy and were happy with our results. Now we just need to focus and pray for the market to head north so that we can divest the remaining stocks before our holiday in a few weeks time!

P.S. Here's a summary of Asian Tobacco Players that you can refer to and is no way a comprehensive version as it lists the major players. Please ignore the rest of my slides on my Slideshare account as it's not related to this post. .


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