KT&G: A Strong Candidate for Outperformance Amid Increased Signs of Market Fears

• In this insight, we provide an update of KT&G Corporation (033780 KS) which is a strong candidate for outperformance amid increased signs of market fears.

• We continue to believe that there is an increasing probability of cigarette price hikes in Korea in 2H24. Last time that KT&G hiked its cigarette prices was in January 2015.

• The company's shareholder return policy is to provide cash dividends of 1.8 trillion won and share buyback/cancellations worth 1 trillion won from 2024 to 2026.

Photo by Stéphan Valentin on Unsplash

In this insight, we provide an update of KT&G Corporation (033780 KS) which is a strong candidate for outperformance amid increased signs of market fears and global recession. We continue to believe that there is an increasing probability of cigarette price hikes in Korea in 2H 2024.

The average price of cigarette per pack is currently 4,500 won in Korea. The last time that KT&G hiked its cigarette prices was in January 2015. It has been more than 9 years since the South Korean government raised the cigarette prices. If there is no cigarette price hikes in 2H 2024, we believe the probability of cigarette price hike in 2025 will be even higher.

Improving Inflation Rates

Inflation rates have been improving in Korea since the recent peak of 6.3% in July 2022 to 2.6% in July 2024. The annual inflation rate in Korea rose 2.6% YoY in July 2024, up slightly from a 2.4% gain in June. On a monthly basis, consumer prices increased 0.3% in July, reversing from a 0.2% fall in June and coming in slightly higher than forecasts of 0.25%.

Bank of Korea (BOK)'s target is to keep headline inflation at 2% over the medium term. If Korea's inflation rate declines closer to 2% in the next several months, it would be easier for KT&G to raise its cigarette prices. However, if the inflation rate rises to 3% or more, then the Korean government could pressure KT&G, making it more difficult for the company to raise prices. In the remaining 2024, we believe there is a higher probability of inflation rate in Korea heading lower to near 2%, resulting in higher probability of cigarette price hike announcement in late 2024.

Inflation Rates in South Korea (Source: Statistics Korea)

History of Cigarette Price Hikes in Korea

The table below shows the history of cigarette price hikes in Korea. The last time the Korean government implemented an increase in cigarette price hike was in January 2015 when it was raised from 2,500 won per pack to 4,500 won (an increase of 80%). The cigarette price per pack which was 800 won in January 1989 to current price (4,500 won), represents an increase of 5.21% CAGR (from 1989 to 2023).

From 1989 to 2023, there were 8 times when the cigarette prices were raised. Cigarette prices were raised frequently in the one decade from 1994 to 2004 but since then it has become infrequent.