KT&G: Increasing Probability of a Cigarette Price Hike in the Next 6-12 Months

• A cigarette price hike has been long overdue in Korea. The last time there was cigarette price hike in Korea was more than 10 years ago.

• We believe that the Korean government could raise cigarette prices to about 7,000 won to 8,000 won per pack from current price of 4,500 won in the next 6-12 months.

• Raising cigarette prices could improve the sharp shortfall in government tax revenues.

A cigarette price hike has been long overdue in Korea. The last time there was cigarette price hike in Korea was more than 10 years ago when the price of a pack of cigarettes was increased by 80% to 4,500 won. There has been some expectation of a major cigarette hike in Korea since early 2024 but no actual official increase announcement has been made.

Despite the lack of cigarette price hike, the overall inflation rates have increased significantly in the past decade. KT&G has a strong argument of the need to raise its prices in order to keep up with the overall increases in raw material prices, distribution, and labor costs. The average annual CPI rates in South Korea was 2% from 2015 to 2024. The combined amount of the CPI increase in this period was 20%.

Due to the political uncertainty in South Korea from 4Q 2024 to 2Q 2025, the discussions about a price hike of cigarettes has been kicked further down the road. However, the discussions of a potential increase in cigarette prices has increased in the past several weeks, especially after the inauguration of the new President of South Korea.

Furthermore, raising cigarette prices could improve the sharp shortfall in government tax revenues.

We believe that the Korean government could raise cigarette prices to about 7,000 won to 8,000 won per pack from current price of 4,500 won in the next 6-12 months. Although there has been a delay in raising cigarette prices in the past year, the arguments of increasing the prices is gaining more ears.

If KT&G is able to raise its cigarette prices to 7,000 won to 8,000 won+ per pack, this is likely to positively impact the company's sales and profit margins, despite decline in volume.

We continue to have a Positive View of KT&G.

South Korea Annual CPI Growth Rates (2015-2024) (Source: IMF)

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.

Along with the increase in the cigarette prices, the percentage of taxes that account for the total price of cigarettes has progressively increased in the past 30+ years. For example, in 1989, taxes accounted for 45% of the total price of cigarettes which increased to 55.5% in 2002 and 73.7% today.