[Exclusive] KT&G Lil's Overseas Intellectual Property Applications Increase Under Baek Bokin's Patent Management... Targeting Export

Focus on Securing Lil Patent Rights... Accelerate Global Expansion Within the Year
CEO Baek "Concentrated Technology... Fruit of Increased Patent Applications"
Expectations Surge for Improved Second Half Performance Including Lil Exports

KT&G 'Lil Hybrid 2.0'.

[Asia Economy Reporter Lee Seon-ae] KT&G's heated tobacco electronic cigarette 'Lil' is accelerating its final preparations to fully enter the overseas market by filing a significant number of intellectual property applications for Lil in various countries abroad. This is analyzed as a result of the research and development (R&D) strengthening strategy continuously pursued by President Baek Bok-in since his appointment in 2015, which has borne fruit in the form of increased patent applications.

◆Rapid surge in overseas patent applications for electronic cigarette 'Lil'... Export within the year= According to internal KT&G documents obtained by Asia Economy on the 16th, the intellectual property rights for the electronic cigarette Lil have been filed with a total of 3,384 applications, including 694 patents in 13 countries (including Korea), 2,033 trademarks in 66 countries, and 657 design rights in 14 countries. Overseas applications (2,600) are more than three times the domestic ones (784).

In particular, overseas patent applications for Lil, which were only 3 cases in 2017, increased to 41 in 2018, reached a peak of 138 last year, and recorded 171 as of May this year, showing a steep upward trend.

The patent application technology that attracted the most attention is the automatic preheating function 'Smart On' of the 'Lil Hybrid 2.0' launched last February. The 'Lil Hybrid,' released in November 2018, is a proprietary platform combining a heated tobacco electronic cigarette with a liquid cartridge, characterized by reducing the unique burnt taste of heated tobacco and achieving a uniform vapor amount. The upgraded product 'Lil Hybrid 2.0' applies the latest technology, including the Smart On function that automatically preheats when inserting a stick and an OLED display that shows battery and cartridge remaining amounts and operating status, enhancing user convenience to a new level.

As KT&G focuses on filing intellectual property rights in various overseas locations, Lil is expected to achieve stable global market entry within the year.

Since its debut in 2017, Lil has been praised by domestic and international consumers for convenience and portability, establishing itself as an influential electronic cigarette brand. As of last year, its domestic device sales market share exceeded 50%, and its dedicated sticks recorded a 31.5% market share in the first quarter of this year, continuing its growth trend. In January, KT&G signed a product supply contract with global tobacco company Philip Morris International (PMI) for overseas sales to ensure stable entry into foreign markets. The initial contract period is three years, with the possibility of establishing a long-term partnership depending on performance, utilizing PMI's distribution network to sell in countries worldwide.

Although the sudden spread of the novel coronavirus disease (COVID-19) slowed export procedures, KT&G has been calmly preparing internally, including intellectual property filings. A KT&G official stated, "We are proceeding with the goal of overseas launch within the year, and there will be no setbacks," adding, "While overseas intellectual property filings for electronic cigarettes are confidential, it is true that a significant number have been filed in multiple countries."

◆Focus on R&D... Expectation of sustained growth= Among domestic companies, KT&G is recognized as one with many patent applications. This is the result of President Baek, who served as head of the production R&D division, focusing on technological capabilities after his appointment, reorganizing the R&D organization, and increasing investment.

KT&G's tobacco R&D expenses, which were around 12.2 billion KRW in 2016, increased to 16.1 billion KRW in 2017, 17.9 billion KRW in 2018, and 23 billion KRW in 2019. This laid the foundation to timely develop necessary technologies amid rapidly changing market conditions. KT&G led the market by launching general tobacco products emphasizing functional differentiation such as odor reduction and introducing the first hybrid heated tobacco electronic cigarette in the domestic market.

In addition to expanding R&D expenses, KT&G established a dedicated organization for next-generation tobacco product development in December 2016 and more than doubled specialized personnel, reorganizing the R&D structure. It also strengthened policy support by expanding the employee invention compensation system for research personnel.

The fruits of focused R&D investment led to an increase in patent applications. Patent applications rose from 43 in 2016 to 95 in 2017, 238 in 2018, and 431 last year, achieving a 1002% increase compared to 2016.

Over the past year, odor-reducing products incorporating KT&G's patented technology have played a game-changing role in the domestic heated tobacco market. KT&G successfully launched odor-reducing products such as 'Esse Change Himalaya' and 'Raison Huiva,' achieving a 64.0% market share in heated tobacco in the first quarter of this year, up 0.9% from the same period last year.

Especially, 'Esse Change Himalaya,' launched in April last year, surpassed cumulative sales of 10 million packs in about four months. Considering that it usually takes about 14 months for a new product to reach 10 million packs sold, KT&G explains this is more than three times faster. It reached 20 million packs in cumulative sales within six months of launch and has now surpassed 50 million packs in cumulative sales as it marks its first anniversary.

'Raison Huiva,' launched in March 2017, was renewed and re-released in August last year with odor-reduction technology applied. Since applying the odor-reduction technology, monthly average sales reached 1,563,000 packs, an increase of about 65% compared to before the renewal.

◆Bright performance outlook for the second half= Despite the direct impact of COVID-19, KT&G defended its first-quarter performance well. On a consolidated basis, sales in the first quarter reached 1.1784 trillion KRW, down 0.6% year-on-year. On a separate basis, sales grew 0.4% to 661.3 billion KRW. Net income was 293.9 billion KRW, up 7.3% year-on-year.

Following the solid first-quarter performance, KT&G plans to improve overseas results mainly in the Middle East market from the second quarter onward. This is based on a sales rights contract with the Middle Eastern importer 'Alokozay International.' The contract grants Alokozay the right to sell heated tobacco worth 2.2576 trillion KRW in the Middle East, CIS (Commonwealth of Independent States), and other regions.

KT&G explained, "Exports to the Middle East resumed at the end of March, and full-scale exports began in April," adding, "We expect to achieve a significant level of performance compared to 2018 and 2019."

Exports of Lil are also expected to be a driving force for positive performance. The securities industry also offers optimistic forecasts. Kiwoom Securities analyst Park Sang-jun said, "Philip Morris has emphasized the collaborative business with KT&G several times in corporate presentations, and KT&G's Lil export plans are gradually becoming concrete," adding, "With the easing of COVID-19 concerns, Lil marketing activities are expected to resume in the second half."

Shinyoung Securities analyst Kim Jeong-seop analyzed, "Exports to Alokozay will be fully reflected from April, and benefits are expected from increased sales and export unit price rises mainly through the U.S. subsidiary," adding, "Starting exports in the second half is an investment point, and if profit improvement becomes visible due to favorable overseas expansion, target stock prices can be raised."

This content was produced with the assistance of AI translation services.