Middle East Tobacco Exports Increase to Triple Digits... KT&G Relieved Despite 'COVID-19' Adversity

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[Asia Economy Reporter Choi Saeng-hye] KT&G is expected to continue strong performance in the second quarter despite a decline in duty-free and domestic tobacco demand caused by the spread of the novel coronavirus (COVID-19). This is because exports to the Middle East, which had been sluggish, have recovered by triple digits, driving overall growth.

According to the Korea Customs Service and NH Investment & Securities Research Department on the 6th, tobacco exports to the Middle East last month increased sharply by 685.6% compared to the same period last year. This is a remarkable growth compared to the export slump experienced over the past two years due to political instability in the Middle East and rapid exchange rate fluctuations. Exports to the Middle East in the second quarter (April to June) rose 33.5% year-on-year.

The background of this achievement lies in KT&G, which has the largest share of tobacco exports among domestic tobacco manufacturers, securing a large-scale tobacco export route worth 2 trillion won to the Middle East in February. At that time, KT&G signed a sales rights grant contract worth 1.8 billion dollars (approximately 2.2576 trillion won) for 7 years and 4 months until June 2027 with Alokozay International, a local importer in the Middle East. In particular, at the time of the contract, a 'minimum annual purchase quantity clause' was newly created to ensure stable long-term profits.

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As the export performance to the Middle East becomes visible, KT&G's second-quarter results are also expected to increase. According to the securities industry, KT&G's consolidated sales and operating profit for the second quarter are tentatively estimated at 1.2849 trillion won and 400.4 billion won, respectively, up 2.1% and 0.3% year-on-year. Considering the decrease in duty-free sales of tobacco and red ginseng due to the impact of COVID-19 and the decline in total domestic tobacco demand, this is a solid performance. Operating profit in the tobacco and red ginseng sector is expected to decrease by 11.2% compared to the same period last year.

Lee Kyung-shin, a researcher at Hi Investment & Securities, said, "The sustainability of KT&G's export performance to the Middle East is expected to be high," adding, "Additionally, overseas subsidiaries are expected to expand their scale through increased volumes in the United States and Indonesia."

Jo Mi-jin, a researcher at NH Investment & Securities, said, "Overall tobacco exports, excluding Japan and Australia, also maintained last year's level despite the high base in regions other than the Middle East last year," adding, "If this trend continues, KT&G's tobacco exports are expected to increase significantly in the second half."

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