China National Tobacco Eyes Hong Kong IPO

January 8, 2019 – China National Tobacco, the largest tobacco company in the world, could list its international unit in an IPO in Hong Kong later this year. That unit, China Tobacco International (HK), is mainly responsible for buying tobacco leaves from countries like Brazil and Canada for its state-owned parent company.

China Tobacco International only represents a small sliver of China National Tobacco’s business — but an IPO would give investors a rare opportunity to own a piece of the state monopoly, which holds a 40% share of the world’s cigarette market.

British American Tobacco and Philip Morris International, the two largest publicly traded tobacco companies in the world, both hold mid-teen shares of the global market, and only sell their products in China through joint ventures with China National Tobacco.

Pre-listing documents indicate that China Tobacco International’s revenue fell 21% annually to HK$5.1 billion ($651 million) in the first nine months of 2018. That decline looks dismal relative to PMI and BAT’s growth rates.

Philip Morris International’s revenue rose 8% to $22.1 billion in the first nine months of 2018, and British American Tobacco’s non-GAAP revenue (which includes Reynolds American’s sales in both periods) fell 6% to 11.53 billion pounds ($14.5 billion) in the first half of 2018.

However, unlike those companies, China Tobacco International isn’t a direct retailer of cigarettes. It mainly generates its revenue from a fixed markup fee of 6% on its sales of imported tobacco leaves to Chinese cigarette makers.

It generates a smaller percentage of its revenue by selling China’s exported cigarettes, which are mainly sold at duty-free stores to Chinese tourists. The unit maintains full control over China’s cigarette exports.

Last May, the company started exporting Chinese-made heated tobacco devices similar to PMI’s IQOS, but those likely aren’t generating significant revenues yet.

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