The IPO of China Tobacco will be far from smoking hot

The Hong Kong IPO of China Tobacco International (HK) Co. is looking like a hard sell.
The offshore unit of China National Tobacco Corp. is not only in a sunset industry that’s been under attack globally because of smoking’s link to cancer, it’s also found itself in the crosshairs of the US-China trade war. Add to that a forecast slump in revenue and a struggling Hong Kong stock market, and there’s enough to give most investors a coughing fit.
On the plus side, China Tobacco’s state-owned parent is by far the biggest cigarette maker in the world, holding a monopoly in a country with more than 300 million smokers. Tobacco revenues added $160 billion in profit and tax to government coffers in 2016, according to the latest available data, a contribution that’s helped to insulate the industry from the anti-smoking campaigns that have assailed cigarette makers elsewhere. China Tobacco is a minor sliver of the business, though. The offshore unit procures tobacco from overseas and sells it to the parent at a fixed 6% markup.
The US supplied 33.5 percent of the company’s tobacco leaf import revenue in the nine months to September 30, China Tobacco said in a stock exchange filing this week. However, the unit has stopped buying from the US after the Trump administration imposed 25 percent tariffs on Chinese products from machinery to robotics in July. Beijing retaliated with an equal tariff on 106 categories of US goods, including tobacco leaf.
China Tobacco predicts a “significant decline” in its tobacco leaf import business revenue for 2019.
The unit has smaller operations exporting Chinese tobacco to Southeast Asian countries including Indonesia, and selling cigarettes in duty-free outlets in Hong Kong, Thailand, Singapore and Macau. Exports have been decreasing in recent years, while the duty-free business is dependent on continued growth in Chinese tourists, who are the main consumers.
Hong Kong was the world’s busiest venue for initial public offerings last year, beating New York and Shenzhen. But many of the year’s biggest listings are trading underwater.
Most major tobacco stocks have performed poorly in recent years. Japan Tobacco Inc., a former government monopoly, lost 24 percent in the past five years, Philip Morris International Inc. is down 21 percent and British American Tobacco Plc dropped 23 percent. Altria Group Inc. has risen 31 percent.
China Tobacco offers a rare chance for investors to access a nation where cigarette sales have bucked the global trend of declines. Yet even in China, health concerns have been starting to weigh.
Investors tempted by the waft of monopoly profits should be warned: Cigarettes can damage your financial health, too.

—Bloomberg

Nisha Gopalan is a Bloomberg Opinion columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter