For the first time, China is opening its tobacco market, the largest in the world, to outside investors, through a listing on the Hong Kong stock market.
The vehicle to be listed is China Tobacco International (CTI), which is responsible for overseas operations, including buying leaf from United States, Brazil and Canada. In the first nine months of 2018, it had revenue of HK$5.1 billion, down 21 percent from the same 2017 period, and profit of HK$222.3 million.
Investors must answer two questions, financial and moral. First, has this market of 300 million smokers peaked and is it going into decline? Second, do they want to give their money into a product that kills nearly two million Chinese every year and, public health activists say, costs the country more in health costs and lost production than it offers in taxes?
“Does the Hong Kong Stock Exchange really want to accept a tobacco company as a member?” said Dr Judith Mackay, Asia’s leading tobacco control campaigner who is based in Hong Kong. She is senior adviser to Vital Strategies, part of the Bloomberg Initiative to reduce tobacco consumption in medium- and low-income countries.
“This is a product that wreaks death and disease upon the majority of its users. The HKSE needs to think of its own image and responsibilities,” she said.
CTI plans to use the proceeds from the IPO to buy tobacco operating entities, cigarettes and tobacco product brands. It also aims to expand sales channels in markets like Southeast Asia through new marketing campaigns.
Headquartered in the Xicheng district of Beijing, CTI operates the international trading business of tobacco. It imports and exports tobacco machinery, cigarette materials, cigarettes and tobacco leaves. It also operates tobacco trading supervision, inspection and customs clearance business. It exports Chinese tobacco to Southeast Asian countries and sells cigarettes in duty-free outlets in Hong Kong, Thailand, Singapore and Macau.
It owns a factory near Bucharest, Romania that produces 4.5 billion cigarettes a year, mainly for sale in the Balkans. By the end of 2015, China’s tobacco industry had more than 30 factories abroad, in Africa, Southeast Asia and elsewhere.
CTI is a unit of China National Tobacco Company (CNTC), the richest monopoly in the world. It produces 2.5 trillion cigarettes per year, 40 per cent of the cigarettes sold in the world. Its profits are larger than those of Philip Morris International, Altria and British American Tobacco combined. It accounts for 98 percent of all tobacco consumed in China, the world’s largest market, with sales in 2017 of 1.1 trillion yuan. That accounts for between seven and 11 per cent of China’s tax revenue.
China has an active and vocal tobacco control lobby, of doctors, public health experts and academics. In the past four years, 20 cities, including Beijing, have implemented public smoking bans but calls for a national law have not been heeded. Activists say the costs of treating tobacco-related diseases and the loss of productivity due to early mortality and morbidity are greater than the revenue earned by the state.
But CNTC is also the regulator – poacher and gamekeeper. It has blocked attempts to put graphic photographs on packets; instead, there is a small written warning, sometimes in English, whom most smokers do not understand. To evade a ban on advertising, companies advertise their brands without saying that they are cigarettes.
One premium brand is Zhongnanhai, named after the compound in central Beijing where the government leaders live and work. It has a plain white packet with writing in blue and no images. It has two warnings – “Prevent young people smoking: stop primary and middle school students smoking” and “This company states that smoking harms health. Do not smoke in places where it is forbidden.”
The economic interests involved in the industry are very powerful. CNTC employs 510,000 people, supports 15 million tobacco-growing households and 300,00 retailers.
The public health lobby demands that, as in other countries, Beijing establish a regulator for the tobacco industry independent of CNTC. It also wants higher taxes, the method proven across the world to reduce consumption. In China, the excise tax on cigarettes is 36.3 percent, against a World Health Organization benchmark of 70 percent.
Tobacco Atlas is a partnership between the American Cancer Society and Vital Strategies. It campaigns for tobacco control across the world. It said: “Tobacco harms the health, the treasury, and the spirit of China. Every year, more than 1.952 million of its people are killed by tobacco-caused disease. Still, more than 723,000 children (10-14 years old) and 267,589,000 adults (15+ years old) continue to use tobacco each day. Complacency in the face of the tobacco epidemic insulates the tobacco industry in China and ensures that tobacco’s death toll will grow every year.”
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