What Factors Will Ensure Growth For Philip Morris In Asia?

The Asian division of Philip Morris International (NYSE:PM) sells tobacco products, primarily cigarettes, that include Marlboro, L&M, Philip Morris, Chesterfield, and Parliament. The major markets for PMI Asia include Japan, Australia, India, the Philippines, Indonesia, and South Korea. In 2015, while its revenues from the region increased 1.1%, excluding excise taxes, its net revenues fell 6%, mainly due to negative currency effects and an unfavorable volume/mix. The reported operating comapanies income (OCI) declined 9.4%, and even the shipment volume fell 2.4%, driven mainly by Korea, the Philippines, and Pakistan, the latter of which reflected a lower total estimated market, as a result of excise tax-driven price increases in June and December 2015, coupled with a higher prevalence of illicit trade and a lower market share.

However, given the massive 1.1 trillion unit market in the region, with PMI capturing ~25% of the market, there is sufficient room for growth for the company. The reasons for this have been highlighted below:

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1. GDP Growth Outperforming The World

Increasing affluence makes cigarettes more easily affordable. According to World Bank estimates, an increase in income of 10% will result in a 7% rise in the tobacco consumption in low-income countries, and a 13% increase in even lower-income countries. Furthermore, in many of the less developed countries, smoking is linked with a cosmopolitan and affluent lifestyle. Hence, with increasing urbanization, and a rise in spending power, many of the young men and women have taken up smoking. As a result, positive volume growth in the region is possible, driven by a faster population growth, and a higher disposable income for discretionary consumption.

2. Presence In The More Profitable Price Segments

The company has a significant, and a growing presence, in the more profitable premium and mid-price segment in the region. Between 2010 and 2015, the company managed to increase its share in the premium and above-premium category by over 2.1 percentage points, and by a similar figure for the mid-price category. In the non-OECD countries in Asia, sales of the premium category cigarettes increased 8% during the time period, and by a whopping 29% for the mid-priced cigarettes. This again has been a direct result of increasing affluence in the region, prompting an upgrade in the smoking habits of the consumers.

3. Expansion Into New Geographies

PMI has been aggressively expanding into new and emerging geographies in the region. For example, in Vietnam, the company expanded its distribution beyond the six cities it was earlier present in, and introduced Champion in the below-premium segment. In India, the company is taking advantage of the strong growth momentum of its Marlboro cigarettes, and has almost doubled its distribution footprint in the last two years. The company has also increased its distribution beyond Dhaka, in Bangladesh, and has established a presence in the mid-price segment in the country with Bond Street.

4. Growth Of iQOS In Japan

Japan is the only country where the national roll-out of iQOS has occurred, and it has witnessed exceptional performance. The market share has steadily climbed since it was first introduced in the country. During FY 2015, the iQOS launch was expanded in Japan to reach 60% of the adult smoking population, and the national roll-out was completed in the beginning of the second quarter. For the second quarter, the HeatSticks market share increased to 2.2%, more than twice its share in the first quarter. Furthermore, the share in the week starting September 18, 2016, reached an estimated 5.2%, and an even higher 7% in Tokyo. The company also noted that the level of cannibalization from its own cigarette portfolio had been reduced, from 40% when the initial geographic expansion started last September, to 35% in the second quarter. Moreover, the growth of these HeatSticks is also resulting in uptrading by adult smokers, as those across all price segments are switching to the premium-priced product. What is an even more compelling argument is that 70% of iQOS purchasers have either fully, or predominantly, converted to it. According to company estimates, this would mean about 600,000 people in Japan, who are exclusive or fully-switched users of iQOS.

Have more questions on Philip Morris? See the links below:

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• How Will Philip Morris Perform In 2016?
• Why Has Philip Morris’ Price Risen ~17% This Year Despite An Earnings Miss?
• How Did The Market Share For Philip Morris Change in Q1 2016 In EU And Its Key Markets, As Compared To Q1 2015?
• How Did The Revenue And Operating Companies Income In Each Region Change In Q1 2016, As Compared To Q1 2015?
• Philip Morris Misses Q1 Revenue And EPS Estimates
• Will Philip Morris Beat Expectations This Earnings Season?
• How Did Philip Morris Perform In The European Union, And Its Key Markets There, In 2015?
• How Did Philip Morris Perform In Russia, Given The Currency Headwinds And Excise Tax Rise?
• How Has Philip Morris Fared In Comparison To Its Peers?
• How Has Philip Morris’ Shipment Volume, By Brand, Changed Over The Past 3 Years?
• How Has Philip Morris’ Revenue And EBITDA Composition Changed In The Last 5 Years?
• How Will Philip Morris’ Revenue And EBITDA Change In The Next 3 Years?
• Philip Morris: Year 2015 In Review
• By What Percentage Did Philip Morris’ Revenue & EBITDA Change In The Last 5 Years?
• What is Philip Morris’ Fundamental Value Based On Expected 2016 Results?
• What is Philip Morris’ Revenue And EBITDA Breakdown?

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