KT&G Corp., South Korea's state-run tobacco producer, said Thursday its net profit jumped 45.5 percent in 2014 from a year earlier, driven by an increase in domesticsales ahead of a sharp price hike.
Net income came to 813.8 billion won ($751.9 million) last year, compared with 559.3 billion won in 2013, the company said in a regulatory filing.
Operating profit went up 15.6 percent on-year to 1.17 trillion won last year, and sales gained 7.6 percent to 4.11 trillion won, it said.
The numbers reflect the performance results by KT&G and its subsidiaries, including the Korea Ginseng Corp.
The solid performance was attributable to increased sales in the local market ahead of a sharp rise in the tobacco tax, which nearly doubled the average price of cigarettes to 4,500 won per pack starting Jan. 1.
Its net profit soared 121.3 percent to 174.4 billion won in the October-December period from a year ago, the company said.
Operating income gained 28.9 percent on-year to 287.2 trillion won in the last three months, and sales rose 6.4 percent to 1.05 trillion won, it said.
The domestic market share for the nation's largest tobacco maker inched up 0.6 percent on-year to 62.3 percent in 2014. Its overseas sales advanced 17.8 percent to 533.1 billion won in the period.
Despite strong earnings, its business outlook is negative as cigarette sales were expected to drop from the price hike.
"We proportionally reflected the rise in the tobacco tax in the consumer price," Park Jung-wook, a marketing department director, said in a meeting with investors. "Although the government earlier estimated a 34 percent drop in cigarette consumption this year, we're closely monitoring the market to analyze the impact of the tax on the company's upcoming sales and earnings."
KT&G was also expected to lose some of its market share in the face of tougher competition with foreign rivals.
British American Tobacco's Korean unit has been selling one of its cigarette brands at 3,500 won per pack, 1,000 won cheaper than the average price for local labels, though it plans to raise the price next month when the current stock is all sold. Philip Morris Korea this week adjusted prices of its main products from 4,700 won to 4,500 won.
KT&G officials, however, said they do not intend to engage in a "chicken game" led by foreign rivals, which would drive down margins below the break-even point.
"Although foreign companies have delayed the price raise, they will not be able to maintain the policy that incurs operating losses," Park said. "Although we may lose some market share, the impact will be temporary. We will set the business strategy in a way that maximizes shareholders' interests."
Following the sharp price rise, buyers flooded into the nation's duty free shops, prompting the government to consider raising cigarette prices sold at airports as well.
KT&G said it was not in talks with the government about cigarette prices at duty free shops.
"It is not appropriate for the government to specifically intervene in prices of duty-free cigarettes, and it goes against the policy of tax-free shops," Park said. "We will make a decision by taking into consideration cigarette prices at foreign airports and demands at tax free shops, but we're not considering a price increase for now."
Market watchers lowered their target price for the Korean tobacco maker on concern of weak earnings in the first quarter.
"Its market share is likely to come under pressure following the price hike as KT&G enjoyed price merit since 2011 when foreign rivals raised prices of main products," said Han Kuk-hee, an analyst at NH Investment & Securities, which lowered the target price from 96,000 won to 88,000 won.
Shares of KT&G remained steady at 78,400 won in Seoul trading on Thursday versus a 0.02 drop in the benchmark index KOSPI. (Yonhap)