Is China a Dead-End for Cigarette Stocks?

China leads big tobacco’s growth prospects for Asia. But could a recent study, China’s Michelle Obama, and a state-run economy spell dead-end for investors?

Mar 6, 2014 at 7:00PM

Big tobacco companies like Philip Morris International (NYSE:PM), British American Tobacco (NYSEMKT:BTI), and Reynolds American (NYSE:RAI) would love to crack China.

While the tobacco industry sputters in developed countries due to regulation and health issues, the opposite story unfolds in developing nations: rising incomes and populations are driving positive growth for global tobacco companies. And yet China remains walled.

Without China, home to 40% of the global smoking population at 300 million smokers, big tobacco companies will be hard-pressed to generate impressive profits in the long term. What follows are major challenges to big tobacco's aims for China...and a glimmer of hope.

Brand competition
Before tobacco conglomerates can profit off China's lungs, they must infiltrate its markets.

That's harder than getting a camel through the eye of a needle: right now, state-owned China National Tobacco Company commands a near-monopoly, with 98% market share. In 2005, Philip Morris allied with CNTC to access China's 600 million tarred lungs. Philip Morris signed a 10-year contract for CNTC to distribute Philip Morris' iconic Marlboro cigarettes.

Though that strategic move no doubt induced jealousy in British American Tobacco and Reynolds American, Philip Morris' bottom line hardly benefited from the partnership. As of 2012, Marlboro had a dismal 0.3% market share in China. Adding insult to paltry profit, Chinese smokers have apparently been puffing counterfeit Marlboros since before 2005.

Tough government
For the Foolish sake of argument, let's assume that Philip Morris, British American Tobacco, Reynolds American, and all big-tobacco companies gain full access to China. In 36 years, will China's market offer attractive growth for big-tobacco companies?

Maybe not, considering that China is trying to ash its nasty habit. Just as Michelle Obama campaigns against childhood obesity, China's first lady, Peng Liyuan, denounces smoking. She even partnered with Bill Gates in an anti-smoking demonstration. China's government seems to be following Liyuan's lead, as indicated by its December decree to ban officials from publicly smoking.

If China's government makes serious moves to curb smoking, it could spell a slow death for big tobacco's growth hopes. A new report issued by British Medical Journal indicates that by 2050, China could reduce smoking by 40% using specified public-health interventions.

Glimmers of hope
Then again, China's government may not hasten to dismantle its tobacco industry before Philip Morris, British American, and R.J. Reynolds have a chance to capture smokers.

Death and taxes: China's cigarette industry links life's two inevitabilities together. In 2011, China's government received $96 billion in revenue from tobacco. China's coffers may be as addicted to tobacco as its citizens, with tobacco bringing 7%-10% of government revenue.

That means if tobacco multinationals can find a way to increase China's tobacco potential, they may be greedily beckoned through its Great Wall. Philip Morris gets China's money motive: "Why would they share their market? To come up with new [tobacco] technology is really the only avenue to get into a place like China," noted Philip Morris' chief executive last June.

To that end, big tobacco's facing an innovation arms race for products like e-cigarettes. Whether these products will be enough to pique China's economic interest remains hazy.

Foolish bottom line
Facing closed doors at every turn, big-tobacco companies like Philip Morris, British American Tobacco, and Reynolds American could benefit greatly from China's monolithic market. Yet they face barriers like China's state-owned tobacco monopoly and an increasingly anti-smoking government. Philip Morris leads the panting pack with market access and innovation insights.

What else does China have going for it?
For the first time since the early days of this country, we're in a position to dominate the global manufacturing landscape thanks to a single, revolutionary technology: 3D printing. Although this sounds like something out of a science fiction novel, the success of 3D printing is already a foregone conclusion to many manufacturers around the world. The trick now is to identify the companies -- and thereby the stocks -- that will prevail in the battle for market share. To see the three companies that are currently positioned to do so, simply download our invaluable free report on the topic by clicking here now.

Glenn Singewald has no position in any stocks mentioned. The Motley Fool owns shares of Philip Morris International. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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