Big Tobacco's transition under fire as WHO targets vaping

JAPAN TOBACCO

14/12/2023 08:00

By Emma Rumney
       LONDON, Dec 14 (Reuters) - Big tobacco firms shifting to
new nicotine products, including Philip Morris International
(PMI)  PM.N  and British American Tobacco  BATS.L , have the
most to lose if tobacco alternatives face the same rules as
cigarettes, investors and analysts said. 
    The World Health Organization on Thursday urged governments
to apply tobacco-style controls to vapes, saying they are
getting new users hooked on nicotine.
    That could spell trouble for tobacco companies developing
alternative nicotine products, as tighter restrictions and
growing awareness of health risks squeeze their cigarette
businesses. 
    PMI  PM.N , the world's largest tobacco company by market
value, has led the shift to smoking alternatives, helping its
price-earnings ratio - a key market gauge of company valuations
- rise substantially compared with rivals. 
    It also means it has the most to lose if tough regulations
extend to nicotine products more broadly, said Pieter Fourie,
manager of Sanlam's Global High Quality Fund, which holds
tobacco stocks. 
    "Maybe that advantage doesn't remain," he said of PMI's
higher valuation. 
    The investment case for companies like Imperial Brands
 IMB.L  would be less affected by such changes, he added. 
    Imperial reset its strategy in 2021 to focus on its core
tobacco business, lowering its aspirations for new nicotine
products after missing several sales targets and also losing
market share in its core cigarette division.
    
    
    FAST SHIFTS UNLIKELY
    British American Tobacco  BATS.L  is investing heavily in
alternative products, focused on vaping and oral nicotine, and
wants 50% of its revenues to come from these by 2035. PMI's
target is two-thirds of net revenues from "smoke-free" products
by 2030. 
    PMI has poured the vast majority of some $10.5 billion it
has invested in "smoke-free" products into heated tobacco
products, where devices heat up tobacco without burning it, in
an attempt to avoid harmful chemicals produced via combustion. 
    The WHO's vape recommendations come ahead of a biennial
conference for 183 governments party to a global tobacco control
treaty, set for next year, where countries are set to discuss
new nicotine products including vapes and heated tobacco.  
    The U.N. agency has no authority over national nicotine
regulations and only provides guidance. While the treaty is
binding, it's unlikely governments party to it will adopt new
rules on alternatives as part of the agreement any time soon. 
    That's because the treaty is developed by consensus, and
governments have very different views on how to approach the new
nicotine products. 
    Some nations like the United Kingdom have put vapes at the
heart of public health efforts to reduce the death and disease
caused by smoking. Elsewhere, in large markets like India, vapes
and heated tobacco products are banned altogether.    
    Countries that do adopt WHO guidance voluntarily tend to do
so at different speeds, said Brett Cooper, managing partner at
equity research firm Consumer Edge. That makes fast, global
shifts in regulating new nicotine products unlikely.
    Still, any moves towards stricter regulations put tobacco
companies at a disadvantage versus today, Cooper said, while
caution from the WHO makes it harder for them to lobby for more
favourable regulations globally. 
        
    
    REDUCED COMPETITION 
    Both Cooper and Fourie pointed out that consumer demand for
nicotine is unlikely to fade any time soon.
    "Unless you actually make nicotine a banned substance, then
these companies have a future market opportunity," agreed Steve
Clayton, head of equity funds at Hargeaves Lansdown, which holds
tobacco company stocks. 
    Controlling new nicotine products has also proven difficult
in many nations.
    In the United States, manufacturers from China have flooded
the market with illegal flavoured vapes in recent years,
capitalising on poor enforcement after regulators tried to clamp
down on e-cigarettes.   
    Australia, where vapers need a prescription to obtain
nicotine-containing e-cigarettes, has also struggled with a
flood of illegal products. 
    That has left tobacco companies competing with an onslaught
of smaller players which often flout the rules. 
    Clayton and Chris Beckett, head of research at Quilter
Cheviot, another tobacco investor, said that more regulations -
with proper enforcement - could actually give the major tobacco
companies an advantage. 
    It would raise barriers to entry and reduce competition,
helping tobacco companies replicate the advantages they have
with cigarettes, Beckett said, including the ability to charge
high prices. 
    "Translate a similar sort of environment from combustible
cigarettes to vaping and heated tobacco, and you end up with
incumbent Big Tobacco having very large market shares and a very
profitable business," Beckett said. 

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 (Reporting by Emma Rumney; Editing by Elaine Hardcastle)
 ((Emma.Rumney@thomsonreuters.com; +447391409253;))