China Marlboro Approval Seen as Big Breakthrough for Altria Unit - Analysts

Source from:  Article layout: raw BEIJING (AFX) 12/30/2005

China's decision to allow domestic production of Marlboro cigarettes is a big breakthrough in a key market for Altria's Philip Morris unit, analysts said. It also signals that China will open its tightly controlled tobacco market -- especially if it sees gains in technology, they said. "This (the China deal) will eventually be a significant business" for Philip Morris International (PMI), said Citigroup analyst Bonnie Herzog in a research note. She assigned a "buy" rating on Altria's stock following news of the decision last week. China accounts for nearly one-third of all cigarettes smoked worldwide, whereas the US tobacco industry is seeing reduced sales and falling profits on costly litigation and expanded smoking bans. China consumes more than 1.8 trln cigarettes a year. Philip Morris signed a deal with China National Tobacco Corp (CNTC) earlier this month to make Marlboro cigarettes under licence in China at CNTC's affiliate factories for sales on the mainland. Production is expected to begin in the first half of next year, according to a PMI statement, without revealing specifics on production volume or location. The deal also includes the establishment of an international equity joint venture, based in Switzerland, which will market Chinese cigarettes globally. Ge Huajin, an analyst with China Construction Bank, said China appears keen to embrace overseas tobacco firms if the deal will bring technological cooperation. "China is keen to upgrade production technologies, so Marlboro was given a green light to produce locally," Ge said. He also said Marlboros produced locally will be exempt from import taxes. And although duties should continue to decline over time, they will still keep market prices for foreign brands prohibitively high for many local consumers. London-based British American Tobacco has been vying to set up a joint venture in China for local production of its 555 brand cigarettes -- a move which has not yet been ratified by the country's tobacco industry regulator. Analysts said that the technology plus the prospect of help in selling local products overseas were probably key factors behind the different treatment for the Altria unit. Ge said Philip Morris's deal represents further strides by China to meet obligations under its 2001 accession to the World Trade Organization (WTO). "Since joining the WTO, China has been gradually opening more sectors to foreign competition, and tobacco is no exception with imports and local production of foreign labels bound to increase," Ge said. "China currently has monopolistic control over production and sales of cigarettes in the country," he said, noting that tough licensing requirements are in effect for each brand a company imports. "But when -- not if -- import licensing restrictions are liberalized, importers will be allowed to import a wider variety of foreign-label brands through single applications, and distributors and local manufacturers will also be allowed to market overseas brands produced in China on a wider scale," he said. Enditem