The Strategist

Chinese tobacco giant shares rise by 500% in three weeks

07/05/2019 - 09:53

Shares of China Tobacco International, a subsidiary of the largest cigarette maker in the world, has risen by almost 500% in three weeks of trading on the Hong Kong Stock Exchange. Experts call this absurdity and consider the behavior of investors irrational.

Shares of China Tobacco International went up by 44% to close the previous day of trading on the Hong Kong Stock Exchange on Wednesday morning. The cumulative growth since June 12, when the company conducted an IPO, reached a peak of 484%, Bloomberg notes.

China Tobacco International is a subsidiary of China National Tobacco, the state-owned Chinese monopoly and the largest cigarette manufacturer in the world. The parent company sells 98% of the total tobacco consumed in China. In 2017, China National Tobacco sales amounted to 1.1 trillion yuan ($ 171.81 billion). China Tobacco International mainly purchases tobacco in countries such as Brazil and the United States and sells the products in China. On June 12, China Tobacco International held an IPO on the Hong Kong Stock Exchange, placing shares at a price of 4.88 Hong Kong dollars ($ 0.13). The company attracted a total of 734.9 million Hong Kong dollars ($ 93.4 million).

According to the World Health Organization, the number of smokers in China fell from 27.7% of the adult population in 2015 to 26.6% in 2018. As noted by Bloomberg, despite the gradual reduction in the number of smokers, the Chinese tobacco market remains huge, and there are not enough public companies. This, according to the agency, explains investor interest in China Tobacco International.

“The price increase is ridiculous, it just demonstrates crazy and irrational investment behavior,” says Dickie Wong, executive director for research at Kingston Securities in Hong Kong. - The current score of [the company] is much higher than it deserves. It is clear that investors are betting on Chinese consumers' love of tobacco and alcohol, but we still need to keep our mind clear.”

In some respects, China Tobacco International is similar to Kweichow Moutai, a liquor company that investors also like, said Managing Director of Beijing-based Dajun Zhimeng Investment Management.