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Overseas unit of China’s state-owned cigarette monopoly lights up after lacklustre trading debut as market sentiments turn stale
* Shares of China Tobacco International changed hands for the first time in Hong Kong at HK$4.97, a 1.8 per cent premium to its IPO price of HK$4.88
* The stock rose to an intraday high of 20.7 per cent amid a declining market, before ending the day up 9.7 per cent

Daryl Choo   
Published: 1:06pm, 12 Jun, 2019

China Tobacco International, the overseas subsidiary of China’s state-owned tobacco monopoly and the world’s largest cigarette maker, picked up pace after a lacklustre trading debut in Hong Kong on Wednesday, as the company’s initial public offering proved extremely popular with retail investors.

The shares began trading in Hong Kong at HK$4.97, 1.8 per cent premium to its initial public offering (IPO) price of HK$4.88. The stock picked up pace even as the market declined amid street protests, reaching an intraday high of HK$5.89, up 20.7 per cent. But it eventually closed up 9.6 per cent at HK$5.35. The benchmark Hang Seng Index closed 1.7 per cent lower at 27,308.46.

The IPO’s retail tranche was oversubscribed 101.4 times. The shares were priced at the high end of the indicative range at HK$4.88, helping the company raise HK$734.9 million (US$93.4 million).

As a subsidiary of China National Tobacco, it primarily procures tobacco leaves from countries like Brazil, Argentina and Canada for its parent company, earning revenue mainly from a fixed mark-up on the sale of leaves to domestic cigarette makers, the company’s prospectus said.

The international unit is also the sole exporter of Chinese cigarette brands like Yuxi and Hongtashan to duty-free outlets in Thailand, Singapore, Hong Kong and Macau. In May last year, it began exporting heat-not-burn tobacco products made in China.

According to the company’s filings, it made a profit of HK$259.5 million last year, a decline of 24.6 per cent from 2017.

The company also said that the US-China trade war will have a “significant” impact on its business as the US accounted for 30 per cent of its imports of tobacco leaves, adding that it has not made any procurements from the US since July 2018 because of the tit-for-tat tariffs imposed on goods from both countries.

Louis Wong, director at Phillip Capital Management, said since the business model is easy to understand, the stock is attractive to retail investors. China has more than 300 million smokers.

“In China, the tobacco industry is tightly controlled, presenting a high entry barrier to its competitors. These are features that appeal to retail investors,” he said.

While oversubscriptions on this scale have happened in the past, Wong noted that it is not common to record such high subscription rates in current volatile market conditions.

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