As indicated by typical sales data, the demand for premium cigarette products of companies in this sector seems to have been declining while demand for discount products has been going up in the past several years due probably to rising price of products and preference of consumers.

Sector’s Current, Trend, Causes behind trend, and Future

Current and Trend

1. The demand for premium tobacco products has been weak as indicated by decreasing sale volumes of companies in this sector.

2. There is an increasingly apparent trend in demand’s shifting to discount cigarette products in the past several years.

3. Global cigarette price has been rising in the past several years and it seems that price of discount cigarette products has gone up faster than premium products.

4. Demand for smokeless products seems to be going up.

Causes behind the trend

1. Stricter government regulation, which caused increasing expenses of companies in this sector, working together with changes in consumer’s life style and strong US dollars, may be the reasons behind changes in sales volume and price.

2. Rising price may cause declined demand and the shifting of demand to lower priced products.

Industry Future

1. Demand of companies for rising price to offset increasing expenses resulted from regulation and as well declining sale volume will probably exist for long. Increasing consolidations in the industry will make continuingly rising price acceptable.

General Financial Performance of Companies In the Sector

It seems that demand for premium tobacco products of companies in this sector has been gradually declining in the past three years as indicated by continuing decrease in sales volume of some of typical companies, whose major products fall into that category. However, we also saw apparent shifting of demand to discount cigarette products.

It seems that, for many companies, the price of their products has been seen rising in the past three years, which, to a large extent, offset the decrease in volume of many companies. In addition, the increasing price seems to be helping improve margin and bring increasing cash flow while offset by increasing expenses in current unfavourable industry and regulation climate.

The typical companies’ gross margin has been kept at about average 61% in the past several years.  With a slight decrease in SG&A as percentage of sales (about 19% in 2017), the typical operating margin went up to about 44% in 2017.

The typical average stock price/cash flow ratio is about 16-18.

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