2. HNB Is Future

HNB stands for “Heat Not Burn”.

This means it heats the tobacco leaves, instead of burning them. Combustible cigarette burns the leaves, and it is this incineration process that makes tar, carcinogenic substance. As HNB extracts nicotine from tobacco leaves without smoke, it is said to be less harmful.

Safer by how much? Some say 80%, and some say 90%.

For more information, please see:

https://www.fda.gov/media/110377/download

https://www.pmi.com/smoke-free-life/busting-common-myth-around-smoke-free-alternatives

The history goes back a long time.

“Barbarians at the Gate” (1989) describes R.J. Reynolds working on “smokeless cigarette”. The new product failed, mostly because of its poor taste.

Then, more than 30 years later, in 2014, Phillip Morris launched in Italy and Japan its HNB product (IQOS). IQOS was a huge success, as it had practical benefits to consumers, in addition to health aspects. As it has no smoke, HNB leaves almost no bad smell on their clothes and fingers. Also – importantly – it tasted quite good.

According to Research and Markets, global HNB is expected to grow at 41% between 2021 and 2025. (Source)

IQOS was launched in Korea in 2017 (vs. Japan in 2014), when KTNG had zero M/S in HNB.

As of 2021, HNB accounts for already 14.8% of total tobacco market in Korea, and HNB’s penetration as of Mar 2022 was 17.6%.

KT&G has 45.1% M/S in HNB (please see below a page from KT&G’s IR material), which grew consistently since 2017.

As with any other consumer goods, brand is a very important asset to tobacco company.

Unlike combustible cigarettes, HNB industry is still young, and both PMI’s IQOS and KT&G’s Lil are new brands. This opens a rare opportunity for KT&G, to become a global brand by leveraging its superior product quality and with no handicap as a lesser-known brand.

KT&G is No.1 HNB in Korea, and the success can be ascribed to its great product, lil. (Source)

The latest line of products, lil Hybrid, is a very smart product that produces faux smoke (it’s not a real smoke; it’s H2O) for visual/mental satisfaction.

With KT&G’s great technology in making HNB as well as accumulated data/experience on consumers, we strongly believe KT&G can challenge Phillip Morris on the global stage, once it has has the right execution plan.

In 2020, KTNG entered into an agreement with PMI on global distribution of lil.

According to news articles, as of Dec 2021, lil was being sold in 22 foreign countries including Russia, Ukraine, Kazakhstan, Serbia, Kyrgyzstan, Uzbekistan, North Macedonia, and Albania.

What kind of give-and-take did KT&G agreed to with PMI? We do not know much about this, because KT&G is not disclosing anything about its HNB performance overseas. We are worried, that KT&G might get positioned as IQOS’s 2nd brand, losing its long term potential in global market.

We believe, in order for KT&G to grab this chance to become a truly global player, it should strengthen its marketing capabilities and expand overseas on its own, without relying on its competitor for distribution. (Refernce)