Huaan Securities released a report stating that Philip Morris International and British American Tobacco recently hit record highs. Since the Federal Reserve began its rate-cutting cycle in September 2024, tobacco stocks have shown significantly improved excess returns. Turning to the domestic market, China's tobacco industry is focusing on modernization and international expansion. Following the implementation of new policies, domestic tobacco enterprises enjoy tax-exempt benefits, highlighting their value. In the global rate-cutting cycle, tobacco stocks offer both offensive and defensive characteristics. On one hand, tobacco companies achieve stable EPS growth through regional and product category expansion. On the other hand, their low earnings volatility and inelastic demand underscore their defensive qualities. Investors are advised to actively monitor CTIHK (06055) and SMOORE INTL (06969). The main views of Huaan Securities are as follows:
Defensive attributes of tobacco stocks stand out in the rate-cut cycle, with leading return performance. Recently, Philip Morris International and British American Tobacco reached record-high share prices. Since the Fed initiated rate cuts in September 2024, tobacco stocks have demonstrated markedly higher excess returns. As of February 26, 2026, British American Tobacco and Philip Morris International achieved excess returns of 42% and 32%, respectively, over the S&P 500. Their defensiveness stems from: 1) Inelastic demand and strong counter-cyclical nature: Tobacco features rigid and repetitive consumption with extremely low price elasticity, maintaining stable sales even during economic downturns; 2) Excellent cash flow and sustained high dividends: Dividend yields typically range from 5% to 7%, becoming more attractive as bond yields decline.
Tobacco stocks also possess offensive attributes, with growth driven by regional and category expansion. Taking Philip Morris International as an example, its growth can be divided into two phases: Before 2016, core PMI EPS growth relied mainly on regional expansion, with increasing revenue contributions from markets like Asia and Latin America. After 2016, core PMI EPS growth was driven by the Reduced-Risk Products (RRP) series. By 2025, the company's smoke-free business accounted for 41.5% of total net revenue and nearly 43% of total gross profit, effectively offsetting the decline in traditional cigarettes. In 2025, the company achieved double-digit growth in both net revenue and gross profit for smoke-free products, increasing by 15.0% (14.1% organically) and 20.3% (8.6% organically), respectively. The company expressed confidence in its 2026 performance growth, forecasting adjusted diluted EPS to increase by 11.1% to 13.1% year-over-year.
Focusing domestically, China's tobacco industry emphasizes modernization and international expansion. CTIHK holds an exclusive position in the tax-exempt cigarette export market, highlighting its significant value. The 2026 National Tobacco Work Conference stressed building a stronger, superior modern tobacco industry system and vigorously promoting high-quality development of international business. As the designated platform for overseas capital operations and international expansion of China Tobacco, CTIHK enjoys exclusive operating rights in the tax-exempt cigarette export market. On February 13, 2026, the company issued an announcement titled "Latest Developments in Continuing Connected Transactions Related to Exclusive Cigarette Export Business." According to the "Measures for the Administration of Tobacco Products in the Domestic Duty-Free Market" issued by the State Tobacco Monopoly Administration, China Tobacco International Co., Ltd. is the sole enterprise qualified for state trading of cigarette exports to the domestic duty-free market in China. After the new policy takes effect, to continue exporting cigarettes to China's domestic duty-free market through the company, counterparties will enter into agency agreements with China Tobacco International. Acting as an agent under the framework agreement, China Tobacco International will sign individual agreements with CTIHK and industrial companies, exporting cigarettes manufactured by the counterparties to the domestic duty-free market in China.
Huaan Securities believes that optimizing the supply chain for cigarette procurement transactions sold to China's domestic duty-free market, particularly changes in the downstream chain, will improve the gross profit margin of CTIHK's cigarette export business and enhance its profitability. In the future, CTIHK is expected to further leverage its platform role and implement its global strategy by integrating more import and export businesses, acquiring overseas assets, and securing high-quality brands.
Risk warnings include potential slower-than-expected macroeconomic growth, corporate operating performance below expectations, rising raw material prices, exchange rate fluctuations, and intensifying competitive landscape.
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