Japan Tobacco Earnings: Robust Pricing and Resilient Volume Lift Profits, but Price War a Concern

Wide-moat Japan Tobacco's second-quarter results were ahead of our expectation and its internal targets thanks to solid volume and continued pricing strength. The results again validate our thesis that strong pricing, a product of its moat underpinned by brand equity of combustible cigarettes, will bolster JT’s midterm profits. On the other hand, smokers’ downtrading in Japan and escalating price competition in the market are a renewed concern. We have brought our assumption for foreign exchange mainly for 2023 to a level in line with the updated guidance after the upward revision. The adjustments leave an immaterial impact on our fair value estimate of JPY 3,200. We view shares as fairly valued given a modest upside to our intrinsic value. Price cuts by rival British American Tobacco on its heated tobacco products could lead to intensified competition in the category and will be something to watch for in the next few months. Our profit estimates for 2023 are a touch ahead of the new guidance.