Venture Corporation - CGS-CIMB Research 2019-09-26: Key Customer Launches New Product

VENTURE CORPORATION LIMITED (SGX:V03)

Venture Corporation - Key Customer Launches New Product

A key customer, Philip Morris International (PM), has launched its new product, IQOS 3 DUO.
Philip Morris may launch another product (IQOS MESH) within 2H19.
Maintain ADD on VENTURE CORPORATION (SGX:V03). We expect the 3Q19 results (we forecast a S$90.4m core net profit, +11.9% y-o-y, -0.4% q-o-q) on 8 Nov.

Philip Morris International today announced the launch of its new product, the IQOS 3 DUO. The IQOS 3 DUO will be available in Japan this month and will subsequently be rolled out to most of the markets where IQOS is currently available by the end of 2019.
The latest addition, IQOS 3 DUO, is designed with new features to help adult smokers switch from cigarettes more seamlessly. Featuring the fastest and most powerful holder within the IQOS family, IQOS 3 DUO allows two consecutive uses without recharging the holder, while the holder charging time is much faster compared to IQOS 3 and IQOS 2.4+.

Also, Philip Morris International through Altria Group Inc (MO US), will start selling I Quit Ordinary Smoking (IQOS), a pen-like electronic device with a sleek battery pack that heats tobacco instead of burning it, in Atlanta in Sep. Altria’s first store will be at Lenox Square in Buckhead, Atlanta.
Altria will target adult smokers who want to continue using tobacco, not kids or non-smokers. Customers entering the Lenox Square store must be at least 21 years of age, with employees checking IDs. Philip Morris International estimates that as at 30 Apr 2019, there were approximately 40m American men and women smokers.

On 27 Aug 2019, Philip Morris International announced that it was in discussions with Altria regarding a potential all-stock, merger of equals. Theoretically, the merged entity could offer a bigger resource pool for the push of IQOS in the US market. However, we understand there could be hurdles such as possibly non-compete agreement between Altria and Juul.
On 25 Sep 19, Philip Morris International announced that merger discussions with Altria had ended. Both companies however agreed to focus on launching IQOS in the US. IQOS is currently the only heated tobacco product with premarket authorisation (including two menthol variants) from the US FDA. Philip Morris International also stated that IQOS is not an e-vapour product. According to Philip Morris International’s analysis of its global data, IQOS is not significantly appealing to youth or to non-smokers.

Philip Morris International believes that in the e-vapour market, there is no product that can address all current adult consumer preferences. Hence, Philip Morris International believes that there is a significant opportunity for its own IQOS MESH. Although Philip Morris International commercialised its heat-not-burn IQOS product first, the company has not been idle on e-vapour products, having invested significantly in their development and getting ready to introduce them in scale. Philip Morris International has been trialing IQOS MESH in London since 2018.
According to Philip Morris International, IQOS MESH’s formal launch is planned for 2H19.

Other products in the works for Philip Morris International include its Platform 2 product (TEEPS) and Platform 3 product (STEEM). TEEPS is a heated tobacco product and Philip Morris International has completed a small-scale city test in the Dominican Republic. This product is still under development.
STEEM is a nicotine-containing e-vapour product. Philip Morris International completed a trial in 4Q18 which indicated that this product was an acceptable alternative to traditional cigarettes in terms of product satisfaction. Philip Morris International continues to engage in product use and adaptation tests, and expects to analyse the test results in 2020.

In Sep 2019, there was a rash of mysterious vaping-linked illnesses in the US that have put healthy people in hospital with serious lung diseases. According to US newswires, reports of vaping-linked illness started proliferating this year. Michigan has banned flavoured vaping products while San Francisco became the first city to ban all e-cigarette sales in Jun 2019, a year after it outlawed flavoured products.
While the negative news is centred on e-vapour products and could be a positive for IQOS, which is a non-vapour product, sentiment may not be conducive for Philip Morris International’s IOQS Atlanta launch.
We note that India’s ban on the sale of e-cigarettes (including IQOS) came into effect on 18 Sep 2019. According to Philip Morris International, the group has only an estimated 1% share of the Indian smoking market.

Despite the recent recovery in Sep off the S$14.50 support area, the long-term trend remains bearish as the bullish momentum faces a major hurdle at the S$16.00 resistance area and 61.8% Fibonacci retracement level. See Venture Corp's share price. More importantly, the bearish rejection off the S$16.00 resistance since 13 Sep also seemed to be establishing a bearish formation, double top rejection suggests a high likelihood of seeing further downside.
With the selling pressure accelerating over the past few days, Venture Corp's share price has also closed below the 20-day moving average, showing further signs of weakness. We expect the share price to trend lower, next to test the S$14.50 support area, followed by the S$14.00 support.

William TNG CFA CGS-CIMB Research | https://www.cgs-cimb.com 2019-09-26

SGX Stock Analyst Report ADD MAINTAIN ADD 16.280 SAME 16.280