Philip Morris International (NYSE:PM) saw more than 36% of its revenue come from its Asia segment in 2012. It generated more than $21.1 billion in sales from this segment by shipping more than 326 billion cigarettes to Asian markets. Revenue per cigarette grew by 3% y-o-y to $0.06 in 2012, according to our estimates. Considering the high dependency of the company on Asian growth amid a sharply declining European cigarette market, revenue per cigarette in Asia is one of the key factors driving our $86 price estimate for Philip Morris, which is around 10% below the market price.
Here, we take a look at some of the key factors driving our forecast for this particular driver.
Historical Trend Of Revenue Per Cigarette from Asia
Philip Morris’ revenue per cigarette from Asia grew at 5.7% CAGR, from $0.055 in 2009 to $0.065 in 2012. It declined slightly in 2010, primarily due to the merger with FTC in Philippines which led to volume growth of 25%. Revenues rose by just 12% during this period as a result of the inclusion of lower price FTC cigarette brands like Fortune.
In 2011, revenue from Asia increased sharply by 35% while shipment volume grew by 11% during the same period. Higher revenues were due to the favorable impact of currency, higher pricing and a favorable volume mix in Indonesia, Japan and Korea. All of these factors led to a 16% increase in the firm’s revenue per cigarette from Asia.
During 2012, the company saw slower volume growth compared to the exceptionally high volume of cigarettes shipped to Japan in 2011, which was attributed to the tsunami that had negatively impacted the supply-chain of its prime competitor, Japan Tobacco. Revenue from Asia grew by 4.3% as a better product mix and higher pricing were partially offset by unfavorable currency effects.
Looking at the historical trends, we can conclude that the key factors expected to drive this metric in the long run are higher cigarette prices, a better volume mix as rising disposable income favors premium cigarette brands and market share gains.
Let’s evaluate each of these factors.
Cigarette Prices In Asia Have Tremendous Upside Potential
Cigarette pricing in the region is one of the most prominent factor expected to drive Philip Morris’ revenue per cigarette. The majority of the company’s sales revenue from Asia (almost 80%) comes from Indonesia, Philippines and Japan. Indonesia is a growing market for tobacco products with a favorable demographics and regulatory environment. Excise taxes on tobacco products have increased by 8.5% on an average on December 25, 2012.  Given the growth rate of consumption of cigarettes in the country, excise taxes are expected to increase further in future, ultimately driving cigarette prices higher as well.
Philippines implemented the ‘sin tax’ law this year, drastically raising taxes on smokable tobacco products in an attempt to curb smoking. (See more on this A Closer Look At Philip Morris’ Asia Opportunity)
Also according to a Bloomberg report, there is still significant scope for raising cigarette prices in Japan even after the sharp 33% increase in 2010.  If we consider the average price of a cigarette with the U.S. as a benchmark, price per unit cigarette in Asia has a potential to more than double in the long run.
Relative Pricing, Increasing Affordability Driving Better Product Mix
With shipment volumes in the Philippines set to slump in 2013 and beyond due to an excise tax increase this year, the shift towards premium brands in Indonesia seen over the past couple of years will help improve the overall volume-mix impact. The share of premium brand shipments in Indonesia grew around 2% y-o-y to reach 27.6% in 2012.
The expanding total market volume of cigarettes (total cigarette industry volume in Indonesia expanded by 8.2% in 2012) and the relative affordability due to rising income levels is driving the volume-mix towards premium brands, which is expected to positively impact overall revenue per cigarette from Asia.
According to the new excise tax structure implemented in the Philippines, the percentage increase in premium brands is lower compared to lower-priced cigarettes, which is helping shift buyers to premium branded cigarettes and lead to higher revenue per cigarette. 
Brand Equity, Market Share Seen Driving Pricing Power
Philip Morris’ extremely popular brands and leading market share give it a a huge competitive advantage in key markets, which helps pricing power. Tobacco companies have taken advantage of brand loyalty and excise tax increases to raise prices on their brands to improve profitability.
Philip Morris has increased its market share in Indonesia from 30.2% in 2009 to 35.6% in 2012, helped by its key brands in all the categories. It owns leading premium brands in all three cigarette categories, namely Dji Sam Soe in hand-rolled kreteks, Sampoerna A in machine-made kreteks, and Marlboro in ‘white’ cigarettes. It also held 27.7% market share in Japan in 2012.
We currently forecast Philip Morris’ revenue per cigarette in Asia to reach around $0.089 over the forecast period. In the short run, as volumes are set to take a major hit from Philippines due to a disruptive tax increase, revenue per cigarette is expected to rise sharply. However, in the long run, we expect to see 4-5% CAGR growth in the metric.
- Tobacco Excise Raised by 8.5% in Indonesia, www.tax-news.com [↩]
- Japan Tobacco Gains As Minister Says Prices Should Rise 75%, www.bloomberg.com [↩]
- 2013 Consumer Analyst Group of Europe (CAGE) Conference, www.pmi.com [↩]