KT&G Subsidiary Faces Facility Investment Dilemma as Capacity Expansion Outpaces Weak Order Demand

Key points: 

- Facility investment dilemma: KT&G subsidiary Taeya Industry (core raw material supplier for KT&G cigarettes and heated tobacco products) suffered from overcapacity due to inaccurate demand forecasting, resulting in a net loss of approximately $26.9 million last year.

- Expansion and challenges: Despite expanding capacity since 2004, new facilities were unable to be fully utilized due to shrinking domestic tobacco demand and anti-smoking policies. 

- Sales growth: By increasing cigarette leaf prices, sales are projected to increase from $19.15 million in 2021 to $30.09 million in 2024, maintaining a 2% to 3% operating profit margin. 

- Future plans: KT&G plans to export Taeya Industry's cigarette leaves overseas to drive global expansion, with expected impairment losses being offset as production volumes increase.

【2Firsts News Flash】According to reports from Korean media, KT&G's subsidiary, Taeya Industry, is facing difficulties in facility investments due to failed demand forecasting. The company expanded its cigarette leaf production facilities with funding from its parent company, KT&G, but the inadequate demand led to significant asset impairment losses and impacted financial stability. Last year, Taeya Industry's net loss reached 35.4 billion Korean won (approximately $26.9 million).

Taeyang Industries is the core raw material supplier for KT&G cigarettes and heated tobacco products. The products are currently produced at factories in Daegu and Gimcheon and are all supplied to KT&G.

Since being acquired by KT&G in 2004, Taeyang Industries has continued to expand its production capacity and secure raw material supply. In 2018 and 2022, Taeyang Industries purchased production equipment from KT&G and expanded its capacity. However, forecasting errors in demand led to a 36 billion Korean Won asset impairment loss, including 13.6 billion Korean Won (approximately $10.33 million) in machinery and 22.4 billion Korean Won (approximately $17.02 million) in construction in progress assets, resulting in some new facilities being idle.

The domestic tobacco market demand is shrinking, coupled with the rise of health awareness and the government's promotion of anti-smoking policies, leading to the Taeyang industry facing difficulties. In 2024, KT&G's domestic cigarette sales are expected to decline, and factory operating rates are also declining.

However, Taeya Industries has managed to deal with the difficulties by increasing the price of tobacco leaves, leading to a growth in sales each year. From 2021 to 2024, Taeya Industries' sales increased from 25.2 billion Korean won (approximately 19.15 million US dollars) to 39.6 billion Korean won (approximately $30.09 million), maintaining a profit margin of 2% to 3%.

In order to utilize its new facilities, KT&G plans to export the tobacco leaves produced by Thaiya Industries overseas. By constructing and expanding overseas factories, Thaiya Industries will actively promote global business expansion. It is expected that as global production increases, depreciation losses will be recovered in the future.

KT&G stated that the expansion of its Taeyoung Industries' facilities is being done in preparation for future demand and added that the losses from asset impairment will gradually recover as production capacity increases.