Japan Tobacco bets on e-cigarette's growth prospect, boosts annual dividend

By Taiga Uranaka

TOKYO (Reuters) - Japan Tobacco Inc (2914.T) said it was still confident about the prospect of its Ploom Tech tobacco-based electronic cigarettes, the launch of which has been delayed due to supply problems, and raised its dividend despite forecasting a lower annual profit.

The world's No.3 tobacco company said it would begin selling Ploom Tech in some parts of Tokyo from June, but added a rollout in other cities would start only from the first half of 2018 - later than initially expected.

While this could be a setback for Japan Tobacco in its race against bigger rival Philip Morris (PM.N) for a larger share of the Japanese vaping products market, the former was unfazed and said it planned to pay a dividend of 140 yen ($1.24) per share this year, up almost 8 percent, to underline a "very strong feeling on Ploom Tech's growth" prospects.

"We thought we needed to convey this to the stock market," Chief Executive Officer Mitsuomi Koizumi said at an earnings briefing on Monday.

Battery-operated Ploom Tech is a device that uses vapour from heated liquid to deliver to the user the taste of tobacco leaves held in a disposable capsule. Japan Tobacco test launched the product early last year in the southern Japanese city of Fukuoka, following which it ran into supply constraints.

The company - whose top brands include Winston, Mevius and Camel - has invested heavily since then to expand its production capacity of Ploom Tech tobacco capsules.

The Tokyo rollout was initially planned for early May this year, but "our test marketing in Fukuoka showed a lot stronger popularity than our expectations. We delayed the launch to avoid the supply shortage", Koizumi said.

The Ploom Tech supply crunch last year had allowed Philip Morris to cash in with a nationwide rollout of its "heat not burn" tobacco product called iQOS, making inroads in a country where Japan Tobacco commands a 61 percent share.

Philip Morris' share of the Japanese market rose 1.7 percent to 27.1 percent in 2016. For HeatSticks, the tobacco used for iQOS, the share rose to 7 percent in the final week of December.

Tobacco companies, facing falling volumes in developed markets due to higher taxes and growing health concerns, are betting on e-cigarettes, hoping the lower-risk alternative to smoking could help accelerate growth.

The trend is also being helped by the emergence of smoke-free places that allow the use of tobacco e-cigarettes.

In Japan, Orix Auto Corp has started a fleet of rental and shared cars that are smoke-free but permit the use of iQOS.

Partly because of the growing popularity of tobacco e-cigarettes, Japan Tobacco expects its domestic cigarettes sales volume to decline by 9.6 percent this year.

It expects a 4.7 percent decline in net profit to 402 billion yen in 2017, while 16 analysts on an average expect 418 billion yen, Thomson Reuters data shows.

($1 = 112.5700 yen)

(Reporting by Taiga Uranaka; Editing by Himani Sarkar)