Japan Tobacco to roll out e-cigarette next year

By Martinne Geller

LONDON (Reuters) - Japan Tobacco aims to start selling its Ploom Tech tobacco-based electronic cigarette in cities across Japan next year, it said on Friday, as it fights to catch up with bigger rival Philip Morris in meeting the growing demand for "vaping" products.

Japan Tobacco, the world's third-largest tobacco company whose top brands include Winston, Mevius and Benson & Hedges, has invested heavily in expanding its production capacity for Ploom Tech tobacco capsules after it hit supply constraints in March following a test launch in the southern city of Fukuoka.

"Though we are not able to comment on the exact timing of the national launch in Japan due to the fast-changing demand, our intention is to expand, starting from the urban areas, step by step, from early next year," Yasuhiro Nakajima, vice president of emerging products, said on the sidelines of an investor meeting in London on Friday.

The company will have increased its capacity by four times by the end of this year and 10 times by the end of next year.

In August Marlboro maker Philip Morris International said its "heat not burn" tobacco product called iQOS had captured close to 3 percent of the Japanese tobacco market, making inroads in a country where Japan Tobacco makes 40 percent of its profits.

All tobacco companies face falling volumes in developed markets due to higher taxes and growing health concerns. Yet Japan Tobacco's near-term growth prospects are even more limited, Jefferies analysts said earlier this week, by its large exposure to Japan and Russia, where there is less scope for the regular price increases that attract profit-hungry investors.

"We own tobacco stocks because they are high-quality, high-margin businesses that generate a lot of cash flow and the profit pool is still growing," said Jonathan Fell, portfolio manager of Ash Park Capital, which owns shares in Japan Tobacco.

E-cigarettes could accelerate that growth in the long term but the global picture is as yet unclear as regulations differ in various countries.

"It's a real wait-and-see thing at the moment," he said.

The global market for "vaping" products was worth about $8 billion in 2015 and many public health specialists think e-cigarettes are a lower-risk alternative to smoking, but some question their long-term safety.

E-cigarettes made with tobacco are still a tiny portion of the market, and as such, Japan Tobacco executives said they could not predict their ultimate potential. The company has also introduced liquid-based e-cigarettes in markets like the United States and Britain, which together account for more than half the global e-cigarette market.

"We believe that addressing e-vapour and t-vapour at the same time is very, very important to be the winner in this entire emerging category," Nakajima told Reuters.

The company also said on Friday its international business was well positioned to meet its forecast for full-year growth of 11.4 percent in profits, 8.1 percent in revenues and 2 percent in volumes.

(Editing by Greg Mahlich)