According to the finance ministry's first draft cited by the Czech Press Agency, cigarette excise tax will increase in the CR as of April 2005 and January 2006. In 2005, it should increase to CZK 0.60 per cigarette plus 0.24% of the cigarette retail price from its current CZK 0.48 and 0.23%. Moreover, the minimum per-cigarette tax should rise from the current CZK 0.94 to CZK 1.13 in 2005 and to CZK 1.36 in 2006. The draft is expected to be discussed by the government in coming weeks and is likely to be approved.
The above news is largely neutral as the increase is roughly in line with our estimates and especially as the target taxation at the end of the transition period in 2007 - 57% of the retail price of the best-sold brand, Petra (PM CR's brand) - has been known for a long time and is largely already priced in. Based on the above, Petra's current retail price of CZK 44 (USD 1.72) may rise to as much as CZK 51 and CZK 59 in 2005 and 2006 respectively if PM CR decides to keep its real net revenues per pack unchanged, i.e. it shifts the entire tax increase onto customers.
The increases will shift cigarette consumption towards cheaper brands (and possibly illegal imports and/or local production), where PM CR has a weaker market position. Indeed, the last tax hike in April 2004 likely contributed to the 4pps decrease in PM CR's market share in the CR in H1 2004 to 75.5%, and a further decrease cannot be ruled out in coming years, subject to the company's pricing policy.
Jan Hájek, Patria Finance