KT&G Corp
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KT&G Corp
Earnings Call Analysis
Q2-2024 Analysis
KT&G Corp
KT&G demonstrated robust performance in the second quarter of 2024, reporting a consolidated revenue increase of 6.6% year-over-year to KRW 1.438 trillion. This growth was primarily driven by the tobacco segment, with revenues growing 11.5%, and operating profits rising 30.6% to KRW 321.5 billion, reflecting strong market dynamics especially in higher-margin global markets. Overall, the net income surged 57.5% to KRW 318 billion, highlighting the company's strong earnings momentum.
The tobacco sector remained the backbone of KT&G's financial performance. Key metrics showed year-over-year increases with a global cigarette revenue boost of 35.3%. The company's focus on cost management in response to rising manufacturing costs allowed it to achieve an operating profit margin of 32%. Furthermore, the share of the global operation in the tobacco business increased to 59.6%, up 3.0 percentage points from the previous year, illustrating gainful expansion in international markets.
KT&G's innovative approach, particularly with the New Generation Product (NGP) segment, contributed to a domestic revenue increase of 10.9% year-over-year as consumers gravitate towards higher-value offerings. The launch of new products, coupled with successful promotions, has expanded market penetration, which is estimated to be at 20.8% domestically. The organization is strategically focused on growing revenues in Asia-Pacific and Eurasia and expected a 10% to 20% growth in these regions for the second half of 2024.
In the health function of food segment, KT&G reported a 1.6% year-over-year revenue growth driven primarily by international sales. However, anticipated declines in revenue by 2.5% to 3% in FY 2024 compared to 2023 indicate underlying challenges. The company aims to restructure its food segment to enhance profitability amidst changes in consumer preferences, particularly a noted decline in demand for traditional offerings like Red Ginseng. Operating profits from this segment are expected to decrease by approximately 28%.
Looking forward to 2024, KT&G has adjusted its consolidated revenue growth guidance from an initial 10%-10.5% to a revised 2.5%-3% due to evolving market realities. Meanwhile, the operating profit forecast is now expected to remain flat compared to the prior year. The projections reflect the company's cautious stance amidst rising costs, particularly in tobacco leaf procurement due to inflationary pressures, which saw an annual increase of 14% for 2024 purchases.
In a strategic move to enhance shareholder returns, KT&G has initiated a three-year shareholder return plan (2024-2026) that includes KRW 1.8 trillion in dividends and KRW 1 trillion in share buybacks. The Board of Directors has approved interim dividends of KRW 1,200 per share alongside a buyback worth KRW 350 billion, aimed at boosting shareholder value and aligning with growth strategies. Such commitments underline KT&G’s focus on maximizing returns for its investors.
KT&G has established a partnership with Philip Morris International to enhance its foothold in the U.S. market, especially regarding regulatory submissions for new NGP products. This collaborative effort is part of the long-term strategy to tap into the significant potential of the U.S., which boasts approximately 31 million users of smoking alternatives. The strategic vision underscores KT&G’s commitment to providing innovative, scientifically substantiated products.
The company's real estate segment faced tough quarterly results, reporting a decline of 29.2% in revenues driven by project completions and ongoing market volatility. The operating profit plummeted by 79.6%, which signals a considerable realignment effort is required. KT&G is reassessing its real estate strategy with an aim to stabilize and enhance profitability through careful project selection and market responsiveness.
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Ladies and gentlemen, thank you for attending the call today. We will now begin the conference call for KT&G's 2024 2nd quarter earnings report. [Operator Instructions] We will now begin with KT&G presentation. Ladies and gentlemen, I'm Jin-han Kim, Head of Finance Officer at KT&G. Thank you for attending KT&G's 2024 Second Quarter Earnings Report. Please allow me to first introduce the KT&G management team in attendance today.
With us today, we have Mr. Sang Hak Lee, Chief Financial Officer of KT&G, Mr. Chang Gu Huh, Chief of Strategy and Planning; Seong Sik Park, Chief of Real Estate Business; Mr. Min Seok Gwon, Chief of Global Business; Mr. [indiscernible], Head of NGP Office; Mr. Yeong Chan Yoon, Chief of Marketing; and Mr. [indiscernible] Chief of strategy at KGC.
Please be advised that the earnings we are about to present today have yet to be audited by the outside auditor. Therefore, are subject to change in date of process. And any forward-looking information discussed in the call today may differ from the actual results to be reported in the future. Before we go into the 2024 second quarter results, Sang Hak Lee, our CFO and CSO, will share with you some key updates on our business activities.
Ladies and gentlemen, this is Sang Hak Lee, CSO and CFO at KT&G. I would like to start by thanking all our shareholders and investors for their interest and support given to KT&G. Before we begin the presentation for the 2024 second quarter earnings, I would like to share with you some key management updates. KT&G is in process of executing a mid- to long-term shareholder return plan for 3 years from 2024 to 2026 with a scale of KRW 1.8 trillion worth of dividends and KRW 1 trillion worth of share buyback and cancellation of 15% of total outstanding shares. As a first step in February, we canceled our treasury shares worth KRW 315 billion. And today, the Board of Directors have decided to pay out interim dividends and execute share buyback and cancellation in the second half of this year for continuous enhancement of shareholder value.
The Board resolved to pay out interim dividends of KRW 1,200 per share, considering the earnings and cash flow of the first half. We expect the total DPS for the fiscal year 2024, including this interim dividend to increase versus the previous year. The Board also resolved a share buyback and cancellation of KRW 350 billion. As such, starting tomorrow, we will be repurchasing a total of 3.61 million shares or 2.7% of total outstanding shares to be canceled in full immediately after the acquisition. And with it, the total value of the shares to be canceled in 2024 is expected to reach approximately KRW 665 billion.
Taking things further, the Board and the management team is planning to make a disclosure for our new corporate value enhancement plan in the second half to actively participate in the government's value program and enhance our corporate and shareholder value. Next is an update regarding our global NGP business. We recently executed a MOU with Philip Morris International for collaboration on U.S. PMTA submission for new KT&G NGP products.
With the MOU, the parties established the intent to collaborate on regulatory submissions on new NGP products to be selected for commercialization by PMI in the U.S. The parties also recognize the importance of the U.S. market, a key market of nearly 31 million of no smokers and 180 billion cigarettes and agreed to advance the shared strategic vision of providing better alternatives to legal-age smokers with scientifically substantiated NGPs.
The new KT&G NGP products are expected to be launched first outside the U.S. And then the parties plan to work on PMTA submission. Going forward, KT&G will enhance corporate value by advancing our sustained growth momentum in the 3 core growth businesses of NGP, Global CC and HFS, while at the same time, strive to maximize shareholder value with shareholder returns at top level domestically and globally. I ask our shareholders and market stakeholders for your continued support. Thank you.
And now we will present to you KT&G's 2024 2nd quarter results. We will begin with key items from our consolidated results and then move on to each business segment. Starting with the key takeaways from our Q2 results. In the second quarter, on a consolidated basis, our revenue grew 6.6%, operating profit, 30.6% year-over-year. The strong Q2 performance was driven by solid growth in our tobacco business, the main business of the company. With tobacco business revenues growing by 11.5%, profits by 30.4% reaching 32% in operating profit margin, especially the Global CC business delivered a growth trifecta volume, revenue and operating profit to reach the highest revenue for a quarter. The growth across the board in key regions led to Y-o-Y growth of 16.2% in volume, 35.3% in revenue and 139.1% in operating profit. The growth of our NGP business was more profit-centered. Domestically, we saw triple growth in key metrics of stick volume, revenue and operating profit.
Internationally, profits continue to improve as sticks account for a higher portion of the revenue mix. In Health Function of Food, our global business expanded its growth. Revenue in China, our top priority target market, grew by 75.4%, driving the 38.4% revenue growth of our Global HFF business and extending the proportion of the global business from 25.7% to 34.9%.
We'll now move on to consolidated results for the second quarter. Q2 consolidated revenue was supported by strong growth in Global CC and NGP rising by 6.6% Y-o-Y to KRW 1.438 trillion. Operating profits for the quarter benefited by sales growth in Global CC and NGP as well as higher per unit profit showing 30.6% Y-o-Y growth to KRW 321.5 billion. As for the net income, operating profit growth and higher currency-related profits led by HFF movement within the quarter drove net income up by 57.5% to KRW 318 billion, and earnings per share grew 59.5% to KRW 2,754. EBITDA rose by 25.4% to KRW 383.1 billion with a better margins at 26.9%.
Moving on to reasons behind movement in earnings. Within the tobacco business, higher manufacturing costs per pack due to global inflation led to a negative KRW 37.6 billion variance in the cost. But improved product mix and pricing supported profits by KRW 36.1 billion, impact from appreciation of the dollar against the KRW was plus KRW 19.3 billion and volume effect from higher global cigarette sales and NGP stick sales contributed by KRW 56 billion, adding to a KRW 73.8 billion additional contribution to the profit from the tobacco business.
HFF saw KRW 9.2 billion increase in profits with higher contribution from high-profit channels and real estates are for the unfavorable comparison from the completion of large development projects leading to a KRW 11.3 billion drop in profits. Due to these factors, the consolidated operating profit increased by 30.6% Y-o-Y moving on to each business segment. Starting with the tobacco business. In Q2 tobacco revenue, stronger Global CC and domestic NGP revenues drove the entire tobacco business revenue by 11.5% to KRW 989.9 billion.
In operating profit, all segments of the tobacco business grew in profits mainly in global cigarettes, but also in domestic cigarettes and NGP to reach KRW 316.4 billion. The share of the global operation and tobacco business for the quarter grew by 3.0 percentage points Y-o-Y to 59.6% with volumes growing in major regions, including Middle East, Indonesia and Eurasia.
Going into the details of each tobacco business segment. Beginning with domestic cigarettes. Our domestic cigarette volumes for Q2, loss of revenue, decline in market volume managed to increase market share to mitigate the volume drop to a 0.4% decrease to $10.33 billion stick. As for KT&G market share, despite intensifying market competition with new product launches from competitors, we were able to launch new products catering to consumer needs and with a higher share of the super slim segment where KT&G has an advantage, the market share continued to grow by 1.7 percentage points Y-o-Y to 66.9%.
Due to domestic cigarette revenues inched up by 0.5% to KRW 428.9 billion, thanks to stronger contribution from high ASP duty-free channel, higher share of premium segment products and increase in ASP.
Moving on to Global Cigarettes. In Q2, global cigarettes, both volumes and ASP grew to drive the revenue growth in all regions, reaching a record high quarter revenue of KRW 359.1 billion and a 35.3% Y-o-Y increase. For global subsidiaries, the newly launched CIC systems in Indonesia and Russia CIS led the volume growth and pricing initiatives, resulting in a 53% Y-o-Y increase for subsidiary revenues to KRW 172.2 billion. In terms of export, robust export volumes in the Middle East combined with ASP growth in major regions led to a 22.2% Y-o-Y revenue growth to KRW 186.9 billion.
Due to total global cigarette volumes driven by simultaneous growth in export and subsidiaries grew 16.2% to KRW 15.31 billion next to NGP. In Q2, domestic revenue, despite intensifying competition with aggressive price promotions, the growth in both market volume and KT&G market share drove higher stick volumes leading to stronger revenue with 10.9% Y-o-Y increased to KRW 137.3 billion. Global NGP revenues were impacted by inventory adjustments for devices that are high unit price declining by 8.8% Y-o-Y to KRW 60.4 billion. When it comes to the domestic and global stick revenues, the key growth driver of the NGP business, we saw a 5.7% Y-o-Y growth for the first half to 7.22 billion sticks.
Allow me to go a bit deeper into domestic and global NGP performance. For the domestic market, higher demand for NGP products was demonstrated in a 1.6 percentage point Y-o-Y growth in market penetration, which recorded 20.8%. As for our domestic stick market share, stronger advantage in devices with little hybrid and new stick launches sustained the market share growth trend to 45.8%. For the global business, stronger penetration within launched markets continue to stick volume growth trend and higher share of sticks in the revenue mix led to improved profitability.
Next is HFF. Due to HFF topline overcame sluggish domestic revenue caused by subdued HFF market and strategic channel adjustments with higher global revenues to a combined 1.6% Y-o-Y increase to KRW 265.1 billion. Q2 HFF operating profit was supported by improvements to the cost structure and adjustments to the discount promotion policy to improve by KRW 9.2 billion to a KRW 1.5 billion loss for the quarter.
Tariff global operations in the quarter was driven by a steep increase in global HFF revenue growing by 9.2 percentage points to 34.9% breaking down the revenue by domestic and global business. First on domestic revenue by channel for the quarter, while stand-alone store revenues grew by 9.1%, thanks to family month promotions, low-profit teleshopping channels going through continued strategic reductions to improve profitability and adjustments to the discount promotions in department stores and channel stores led to a 11% Y-o-Y decline in domestic revenue to KRW 172.5 billion. As for the global business with China at the center revenue grew 38% Y-o-Y to KRW 92.6 billion. In China, with the 618 promotion performance improved on and offline to show a 75.4% Y-o-Y revenue growth.
Moving on to real estate business. In Q2 real estate revenue, despite revenue recognition from the Anyang development project and contribution from other developments, including East Daejeon and EMEA, the continued compression against completed subsidiary development projects, including Gwacheon Sang PFV drove total revenues down by 29.2% to KRW 80.5 billion, Q2 operating profit still impacted by completion of Suwon and subsidiary development projects, including Gwacheon was down 79.6% Y-o-Y to KRW 2.9 billion.
I would like to move on to our guidance for the year 2024. For our tobacco business, robust growth is expected to continue into the second half. We anticipate to meet the previously announced guidance in tobacco as we strengthened both growth momentum and profitability in all segments of cigarettes and NGP. For health function of food, as we attempt to improve the fundamentals of the business and pursue structural innovation as well as increased marketing investments to accelerate the global expansion we do expect some changes to the P&L.
As such, we anticipate the performance for the business to fall short of the previous guidance as revenue declined 2.5% to 3% Y-o-Y and operating profit is reduced by 28% to 28.5% Y-o-Y versus 2023. For real estate, in response to the deteriorating real estate market, we plan to reassess the business directions for real estate to restructure the business. For the subsidiary projects, including equity investments that accounted for 30% of the previous guidance, we have decided to a complete reassessment from an ROE management perspective, on top of that, as the delay in recognition of major development projects of legacy properties, including Anyang is reflected into our P&L, we anticipate revenue to be down 34.5% to 35% Y-o-Y and operating profits 92.5% to 93% down.
After taking into account these changes in business environment for HFF and real estate, 2024 consolidated revenue that was initially expected to grow 10% to 10.5% versus 2023 is now projected to grow 2.5% to 3%. As for 2024 consolidated operating profit with initial expectations to be 6% to 6.5% growth versus 2023, we now revise our projection to remain flat compared to the previous year. KT&G will do its utmost for revenue growth and profitability enhancement based on the strong growth momentum and profitability of the tobacco business and any changes to the guidance will be immediately communicated.
With that, I conclude the KT&G second quarter earnings presentation, and we can now move on to Q&A.
[Operator Instructions] The first question will be presented by Jung Wook Kim from Meritz Securities.
I have 3 questions in total. The first one being, if we look at Q2, it seems that the earnings related to exports for our global business and our key target markets were quite significantly improved compared to Q1. What are the main reasons for that? And is it going to be sustainable in the second half? The second question is with regards to the cost burden coming from the tobacco leaves. So in Q2, what is the level of the cost burden? And also in terms of the purchase price because the purchase price for this year will have an impact for next year. I would like to get a level of the sense on a Y-o-Y basis, if you could provide some more details.
And the third question is regarding HFF. It does seem that the domestic business is still sluggish. Is it that you're seeing an overall shrinking of the entire market? And the main reasons from the company's perspective, what have you identified as the key reasons? Is it because of the economic cycle? It is the overall trend of the HFF consumption. If there are any insights that you can share, that would be appreciated and also your outlook for the second half as well.
First, for the first question in terms of the improvement that we see for the Global CC business. We did see a significant improvement in the second half centering around the markets in Indonesia and Russia with the strategic approach of increasing ASP supply prices there. And we also focused a lot on the new product release for new market categories of our high margin, which resulted in good significant numbers for the second quarter.
Moving forward in the second half, we will also continue to focus on markets like Asia Pacific, and also Eurasia and CIC to further strengthen marketing activities there and we expect, as a result, we will be able to see a growth of 10% to 20% on a Y-o-Y basis.
And for the second question, in terms of the cost burden coming from the tobacco leaf. So if we look at the overall situation due to the impact of global inflation, we do see the increase -- cost increase pressure of the main and sub-materials of tobacco leaves continuing from 2022. The main material foreign tobacco leaves in terms of the purchase price for 2024 has increased 14% on a Y-o-Y basis and the domestic tobacco leaf purchase price for 2024 is the same as the level of Q4 of 2023.
And moving forward, if we look at the cost burden impact for the second half, we do expect to see continued price increase pressure from the tobacco leaf purchase. So the cost burden will continue in 2024 as well. However, if we look at the pace of the price increase for tobacco leaves, it is slowing down. And if we look at the sub-material price trend, it is stabilizing since 2023. So -- and if we look at the overall situation, we do believe that in the long term, the cost burden impact will be mitigated.
And next for HFF. If we look at the overall situation of the consumption trend in HFF, a lot of the products centering around Red Ginseng have been showing a trend change from oriental materials to a general health function of fluid like vitamins and probiotics. As a result, we do see an overall reduction or shrinking of the Red Ginseng market and a slowdown in recovery as a result. And on top of that, with the economic slowdown and inflation pressures, the overall impact has been materializing in the recovery of the Red Ginseng market overall. And we do expect that this trend will continue in the second half of it as well. In response, we are trying to respond accordingly based on new product releases and also products with new functional enhancements.
So focusing on the 6 major functional enhancements for the Red Ginseng products that will prove to be efficient in terms of boosting health. And we will try to also continue to push additional new products and releases of the health functional market to increase our presence in the market. And on top of that, we also plan to continue to expand our presence in the online and CBS channels targeting the young population. So providing good value for value products and also additional new products that are trendy that will fill the generation so that we could create new demand in the market.
The next question will be from Hyeeun Kim from Morgan Stanley.
I have 4 questions in total. The first one being for NGP. There was the release of the Lil Aible. So if you could share any initial feedback from the customers that would be much appreciated. And if you have any further plans for channel expansion, could you share that as well? The second question would be for global NGP. So in terms of new country entry and also new product releases, if you could provide some updates, that would be much appreciated.
And the third question is, of course, there are a lot of difficulties surrounding the business environment. I think there are some potential changes that could come related to the tobacco tax and regulation. So if the company has any prospects or thinking about what is going to happen on that front, if you could share some of your thoughts, that would be great.
And the third question -- or the last question is with regards to what you spoke about in your opening comments in terms of the new corporate value program. I think there was already the announcement of the 3-year shareholder return policy that was announced earlier before. So, was the corporate value program intention to be on top of the previous existing one that was announced? Or are there additional points that are being considered if you could share those plans as well, that would be appreciated.
First, I would like to answer the question. The question would be answered by Head of NGP, Mr. [indiscernible]. If we look at the initial consumer response for the Lil Aible 2.0 launching. So as you probably well know, we did release Lil Aible 2.0 in 6 sites, minimally in nationwide on June 26. And on July 10, we also did expand that further to 19 sites, Lil Station and CVS in Seoul. I think it is a little bit early in time to give you an overall, I guess, a detailed explanation of the initial customer response as we're still in it's early stages, but we are getting initial feedback that is quite positive from the consumers because with one device, it's possible to use 3 different types of stick and also has enhanced functions such as reduction of heating time and also fast charging and in such aspects, the user convenience has been significantly improved. So the overall response at the moment, as we can say, in its initial stages have been quite positive.
And moving on to the next question, which I understand to be mostly about the overall business landscape surrounding NGP and with regards to our product plan. So if we look at the current market entry, we have entered into 33 markets as of now, which covers about 80% of the total NGP demand. So I think in terms of the number of countries that have been entered, we don't really view that as a significant importance as of now. What we rather view as important from the company's perspective, is really what we have available in terms of product launches.
So we do want to have additional platform launches to be able to have success of the overall business operations. And that is something that we have consensus with PMI. If we look at the overseas an important update for the global business. For Russia, we have released the lil HYBRID in 4 major cities in Russia and considering that this is the #2 market in terms of total demand, this is quite a significant update. And the hybrid platform is actually one of the most successful ones that we have experienced in Korea. This is an area to be highly, I guess, has high expectations about and I think probably, we will have, in terms of the detailed plans for the new market penetration and new product releases, please understand that at this point in time, this is only the high-level information that we can share with main details. Please understand that they cannot be shared at the moment.
And for the next question, it will be answered by the Chief of Marketing, Mr. Yeong Chan Yoon. So with regards to the tax and regulation changes, as of now, there hasn't been any deliberation at the government or the national assembly level in terms of tobacco tax. So it is difficult for the company to predict the timing and the possibility of a potential tax implementation or change. We are going to closely monitor the discussions and the outcomes that are happening at the government national assembly and academic circles. And we will be using different types of scenarios so that we could further enhance the profitability of the domestic CC business by responding accordingly to any potential situation.
And with regards to your last question, it will be answered by CFO, Mr. Sang Hak Lee. If you look at the shareholder of the value enhancement program and the plans, we did already announce from the company side. The corporate value-related plans even before the government initiated such corporate value program back in 2023, November. And on top of that, the company also did announce a new shareholder return policy and we are going to make according -- the related executions according to that plan moving forward. We did announce that we are going to have an announcement on the corporate value of program in the second half of the year. We did announce that we will -- we have an announcement for that today, just today. And this will be based on the new shareholder return policy.
And based on that, there will be updates to the corporate value of plan to be released in the second half disclosed after there is an approval from the Board of Directors. In the first quarter, we also did put forward the plan in terms of our ROE to increase by 15% until the year 2027. And the main 3 pillars being enhancement of profitability, asset efficiency and also sophistication of capital policy. So among these main 3 pillars, the main key initiatives have been identified, and we are going to pursue the related activities according to such plans.
The next question will be presented by Sanghoon Cho from Shinhan Investment Securities.
Yes. My question is with regards to the global business. So if you look at it not from the company at the entity level, but more focusing on the overall export related earnings or performance, do you see that coming for Asia Pacific and Middle East, there is a fluctuation in your earnings number on a Q-o-Q basis depending on shipping? I think because in the Middle East, previously, there were some issues in shipping that had a sway in numbers. And also in Q1, we saw that being an issue on the Asia Pacific side of the business, but it did rebound back in Q2. So I think because of such fluctuations that we are currently seeing, I am curious if there are any strategies or ideas that you have to improve that from a structural standpoint.
So with regards to our overall business in the Middle East and Asia Pacific. We did see some activities to normalize the level of local inventory that had an impact on the fluctuations in the numbers for the period of the end of 2023 and 2024. So we are closely monitoring the current situation in terms of sales and the inventory levels on the ground. In the second half, we plan to have additional Titan monitoring to view the level of sales to be able to meet the demand of the site based on the actual demand on the site so that we could further have better management of the numbers in terms of volatility and fluctuations.
The next question will be presented by Younghoo Joo from NH Investment and Securities.
I have 2 questions in total. If we look at the duty-free channel side, it seems that on the airport side with the increase or the recovery of the foreign tourists, we are seeing the better level of recovery compared to the previous levels. I think I would appreciate an update in terms of the domestic side of the channel for tobacco and the health functional food. In terms of the guidance that was provided as part of the presentation for real estate, obviously, I think for this segment, there are more fluctuations on an annual basis that are having an impact the numbers. So if you could provide an idea or approach that you are having mid to long term for the real estate business, that would be appreciated.
First, I will answer for the tobacco part of the duty-free channel, this would be by Mr. Yeong Chan Yoon, Chief of Marketing. If we look at Q2 for the duty-free channel, there has been an increase of the number of people going in and out for international travel. So as a result, we have seen an increase in both revenue and volume on a Y-o-Y basis. And if we look at the overall situation moving forward, there is an increase in terms of international flights and also the increase of foreign tourists that will help to recover the performance of the duty-free channels to back to previous levels. However, because of such impact like external factors on FX fluctuations, there are some uncertainties that are still existing. So in terms of the timing that it will be completely normalized back to the previous levels, that would be a little bit flexible in terms of the exact timing.
And the answer for the HFF side of the business will be answered by Chief of Strategy at KGC, Mr. Chang Gu. If we look at for HFF for the duty-free channel, there was an increase of 5.5% compared to the previous year in terms of revenue. And a lot of the recovery has been pulled by the duty-free channels at the airport. If we look at the overall situation of the duty-free channel for HFF moving forward, there has been a slowdown in terms of the overall duty-free channel performance due to the reduction in commission for agencies and buyers and also the strength and monitoring of bulk purchases from the customs office. And also because of the slow recovery in Chinese group tourists, we don't really expect a fast recovery in the city, the duty-free channels as well. in the downtown area.
So because of that, we don't expect that the recovery in terms of our earnings from China will be in a fast pace. So KGC is going to respond accordingly by trying to identify new demand, really focusing on the domestic consumers and the airport duty-free channel and also try to improve our profitability by focusing our operations on high-efficiency strategic products.
For the real estate question, the question will be answered by Chief of the Real Estate Development Office, Mr. Seong-sik Park. So despite the various measures that the government has announced to vitalize the real estate sector, there still have been limitations in terms of recovery due to the impact of increased costs for construction and also the additional cost burden impact that we are seeing from the cost side -- on the real estate and the construction side in general. For ROE moving forward, in order to make improvements to that, we are going to focus, but at the time -- at the moment, we had to review overall from scratch -- the overall opportunities that we have for new business and also the equity investment projects that were on -- in our agenda because of the current business landscape. Moving forward, we will continue to try to take on our business projects based on profitability and stability and really focus on carrying out the development projects for the land that we own that we deem that have a high development value.
The next question will be presented by Yu-jung from Hanwha Securities.
I have a question in terms of the business and for the Middle East. It seems that our exports in the Middle East did increase quite significantly in comparison and we did see some good numbers there. Were there any specific drivers for that? And what's your outlook for the second half?
For that question, it will be answered by Chief of Global Business, Mr. Min Seok Gwon. We are focusing really in the second half of the second quarter of 2024 for the Middle East market to expand the demand, local demand for our high turnover products and there was an increase in terms of our export volume to have adequate level of inventory secured by our partner companies. So as a result, in the second half, we do also expect that there will be an increase of 5% to 7% on a YoY basis based on the increase of our main product sales and also new product releases to be expected.
With that, we will now close the earnings call for KT&G for 2024 Q2. Thank you very much for your participation. Thank you.