-  Yesterday, various newswires reported that Philip Morris International Inc and the Thai Tobacco Trade Association (which represents more than 1,400 Thai retailers) will be filing a suit against the Thai government in relation to its April ruling to further increase the size of pictorial health warnings (PHW) on cigarette packs.

-  A similar move was made by Japan Tobacco Inc. which filed its suit against the country’s health minister and two other officials on June19. We understand that groups have until July 4 to contest the decision as the regulation would come into effect on October 2.

-  The plan to enlarge the graphics and anti-smoking warnings to 85% of principal pack display areas from the current 55%, would position Thailand as one of the strictest countries in packaging and labelling laws. This would also be higher than the 50% recommendation by WHO in its FCTC guidelines.

-  The tobacco manufacturers are maintaining that the move is unconstitutional and will violate their trademark and intellectual property rights. Nonetheless, Thailand’s health ministry insists that the move is in line with the law and the increased warnings visibility will better aid its efforts to curb smoking.

-  Note that PHW differ from the plain packaging measure adopted by Australia this year. The latter is more restrictive as it prohibits all forms of product advertising including logos, colour and brand imagery as well as constraints on font size and type. This essentially standardises the cigarette packs.

-  In our opinion, we do not believe the local tobacco players, namely British American Tobacco (M) Bhd (BAT) and JT International Bhd (JTI), or their parent companies will legally challenge any of the recently proposed regulatory reforms by the government as the initiatives are more moderate in nature.

-  For example, the current packaging and labelling ruling in Malaysia is 50:50 (front:back) with the Ministry of Health looking to increase the size by 10% to 60:40. It also intends to introduce new images to bolster the effectiveness of the PHW.

-  Additionally, we reckon that the government is cognisant of ongoing legal challenges between other governments and major tobacco manufacturers, and it would only take the cue from these court rulings over the legality and effectiveness of any reforms, before implementing them here.

-  We maintain our NEUTRAL recommendation on the tobacco industry with HOLD recommendations on both BAT (FV:RM62.00/share) and JTI (RM7.20/share) for decent dividend yields of 4.5%-5% per annum. Operating environment remains challenging with numerous regulatory risks, potential hike in excise duties as well as growing illicit white volumes.

Source: AmeSecurities