-  It was reported in a local daily today that an amendment to the Control of Tobacco Product Regulations 2004 under the Food Act 1983 which was gazetted in June last year has taken effect on 1 January 2014.

-  Unlike previous rule changes, the latest revision may be beneficial to the domestic tobacco manufacturers as it is targeted at those in the illicit trade - the legal cigarette industry’s biggest challenge.

-  The new provision states that “no person shall sell or offer for sale, buy or have in his possession any packet or carton of cigarettes that is not printed with the texts set and health warning images”. In other words, this means that the buyer of illicit cigarettes are now subject to the same laws as the sellers that is, a maximum fine of RM10,000, jail of up to 2 years, or both.

-  Back in 2009, the government had stipulated that cigarette packs must carry health warnings in a uniform text, size and colour as well as bear 1 of 6 government-approved pictorial health warnings (PHW). There is a proposal to introduce a new set of images and to increase the size by 10% to 50:50 from the current 60:40. As yet, we have not obtained any updates with regards to this ruling or on the other recommendations (refer to report dated 4 June 2013).

-  According to the Confederation of Malaysian Tobacco Manufacturers (CMTM), the proportion of illicit cigarettes had increased from 20% in 2002 to 36.3% in 2010, corresponding to a legal TIV of 19.5bil sticks in 2002 and 13.5 bil sticks in 2010. Share of illicit sticks peaked at 37.5% in 2009. At the last count in May 2013, illicit sticks made up 33.6% of the total cigarette market.

-  With a potential spike in illicit cigarette volumes in the coming months following the sharp 14%-17% hike in pack prices in October 2013 and reduction in disposable incomes, we opine that the implementation of this latest amendment is timely. That said, all eyes will now be on the enforcement agencies to ensure its effectiveness.

-  All in all, we reaffirm our NEUTRAL stance on the sector with HOLDs on BAT (FV:RM62.00/share) and JTI (FV:RM7.20/share) at this juncture. We believe that the price increase is more than sufficient to offset any loss in legal volumes, ensuring the tobacco manufacturers’ margins remain intact. 

Source: AmeSecurities