- Over the weekend, The Edge Malaysia ran an article over the activities of the Malaysia Competition Commission (MyCC), whose role has become more prominent in view of the current cost inflation and price hikes.

- Industries that have been scrutinised by MyCC in recent times include icemakers, stationers as well as the aviation sector. The investigation into the aviation sector came to a close in September 2013 with MyCC announcing a fine of RM10mil to be imposed on each player (MAS and AirAsia) for contravening the Act during their short alliance in 2011.

- According to MyCC’s CEO Shila Dola Raj, Competition Act 2010 states that it is not illegal for an entity to raise the price of its products or services as long as it is independent of its competitors’. The action would, in fact, have the opposite effect of encouraging competition.

- It would only be deemed an infringement (under Section 4 of the Act) if the price hike was “the result of collusion between any groups of sellers, suppliers or manufacturers”. A contravention could result in the entity being faced with a maximum fine of up to 10% of its turnover.

- Given that domestic tobacco manufacturers have raised prices thrice in the past year (and at around the same period each time), we are not surprised that the players have begun to attract attention from MyCC.

- In addition, industry observers have also highlighted that the price increase was above what was necessary to cover any costs or excise duty hikes - hinting of the tobacco industry’s use of its oligopolistic nature to garner additional profit. We, however, deem that the greater price increase to excise increase ratio was a necessity to offset the possibility of declining volumes.

- That said, we stress that the commission has yet to open any investigation to ascertain any violation of the Competition Act 2010.

- As such, we maintain our NEUTRAL recommendation on the sector at this juncture with no change to our forecasts and HOLD ratings on both BAT (FV:RM62.00/share) and JTI (FV:RM7.20/share).

- We opine that it would be difficult for the commission to monitor as well as prove a violation especially if no official statement on a price increase was published. MyCC resorts to three approaches in opening an investigation :- (i) after receiving a complaint; (ii) when MyCC has reason to suspect an infringement; or (iii) under the direction of a minister.

Source: AmeSecurities