- Various press outlets reported that South Korea’s state health insurer (NHIS) is filing a lawsuit against three tobacco companies, including the local units of British American Tobacco and Philip Morris. These two companies respectively command 13% and 19% of the South Korean tobacco market. The other party named in the filing is KT&G Corp, the domestic market leader with a 60% market share.

- NHIS is seeking at least of 53.7bil won (US$ 51.9bil) as compensation for costs associated with the treatment of smoking-related diseases. Earlier this year, the insurer had claimed that it spends more than 1.7tril won (US$ 1.6bil) annually on treatment of such diseases.

- This is reportedly the first lawsuit by the state government against tobacco firms in South Korea. According to Reuters, only four other tobacco lawsuits, all brought by individuals or families, have been heard in the country. We understand that none of it was successful.

- Through a statement to The Edge Financial Daily, British American Tobacco (Malaysia) Bhd’s (BAT) management revealed that the company supplies semi-finished goods to the South Korean unit. This is part of the group’s growing contract manufacturing business (FY13: volumes +16% YoY), which has not only help raise BAT’s utilisation rates, but also its margins.

- BAT’s management had also clarified that South Korea’s contribution to the group’s earnings is insignificant. We gather that most of the output from this division is exported to countries like Australia, Singapore and Philippines.

- No change to our earnings forecast at this juncture. We maintain our HOLD recommendation on BAT with an unchanged fair value of RM62.00/share. With the recent proposed privatisation offer for its peer, JT International Bhd (JTI) (Accept offer, Offer price: RM7.80/share), BAT is the only listed tobacco manufacturer in Malaysia.

- That said, we do not expect the tobacco industry’s bargaining power on regulatory and tax issues to be compromised given that BAT, together with JTI and Philip Morris International, form the Confederation of Malaysian Tobacco Manufacturers, which speaks on the legal industry’s behalf. 

Source: AmeSecurities