Highlights

• Vaping has become extremely popular and is gaining traction amongst Malaysian consumers as an alternative to cigarettes and as a cessation device.
• Euromonitor International estimates that the gl obal ‘ vaping industry’, which consists of vaping devices and liquid nicotine or E-juice, was worth USD6bn in 2014 and consists of 13m users worldwide. The ‘ vapi ng industry’ is expected to grow with a CAGR of 29.3% to 2019.
• Vaping in the context of the Malaysian market is a reference to the 2nd generation devices of ‘open tank systems’. We believe that Malaysian consumers have by passed the 1st generation ‘cig-a-like’ devices.
•  The vapor industry transcends the traditional tobacco industry. There are lapses with the consumer electronic and pharmaceutical markets. The vaping industry operates in a niche where its products are positioned in the same light as pharmaceutical cessation products such as nicotine patches and the demand for the 2nd generation open tank systems has parallels with consumer electronic demand, whereby technological development leading to new features, fosters fast turnover/upgrading rates.
• It is estimated that there are approximately 400,690 adult vapers in Malaysia. Based on BNM statistics and WHO survey estimates, the estimated adult smoking population in Malaysia is circa 4.6m persons. This indicates that the population of vapers as a percentage of daily adult smokers is about 8.7%.
• In the absence of a concrete regulatory stance, we believe that the vaping industry would continue to flourish. This presents a threat to the traditional tobacco industry due to switching and substitution from existing smokers.
• Previously, when cigarette prices increased, smokers down trade from Premium to VFM brands. Presently switching from smoking to vaping is a reality. This expected to exert further pressure in addition to illicit cigarettes and regulatory tightening on the al ready dwindling volumes of the legal tobacco industry. The ent rance of vaping into the market territory of the traditional tobacco industry is a threat .

Sector Impact

• Negative to total industry volume. Those switching to vape are lost to the tobacco industry. Those who vape and smoke are splitting their nicotine consumption budget between two industries.

Stock Rating

• BAT being the dominant player in an oligopolistic market, with control of circa 60% of market share of the tobacco industry is not immune to the vaping phenomenon. Vaping adds further pressure to its dwindling volumes. Despite this, earnings are still relatively defensive, at least in the short to medium term. Dividend yield of about 4.6% and defensive earnings justify our HOLD call. TP of RM65.54 based on DCF.

Source: Hong Leong Investment Bank Research - 9 Oct 2015