Highlights

• Moving into 2016, vaping still remains in a state of flux across several legislative/regulatory bodies. Nonetheless, some states have begun to take a stance on the subject with banning the sale of vaping products entirely, whilst other states have taken a ‘wait and see’ approach on the health/legal implications at the federal level. Other states, whilst not banning vaping; have aligned their positions with that of the respective Fatwa committee of the state, thus banning the use of vape for Muslims only. (See Figure 1).
• At the federal level, a report on vaping is scheduled to be tabled to the cabinet by end of January before a firm decision will be made. The fact that the federal government has not out rightly banned vape products has led us to believe that regulation of the sub-sector are on the cards.
• We are of the view that the federal government will ultimately regulate the vapor sub sector; however the question remains as to whether it will be regulated as a pharmaceutical product, medicine or food product, remains a guess at present .
• We reiterate our position that irrespective of the regulatory outcomes that are to unfold upon the vaping industry, it will still be negative on the traditional tobacco industry. Vaping is not only a trend but a disruptive technology to traditional tobacco much like what Uber is to the taxi industry and AirBnb is to the hotel & motel industry.
• We opine that even i f vaping is decreed illegal and banned, it would occupy and expand in the same space that illicit cigarettes operates in, compounding further woes on the already declining volumes of the legal tobacco industry
• The recent off budget excise duty led price hike of 23%-26% for premium and VFM cigarettes will have only furthered the cause of the vapor sub-sector.
• We reiterate that previously, when cigarette prices increased, smokers down trade from Premium to VFM brands. Currently switching from smoking to vaping is a reality. This expected to exert further pressure in addition to illicit cigarettes and regulatory tightening on the already dwindling volumes of the legal tobacco industry.

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. Given that the share price has retraced to a level that we feel the market has priced in the ED as well as the impacts of vaping to the sector; we upgrade our call to a HOLD. Maintain TP of RM53.30 based on DCF.

Source: Hong Leong Investment Bank Research - 26 Jan 2016